Q2 2021 Neenah Inc Earnings Call
Okay.
John.
Okay.
[music].
Good day and thank you for standing by welcome sitting on <unk> 2021earnings call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask the question. During the session you will need the press star 1 on your telephone if you require any further assistance. Please press star Zero I would now like behind the conference of worthy of your Speaker today, Carl Anderson, Vice President of <unk>.
Great strategy and Investor Relations. Please go ahead.
Good morning, and thank you for joining us on maintenance second quarter 2021 earnings call on the call with me today are Julie <unk>, Chief Executive Officer, and Paul of the Sanchez Chief Financial Officer by way of introduction. My name is Kyle Anderson, and Paul and I will be responsible for Investor relations following the retirement of debt.
Mccarthy.
I've been with Neenah in various roles since 2004, and I look forward to working with you on this new capacity.
Julian Paul will discuss recent activities of results as well as share some thoughts on our strategy as we look ahead in the year.
We issued a press release covering financial results yesterday afternoon, and hopefully many of you have had a chance to review that information as always actual results could differ from these forward looking statements due to risks noted on our website and in our SEC filings. Following our prepared remarks, we will open the call for quest.
<unk>.
And second quarter, we continued our growth momentum with adjusted earnings of <unk> 65 per share excluding $2.41 says of the unusual costs in second quarter 2020, the adjusted loss per share of <unk> excluded $2.90 of such costs.
Details of these adjusting items along with the reconciliation to GAAP amounts can be found in our press release with that I'd like to turn things over to Julie.
Thanks, Kyle and good morning, everyone.
Second quarter was very active and we continue to demonstrate strong traction both in terms of the operating performance and in executing our strategy I want to start by highlighting our safety performance the Hell.
<unk> and wellbeing of our employees is our number 1 value and I'm proud to say, we continue to make solid progress toward a zero injury culture.
We reached a new safety milestone for recordable incidents during the quarter and currently more than half of our facilities are over 100 day incident free.
Now turning to operating performance.
Second quarter showed continued top line momentum with near record quarterly revenue driven by strong organic growth in all categories.
Specially in technical products, where we achieved an all time record for the quarter the.
Demand was strong with improving conditions in end markets share gains and new product placement with key customers. We also successfully completed the task of the acquisition and initiated the both the restarting of an idled assets and the closure of our Appleton facility driving meaningful Val.
In all cases.
As with many companies we are experiencing near term challenges from supply chain disruptions and rapidly increasing input costs. We're continuing to work through these disruptions, but expect them to continue throughout the third quarter.
During this time, we have effectively been able to gain share due to our ability to quickly commercialize alternative solutions for customers.
The higher costs are impacting our margins in the short term, we've taken pricing actions across our entire portfolio and in some cases multiple times in order to address the extraordinary level of raw material inflation, we are experiencing.
The timing of our pricing actions varies by business, but all business lines have either implemented price increases or communicated to customers and increase that will be effective in early 2022.
I am confident we will offset the raw material cost increases this year through our volume price and cost initiatives and we will enter 2022 on a good margin trajectory and with additional pricing actions becoming effective.
In addition to our operating performance.
Clearly focused on advancing our ESG efforts.
From the environmental standpoint.
<unk> recognized with a focus on energy award for energy efficiency excellent at our largest north American facility.
We also welcome the new member to our board of Directors truly single Trinity has the global leadership experience with Dow chemical and Henkel and is currently the CEO at chroma color. We're pleased to welcome <unk> and believe he will further strengthen our board.
I am encouraged with our execution during the quarter as well as the meaningful progress in activating our long term strategy, which I'll cover later on this call now I'd like to turn it over to Paul to review financials.
Thanks, Julie and good morning, everyone. The second quarter was extremely busy for neenah as we took actions to drive our strategy, including the successful completion of the of cost of acquisition at the beginning of the quarter, which resulted in $33 million of sales and accretive EBIT margins in the high teens.
The synergy realization is on track from a cash earnings perspective, the business contributed about <unk> 15 per share for the quarter, we announced the closure of the Appleton facility, which is expected to result in annual savings of $7 million to $8 million beginning in the fourth quarter of this year.
We began to see unprecedented raw material cost increases as expected and we continue to respond with pricing and some of our businesses, we've announced multiple price increases as we work to offset the rapidly evolving input cost environment, we announced the restart of a production line in neenah.
The Wisconsin as a result of the success of our fine paper and packaging teams efforts to drive volume, we committed $13 billion of capital for a new coder to support our recently acquired release liner business as we continue to see the growth we had expected in the location that was the greenfield less than 3.
Years ago, and we've refinanced our debt at favorable terms to support our acquisition and reduce cash costs.
<unk> reached $269 million up of $108 million from last year's pandemic influenced second quarter and up $42 million from the first quarter of this year. This quarters result includes $33 million from the of cost of acquisition technical product sales were a record.
$180 million up 79% from last year and up 24% sequentially from the first quarter <unk>.
Fine paper and packaging sales were $90 million per the quarter up 48% from last year and up 10% sequentially from the first quarter.
We were pleased with the results in a number of our key businesses, including filtration packaging industrial solutions and release liners, all of which performed well during the second quarter of.
Adjusted earnings were $19.3 million.
Compared to 500000 in last year's second quarter in the first quarter of 2021, we reported adjusted earnings of $26.1 million.
The second quarter results reflect the rapid increase of input costs, which as anticipated are impacting the business in advance of our pricing initiatives as our pricing actions volume increases and other efficiency initiatives begin to take hold we expect to offset the impact of the cost increase.
<unk> by the end of the year.
The technical products adjusted earnings were $14.7 million up from $5.8 million in last year's second quarter and down from $19.5 million in this year's first quarter, reflecting the disproportionate impact of raw material cost increases in this segment.
The second quarter result for technical products compares favorably to the almost $13 million delivered during the second quarter of 2019, reflecting the strength in underlying markets such as filtration as well as the impact of the cost of acquisition.
On the paper and packaging adjusted earnings were $10 million for the second quarter up from last year's loss of $600000 and down from $12.8 million in this year's first quarter again, reflecting the impact of raw material costs and the timing of price increases.
Yes.
We're pleased with the top line performance of the client paper and packaging as we're seeing it recovered to 90% of the pre COVID-19 run rate as expected.
Turning to the balance sheet and cash flows liquidity remained strong while cash flow from operations of $23 million was down from the 44 million recorded for the first 6 months of last year. The difference was due to working capital, reflecting the rebound in business trailing 12 month adjusted E.
Vit.
The $121 million as of June 30 of this year compared to the 101 million, we reported last calendar year as we see the benefits of our continued growth and the impact of the top of the acquisition.
As the result of the strong EBITDA growth and free cash flow. We're on a path to see adjusted net leverage dropped to approximately 3 turns by the end of the year absent any other actions year to date, the capex was $11 million versus $8 million last year were expecting capex the pickup in.
The second half of the year getting us into the low to mid $30 million range as safety growth and cost reduction initiatives are implemented including the beginning of the $13 million at the cost of expansion Capex.
Our effective income tax rate was the benefit of 21% in the second quarter of this year compared to a benefit of 19% in the second quarter of last year.
Both periods were significantly impacted by the effects of the impairment losses, which will not repeat and this year's 21% rate includes the effect of the acquisition of the tosser and associated acquisition costs. The cost us carries a blended tax rate in the mid twenty's. So our tax rate is expected.
To rise slightly from our historical rate as we will be around 23% for this year.
As we mentioned in the Q1 earnings call and you can see on our Q2 results. We continued to face rapid escalation of input costs, including many fibers, reaching all time high pricing levels. During the second quarter global demand resurgence has significantly contributed to widespread shortages in many chemical markets.
The resulting in the limited number of raw material shortages and stubbornly elevated costs for many materials.
The input cost increases significantly impacted our results in Q2 trends in the past months are beginning to indicate that our costs will peak in Q3 and generally stabilized in Q4.
As we mentioned our teams are continuing to work to offset these input costs with pricing action.
We expect the impact of the input costs in the third quarter to be $7 million to $8 million incremental to that of the second quarter of which we expect to offset about half of the additional costs directly with our pricing initiatives as they begin to gain steam on.
Also as the reminder, we have most of our annual maintenance downs in the third quarter, which adds 1 to 2 million to quarterly cost as.
As I said earlier, we expect to fully offset the increases by the end of the year through a combination of pricing actions volume increases and efficiency improvements and we expect to see the gap between raw material cost and pricing begin to narrow in the fourth quarter.
And on that note I'll turn it back to Julie.
Thanks, Paul as we wrap up the call and wanted to provide some additional comments on how we are executing our strategy and positioning neenah for long term value creation.
We're focused on building our business into 1 that rewards shareholders by consistently growing the top line at around 5% annually, achieving mid teen operating margins, earning return above our cost of capital and generating significant cash flow on.
Our success starts with growth and we have 4 targeted platform to fuel our growth.
Filtration media.
The coatings, the engineered materials and imaging and packaging.
These platforms provide a framework that creates focus and guidance resource allocation and investment decisions innovation and M&A efforts. Further this approach offers ways to extend the business, while the remaining aligned with the maintenance of course strength, including our assets and technical.
Capabilities and material science Knowhow using these 4 growth platforms as a backdrop, let me provide a few examples of recent progress and the successes, which are good indicators of how we are building for future growth through our strong innovation process organic investments and.
M&A activity.
First our filtration business was up almost 11% from 2019 levels. Following a record performance in Q1 of the share.
We continue to focus on innovative high efficiency solutions and extending beyond transportation filtration.
As such we recently launched our neenah per air filtration portfolio.
Utilizing proprietary technology, we created a premium solution for HVA.
And air Purifier elements for both commercial and residential use or.
Our electric statically charged media can reach the efficiencies of up to 99, 9% the highest level of available on the marketplace with strong macro trends focused on air quality. This is an important new part of our portfolio.
Second we continue to build our specialty coatings platform with our most recent effort centered on the of top of the acquisition and growth and release liner.
The process is performing well, including record revenue and record earnings in the month of June.
This is a business thats sort of the multiple end markets, given the low volatility and multiple avenues for growth.
Integration is well underway and on track with expectations. We are also progressing as expected on our synergies, including new trials of crossover of customers and new business with 2 very large customers in North America.
Further as Paul mentioned, we recently announced a 13 million dollar of investment and new coating capacity to support growth in this category and meet ongoing demand for our products.
Within engineered materials, we expanded our innovative water to first of all product portfolio, which we've branded disbursed. The this is a label product line that allows for the product along with printed and written graphics to disperse and the presence of water Neenah is the only North America.
Manufacturer of this market, leading solution, which provides an environmentally friendly alternative for residential and commercial applications.
Lastly, within imaging and packaging our back to school items and newly designed planners channel and teacher tools have all been very well received at major retailers and continue to outpace the category and grow share our premium packaging business has rebounded nicely.
It is accelerating with significant new business and gift card box fast and folding board applications.
M&A is also key to how we build out these growth platforms and is an important part of our strategy. We continue to be active and engaged with a robust pipeline of targets that help extend our capabilities or broaden participation in markets with strong growth dynamics at the.
The same time, we remain committed to maintaining a strong balance sheet and generating strong cash flow, which we'll use in a prudent manner as we grow and transform our company.
Additionally, we continue to make progress on the Neenah operating system, which is our approach to applying lean manufacturing methods.
<unk> drive continuous improvement in our facilities.
To date, our Neenah operating system implementation is delivering results ahead of plan and is expanding beyond the 2 facilities originally targeted this year.
We're seeing benefits and capacity improvements efficiency gains and waste reduction.
Our focus on efficiently managing our asset footprint is also key to delivering growth and margins as evidenced by our recent announcement to restart on idled assets by investing in additional coating capacity and closing our Appleton facility rigs.
Regarding the closure of Appleton and 2020, we launched a multi faceted project to accelerate and improve the returns on the asset with clear milestones.
As the year progresses, we had not achieved target milestones and did not see a long term financially viable option to achieve our expected margins and we made the decision to close the facility.
This closure will result in the benefit of $7 million to $8 million annually, and we will ramp down and close the facility in the fourth quarter of this year.
This by no means lessens our focus on filtration, we remain committed to the broad filtration market as a key growth platform and continue to drive record results in this business.
So in summary, we're taking actions to drive continued performance from Neenah and alignment with our strategy. We have multiple avenues for growth, both top and bottom line and our trajectory looks promising I'd now like to open the call for questions.
As a reminder to answer the question you will need the cash star 1 on your telephone to withdraw your question press the pound key.
The standby, while we compile the Q&A roster.
Your first question comes from the line of John <unk> from CJS Securities. Your line is open.
Hi, Good morning, everyone and thank you for taking my question Good morning, John Good morning.
Wanted to start with the pay per segment instead of recovered pretty nicely on a little bit ahead of schedule any thoughts on the trends from Peter I think you had previously called out 90% of kind of the full recovery for that business.
Is there more upside now that we're a little bit ahead of schedule.
John on that as a business debt when business comes it comes not necessarily linearly, but end shocks and so we saw some nice new business on our packaging.
Part of that portfolio as well as on consumer products.
And commercial print has recovered pretty much as we expected I would say in regard to see the prior.
Communications around 90% of pre Covid levels were still expecting to recover at that level, but we'll see a little bit of fluctuation the startup of the asset that we announced the really has the support that.
The demand path as well as provide flexibility of the surge capacity for us.
Okay, great. Thank you for that color.
Also just in terms of things potentially happening earlier than expected.
It sounds like Youre going to catch up to the Cogs inflation by Q4.
If you remember you, saying you would take on until next year is that it in fact, the case now than maybe you were able to pull on all of that pricing action compared to what you might've thought of.
Of course earlier.
Yes, let me, let me start with that 1 time and Paul will feel free to add anything that I may Miss.
Pricing, we've taken pricing with all of our customer or we've communicated with customers about pricing actions that will be ex that.
Active early 2022, so I think from a timing standpoint, what we've talked about and what Paul mentioned was we expect about $7 million to $8 million of incremental inflationary cost in Q3 versus Q2, and we expect to recover about half of that amount in Q3.
For the entire year, we're still expecting north of $30 million of inflationary cost increases in our raw materials, including freight and we expect to recover more than half of that but not all of it in 2021 as you know we get a quicker recovery in fine paper and packaging and then we have a.
Annual agreements and our filtration business. So those agreements we've had those conversations there's plans in place, but they don't become effective until early 2022.
And John can add.
Just to add a little bit to that so we think that in the third quarter like we talked about 7 to 8 of which will be able to offset past so incremental to the second quarter and I think what we said in the fourth quarter as we expect to start making traction again and narrowing the gap between the pricing and of the raw material inputs.
But like like Julie said, we expect to offset about half directly with pricing and then the rest with our other actions for the full year.
Got it that's helpful.
Okay, and just wondering how much excuse me how.
How much of the Appleton facility of contributes on solar winds down.
I guess the vessel I guess, the 20% to 25 million revenue reduction.
I know, it's still cost, but just in terms of on the revenue side.
It'll be about a quarter of that each quarter. So we are ramping down with customer orders throughout Q3, and running out with customers. Some of the Appleton business, we are transitioning to other assets.
So it's about on the fourth quarter I would expect about a quarter of that $25 million that we won't pay per appleton on about a quarter of the benefit as well.
Okay, Great and then finally you mentioned the.
I mean the.
Operating system improvements just is there any quantification on how much more youre saving this year or is that just makes the acceleration of spreading out the different plants and then getting the sooner.
It's a little of of both I mean, we're accelerating and spreading out 2 additional plants, but we're also seeing savings come in even higher than we originally estimated it is the ramp up and we do have third parties in place this year, helping us implement so that is offsetting some of the benefit falling directly to the bottom line as we to continue to.
To implement this across our facilities and we have consultants and other folks that are supporting the exit will see even greater improvement in the out years from the operating system standpoint.
Okay, great. Thank you.
Thank you John it's John.
And John you asked the question you will need the cash star 1 on your telephone. Your next question comes from the line of Chris Mcginnis from Sidoti Sidoti and company. Your line is open.
Good morning, Thanks for taking my questions and congrats on the results.
Thanks Beth.
Sure.
If we could maybe just start with.
On the inflationary environment do you see that at all impacting demands for you at all or.
And of that.
Issues from publically I'll turn on again.
Our demand is very strong across pretty much all of our categories. So it is impacting our cost and thats, where were really seeing and thats a timing issue just like it has been historically, if you think about our margins they're going to be compressed in the short term as we catch up on pricing there'll be more.
Eighthly recovering in fine paper and that it takes us a little bit longer in filtration on some of our technical products categories, but we have historically recovered that pricing over time, and we expect to do that again from a demand standpoint, we're seeing really strong demand.
Signals of the future demand.
Okay great.
I think you mentioned market share gains.
And PPE if I'm correct is there.
Can you maybe just talk about what's driving that.
I've been hearing more of the supply chain issues leading to.
Maybe more on North America based companies, taking that I know the.
TPS of little bit more broken out from a regionally, but can you just talk about book market share gains that you talked to you mentioned.
Sure I think we're seeing a couple of things when we when we're experiencing supply chain disruption, it's really impacting us from a cost standpoint, we're juggling around machine schedules were managing shorter runs on our assets things like that from a demand standpoint, it's still very strong and what we've been able to do is provide.
Substitute or alternative.
From our innovation team is really helping us to grow share by providing new formulation for our customer. So we have a supply of strength.
A particular chemical being able to quickly alternate to on a different solution for our customers and quite honestly. This is giving our customers. Some additional incentive to make some of those some of those changes with us.
So thats really whats driven the share gains.
Great.
Just 2 questions on the path for I guess, just 1 with the investment years due to input with the $13 million per new quarter.
Moving to think about that in terms of.
You hit your growth for this year and how often would you have the AD exposure to expanding the capacity.
Almost times, which give you before you actually expand given.
On the growth rate there.
Yes. This is an investment that we knew going in to the top of the acquisition that we would be making and so.
Really exciting parts to be able to continue to invest.
And organic growth in the future and it goes into an existing facility, which I think as Paul mentioned was a greenfield facility. Just a few years ago that facility is ramping up of really strongly in the top of has had over 8% growth over their history and record performance topline and bottom line in <unk>.
1 of the share and really strong demand signals. So all of that to say this is to meet the expected growth that we have and release liners and well continue to evaluate of that market for continuing the growth I view it pass as a foundational acquisition.
It gives us a strong footprint of builds from whether that's organic investments or inorganic investments. So youll see us continue to grow in this area within our specialty coating platform.
And then you mentioned the 2 large customers in North America ex U.
Just talk a little bit of although the new custom.
Customers 2 of tougher and that's using the relationship can you just expand a little bit on that sounds like early success the show.
Sure.
A little bit of 2 things 1 of the large customers with an existing neenah customer and so our ability to work in a cross pollinate, what's the of top of the business has been very successful there. Another 1 is 1 that the across the team has been working on for some time and landed in North America because of the additional capacity.
<unk> capabilities that are ramping up and of the facility in Mexico.
Yeah.
Thanks for taking my questions do on Q3 I'll.
I'll jump back in the future.
Thanks, Craig.
The next tranche from the John Atkin from CJS Securities. Your line is open.
Hi, just 1 more from me guys. I was wondering if you could just give us a little color on how trends of.
And in July on number 1 and number 2 what are your expectations are for August I know, usually the seasonally down quarter people go on vacation, but im wondering if theres a different expectation. This year just given the state of inventories across the number of industry net things that are still in high demand.
John This is Paul I think what I think what Julie said earlier on the call.
What's really really important and that is that we've seen very strong demand and so we like the demand that we've seen and.
It's the question of the raw material side of it and the timing on pricing for us up but the top line has been has been pretty robust.
Okay. Thank you.
The annual further question at this time I'll Anderson. Please proceed with your closing remarks.
Great and thank you for your time today to recap, we are aggressively pursuing pricing and other actions to offset near term raw material impacts over time, we continue to focus on our 4 growth platforms with disproportionate capital investment innovation and M&A activities, we're seeing traction on our strategy to.
<unk> achieved 5% top line of double digit bottom line growth consistently over time.
So we're looking forward to updating you on our continued progress next quarter, Thanks and have a nice day.
This concludes today's conference call. Thank you all from your participation you may now disconnect.
Okay.
Yes.
[music] book.