Q1 2021 Neenah Inc Earnings Call
Youre welcome.
Ladies and gentlemen, thank you for standing by and welcome to the Neenah first quarter 2021 earnings Conference 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 a question during the session and then they depress.
So one of your telephone and please.
Please be advised that today's conference is being recorded.
I'd now like to hand, the conference over to your Speaker today, Mr. Bill Mccarthy Vice President of Investor Relations. Thank you. Please go ahead.
Thank you for joining us on <unk> first quarter 2021 earnings call. We issued a press release covering financial results yesterday afternoon, and hopefully many of you have had a chance to review that information.
On the call with me today are Julie <unk>, Chief Executive Officer, and Paul Santos Chief Financial Officer.
Julia and Paul will discuss recent activities and results as well as share some thoughts as we look ahead and the year.
As always the 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'll open the call for questions.
We started the year strongly with adjusted earnings of $1 four per share. This excluded 55 for costs, primarily related to our acquisition of <unk> and 2020 adjusted earnings of $1 12 per share excluded 15th of unusual costs.
Complete details on adjusting items, along with a reconciliation to GAAP figures can be found in our press release.
As a reminder results from both years also reflect the reclassification of our publishing grades from technical products to fine paper and packaging.
Annual sales for this business were around $25 million last year.
On a personal note this will be my last earnings call. After 17 years with Neenah.
I can happily retire now that I hope the company record for the most consecutive earnings calls sorry Bonnie.
I've seen our company changed dramatically from its origins and pulp and paper, becoming faster growing and more capital efficient while also significantly increasing cash returns to shareholders on the <unk>.
Cited by the opportunities ahead, both for me and for Neenah, and it's been my pleasure to work with such a talented group of people through the years.
With that I'd like to turn things over to Julie.
Thanks, Bill and good morning, everyone.
Financial results for the first quarter outpaced that plan, demonstrating strong momentum and continued demand increases and both of our business segment.
Technical products sales increased 10% over the prior year and our filtration business delivered a quarterly record and both sales and profit <unk>.
Fine paper and packaging revenues grew 8% versus the fourth quarter and have growth sequentially in each of the last three quarters, putting us right on track to achieve or exceed 2021 revenue target.
Consolidated net sales of $227 million were up 10% from the fourth quarter and they will still down slightly versus last year due to the expected slower recovery of fine paper and packaging.
Adjusted operating income of $26 million was up significantly and from $21 million and the fourth quarter and was just short of last year, while adjusted earnings per share at top dollar for only the second time in the past 11 quarters.
And trading volumes and disciplined cost management operating margins expanded in both segments to mid teen levels.
In addition, cash generated from operations of $21 million.
It was one of our strongest first quarter and up from $14 million last year.
Our strong cash generation and solid balance sheet provide the financial foundation for us to successfully execute our strategy to grow and targeted platform.
This includes the recent acquisition of a pasta, which further expanded our presence and specialty coatings and I'm very excited.
Excited about the opportunities this new platform based and Neenah, and we'll talk more about the acquisition later in the call.
As a result, and the quarter reflect we're making progress on a number of areas. However, the year has not been without a few challenges with temporary supply chain disruptions and rising input costs, which will impact us and more significantly starting in the second quarter.
Our teams have responded swiftly to these challenges working diligently with key suppliers to procure necessary materials and implementing selling price increases.
And we'll talk more about this later, but we fully expect to offset the impact of rising input costs over time, just as we have historically demonstrated.
Let me wrap up for now with a few additional accomplishments and the quarter.
First and foremost is employee safety.
We achieved a meaningful milestone and our safety performance in March and our entire global organization for the first time ever successfully completed a month with zero recordable incidents.
This demonstrates the commitment of our employees are safe work practices are targeted zero incidents and our teams have demonstrated this is achievable.
Net with continued to expand our presence and key targeted markets. Our filtration business is growing and accelerated rate both in core markets and and newer market like air and industrial filtration and.
Examples include our highest performance transportation grade face mask media water filtration products and evaporative cooling materials.
Also on technical products are back in business is growing with new tape products and geographic share gains.
Seeing nice traction and performance labels with the recently launched dispersed and Dissolvable food label product that provides users added convenience and a more environmentally friendly footprint with a zero landfill waste.
And fine paper and packaging, we were recently awarded significant new business with incremental placements at large retailers for our consumer products and.
And new premium packaging business within our targeted verticals of spirit beauty and technology as customers increasingly value the environmental sustainability of our offering.
Both the new packaging and consumer products business will begin shipping later this year.
We took significant steps forward during the quarter on important environmental social and governance initiatives, we published our 2021 corporate sustainability report highlighting neenah sustainable sourcing practices reductions, we've achieved and our carbon footprint water and energy usage and the <unk>.
Increased diversity of our board and workforce.
Also I recently joined the CEO action for diversity and inclusion organization and we've introduced employee resource groups. So that employees can connect and new ways.
I strongly believe a diverse and inclusive workforce leads to greater performance growth and opportunity.
And all I was very pleased with our strong financial performance the results of our employee safety efforts.
Early benefits from a neenah operating system and the successful execution of our strategy to grow and expand and targeted new markets, including the addition of the Tosser I'll talk more about this and some of our other strategic initiatives later in the call, but now Paul will cover first quarter financial results in more detail and share it.
Few thoughts on our outlook for this year.
Thank you Julie and good morning, both.
Both business segments delivered another sequential quarter of improved sales earnings and margins versus the fourth quarter of 'twenty sales were up 10% adjusted operating income grew 25% and margins reached the mid teen Mark.
Our cash generation remains strong and we ended the quarter with liquidity of just under $200 million.
We also closed on a toss up in early April and finance this acquisition with a more favorable term loan b.
As you will see later today and our 10-Q, we've modified the way we group our technical products categories to better reflect our alignment with the Tulsa filtration, which remains our largest business will represent over 40% of segment sales our release liner and digital transfer business.
Now, including a Costco will form the core of our new specialty coatings sub segment.
Our third grouping is industrial solutions comprised of tape and abrasive backing along with a number of other categories specialty coatings and industrial solutions are each expected to represent about 30% of technical products sales.
Turning to financial results and the first quarter technical products sales of $145 million increased 10% from the first quarter of last year.
The volume driven growth was led by filtration, which delivered record top and bottom line performance.
Filtration sales grew more than 20% with strength across all end markets.
Revenues in the quarter also benefited from a stronger euro.
Though this was largely offset by lower selling prices and the quarter and.
Adjusted operating income of $20 million was up more than 20% from $16 million in 'twenty driven by higher volume continued spending discipline, good manufacturing performance and favorable foreign currency translation.
Turning to fine paper and packaging quarterly sales were $82 million and have continued to increase sequentially with sales up 8% from the fourth quarter of 2020 as demand recovers.
Revenues, we're still short of last year, primarily due to lower volumes, especially in commercial print used for advertising and marketing, which has been hardest hit adjusted.
Operating income of $13 million and the first quarter of 'twenty, one was down from the exceptionally strong $17 million and the first quarter of 'twenty, primarily due to lower sales and production volume and a less favorable mix.
Offsetting this were benefits from lower cost, including SG&A.
We also regrouped our product categories and fine paper and packaging are faster growing premium packaging and consumer products now make up almost half of segment revenues and will help improve the growth trajectory.
Commercial print, which includes publishing makes up the other half of revenues.
I'll turn to a few corporate items SG&A expense was $24 million and the first quarter of 'twenty, one down from 27 million in the prior year as a result of actions, we've taken to manage spending and reduce costs enel.
Unallocated corporate costs after adjusting for onetime items related mostly to the <unk> acquisition were $6 $2 million and in line with the prior year.
In 2021, excluding E. Tosser, we expect quarterly SG&A to average approximately $25 million with unallocated corporate cost of about $5 5 million.
We are and the process of completing purchase accounting and mapping etops us P&L line items to U S. GAAP will provide further details on this later in the year.
With the upsizing of our term loan B from 200 million to $450 million, we negotiated more favorable terms, including a reduction and the variable interest rate from 5% to three 5%.
Quarterly interest expense is now expected to be approximately $4 $7 million, which includes $1 2 million of noncash amortization expense.
Our effective income tax rate was 21% and both the first quarter of 2021 and the first quarter of 2020.
And the constant carries a blended tax rate in the mid twenty's. So our tax rate may rise over time, but our rate of 22% should still be in the ballpark for this year cash.
<unk> taxes continued to be about two thirds of our book rate, primarily as a result of utilizing prior period R&D credits.
Cash provided from operations of $27 million in the first quarter of 2021 increased from $14 2 million in the first quarter of 'twenty as a result of lower working capital requirements.
Capital spending of $4 8 million in the first quarter of 'twenty, one was consistent with the prior year and we expect full year spending to be around $35 million.
Our balance sheet remains in great shape. Following the acquisition projected debt to EBITDA is around three times and with cash of $41 million and nothing drawn on our revolver. We continue to have plenty of liquidity.
I'll wrap up with a few additional comments on our outlook clearly and encouraging sign has been the strengthening demand. We're seeing at both segments. We just had a very strong quarter evidenced thing the traction of our strategy. That's beginning to show as we look ahead, we expect technical products to resume a more tip.
Nickel seasonality with sales softening as the year progresses.
Both segments will also have our usual cost for annual maintenance downs in the third and fourth quarters.
Like many companies, we are facing a rapid escalation and input costs affecting prices for fibers chemicals and transportation.
Does our manufacturing formulations and technical products utilized a significant amount of polymers and other chemicals as well as fiber and the impact of rising input costs. On this segment will be larger and about twice that of fine paper and packaging.
To be clear Neenah has historically been able to recoup raw material price increases and I expect this time to be no different.
And our February call I indicated that input costs this year could be more than $20 million higher than in 2020, and that we would more than offset that through our pricing actions with volume growth and cost reduction efforts.
Since that time fiber and chemical price forecasts have increased and now we project the impact to be north of $30 million this year and unprecedented amount and this short period of time.
As such we are and have been quickly taking additional actions to offset this incremental impact cash.
Consequently, I still believe that with our strong Q1 performance and these additional actions will offset the impact of higher input costs. This year.
While I feel good about our prospects for the full year with contractual timing delays and many of our fiber contracts and annual pricing for some customer contracts, we will see a significant cost impact beginning in the second quarter compared to the first quarter the impact of higher input costs in the second quarter of 'twenty one.
Net of our actions is likely to be around $7 million. The impacts should begin to moderate from there as contractual selling price adjusters and additional actions take effect ultimately we expect to recover input cost increases with pricing as we have historically as additional.
Contracts are reset price adjusters fully take effect and our direct pricing actions are completed.
Let me turn to a few financial highlights for the top of that.
<unk> has annual sales of about $140 million or approximately $35 million per quarter with the mid teen EBITDA margin.
Since we're still in the process of finalizing purchase accounting I won't comment on U S. GAAP numbers, but would note that while our organic businesses carry a depreciation and amortization rate of about 3% to four percentage of sales. This percentage for acquisitions can be double that due to reflecting the fair value.
Intangibles and other assets, we expect the transaction to be immediately accretive to earnings and to deliver attractive returns on our investment.
Having been at Neenah per year.
I've been pleased with our clear strategic direction to drive profitable growth and with the talent and can do attitude in place to execute these strategies and all enabled by our strong financial position.
<unk> remains committed to disciplined financial principles, including an attractive return to shareholders and on that note I'll turn it back to Julie.
Thanks, Paul and I will wrap up with comments on our strategy and the actions, we're taking on to execute it.
And I've mentioned that we're focused on extending our presence and growing market both organically and through M&A. We have identified four target growth platform filtration and specialty cutting and engineered materials and premium packaging.
These platforms are made up of large growing profitable and defensible markets that align with our manufacturing technology.
Average, our material science expertise and share common customers and path to market and.
And the recent acquisition and the <unk> is just one example of how we're building out these growth platforms.
<unk> is a leading manufacturer and the multibillion dollar level and release liner market, providing us a new large addressable market opportunity. We lease lineup are used and a diverse set of and east categories, such as label hygiene tape industrial medical and from.
<unk> net.
<unk> well positioned to capture growth and multiple avenues.
And Costa is also well positioned geographically on the strong market presence and state of the art technology.
Historically, the release slate and market has been resilient throughout economic cycles.
Going forward the market anticipated growth and supported by several key macro trends.
Such as the growing demand from medical and hiking supplies Inc.
Increased labeling and shipping and light weighting its products through the use of composites.
<unk> has demonstrated a strong track record of growth and margin expansion with historical growth of around 8% annually.
Strategically this acquisition provides a meaningful foundation and release liner from which we can build upon both organically and through future acquisitions.
With overlapping customers and end market as well as complementary technologies and supply chain. We're excited about how this new platform integrate with our core business.
One of the most compelling aspects of this transaction is the talent and leadership team up and Casa I'm very encouraged by our early integration effort and the potential and value will create together as one team.
Integration is well underway and we anticipate about $4 million and as Kirk synergies coming both from commercial and cost opportunities.
For Neenah as a whole we're targeting to deliver average top line growth of around 5% annually.
Faster bottom line growth rate as our margins continue to expand.
M&A will continue to be a key component of our strategy combined with a number of tireless and place to drive organic growth.
Let me talk about some of these next.
From a topline perspective with investments and resources bias toward our core growth platform, we expect to accelerate our organic growth rate with an improving portfolio mix and.
Infiltration and seeing strong results across all end markets, while transportation filtration and remains very strong our air water and industrial filtration business is growing in double digits and represents a large market opportunity.
We'll continue to invest to extend our technologies and expand our presence and these complementary and filtration market.
I've talked about the opportunities, we have and specialty coatings with the <unk> and with our digital transfer business. Our third platform engineered materials utilize a set of <unk> specialized materials technologies and growing market.
This business is growing double digits topline and bottom line with future growth supported by recent investments that will increase our capacity.
While our growth will come disproportionately from technical products, which is now 70% of Neenah, We're also successfully growing and premium packaging and consumer products.
And I mentioned earlier a few of these recent successes that are driving growth and these areas.
Finally, I would note that all four of our targeted growth platform and benefit from favorable macro trends like the need for improved air and water quality and aging population and a growing preference for sustainable products.
And innovation is also a key catalyst that will add to our growth rate.
I'll always a part of our focus and I'm encouraged by the direction, we're heading under our new global head of innovation, we've aligned our R&D teams to leverage their knowledge and skills across neenah and are tapping in to employees and customers for input and site and ideas.
This will allow us to identify and act more quickly on opportunities to unlock even greater value with existing and new customers and end markets and I expect our pace of development to continue to increase over time.
Turning next to margins, we expect both segments ultimately to achieve sustainable mid teen EBIT margin.
<unk> will benefit from and improving and diversified mix as our faster growing and more advanced products tend to be the most profitable as our performance this quarter demonstrates.
And our innovation efforts will also be pointed to these higher margin products and markets.
The Neenah operating system is another way, we will continue to drive meaningful and sustainable margin improvement.
As a reminder, this global manufacturing initiative is based on lean principles and we've recently begun implementation at two of our largest facilities.
Thus far results have exceeded our expectations and ultimately and we expect to add about $20 million and value annually and support our employees and customers with improved safety quality delivery and cost.
As I sat on our last call. None of this would be possible without the right people I'm pleased with our talent and with a culture that makes safety and a top priority and results oriented with a strong bias to speed and it's collaborative and inclusive.
We started off the year strong with our growth and margin and and delivering ahead of expectations.
And the near term, we are facing inflationary headwinds and we're taking actions to overcome these just as we have historically.
We have a strategy with clear catalysts and initiatives underway that will create long term value and continued neenah transformation and faster growing more profitable specialty materials company.
Before we open the line for question and I'd like to thank Bill Mccarthy, who has been our Investor Relations later from the start and with over 66 quarters of earnings cloud experience with Neenah, and addition to IR Bill has been involved in multiple areas and neenah, and we have valued and benefited from index.
Expertise guidance and by internally and externally.
On our next call, we will introduce Kyle Anderson, who will be taking over the IR function and his contact information is on our website.
<unk> has deep and broad experience with Neenah and confident he will also be highly effective and this role and.
Now I'd like to open the call for questions.
Okay.
Okay.
Sure Hi, this is Julie and pod and hopefully have a bad connection, but if you can hear us ask questions. We're here and available to answer.
Yes, Hi can you hear me.
Hi, John.
Sorry, I don't know.
And what happened here.
Pete Lukas and CJ adds for John.
Hey, Pete.
How are you congrats on the quarter.
You answered a lot of the questions and I appreciate that just wondering if you could talk a little bit how demand is trending in April and may and if you've seen any surprises either positive or negative on the demand side.
Yes, I would say and we're continuing it fits a little bit different by Stagnates, we don't give formal guidance, obviously, but we're continuously recovery and fine paper and packaging just as we expected more so and the consumer products side and packaging and still a little bit lagging on commercial prep and then tech products hasn't really recovered.
From any impact from COVID-19 and as continuing strong demand that we saw in the first quarter.
Great and in terms of filtration and usually in the mid cash usually and negotiate those prices at year end do you think youll be able to pull that forward given the current environment.
And that is the question of the day.
The team and both segments have.
<unk> announced and implemented pricing and you're exactly right the ones that have a little bit more of a lag for us typically our NGL price and because we have annual agreement where on a pretty unprecedented environment and so we're working closely with customers. During this time to see what different approaches and we may use but the pricing lever.
Announced with pull through incentives back it's delivering value just as we expected and.
Our time, there might be some time and differences here, we have a history of recovering input costs, we're expecting the same thing with <unk> input cost.
Galatians.
The other thing I would tell you because it's so condensed and steadfast and this year, we're really focused on how we close that gap not just with pricing, but with incremental volume with an improved mix and the growth platforms. We've talked about with cost reduction efforts with our neenah operating system efforts as well as pricing.
Great and then I guess last one from me sticking with filtration and given that you are having a record quarter.
Are you starting to fill up the Appleton capacity now.
Our filtration business.
From across all of the categories, and which we compete transportation filtration water air filtration evaporative cooling industrial air So really strong demand signals that we're getting.
We've talked about in the past without and managed by asset as much as we do with our system and so we do make trade offs.
Really excited and thrilled with the margins and demand and that business, but I would tell you as far as our North American filtration and transportation filtration business.
It is not yet delivering on where we expect and it is still a drag on our financials. So record for formats, but it's not really being driven out of our north American transportation and filtration.
Very helpful. Thank you very much.
Sure.
Hi, Craigslist and see your name on a screen, but I don't know if you can hear us.
Hi can you hear me.
And.
And <unk>.
Sorry, this is a long day.
I didn't get prompted by I apologize.
Congratulations and congratulations on a strong start to the year Bill Thanks for all the help and.
Good luck and retirement.
Going on issues.
I guess just to start with.
The demand.
Around filtration surgery was talking about how much of that is maybe pent up demand.
Or versus maybe change in the market and to us.
And has COVID-19.
Change the market to a higher growth rate and some of those end markets that youre working with <unk>.
Creation breakdown and water.
Well I think there's some great macro trends, particularly in areas like water filtration and air filtration and door air pollution control.
<unk> air quality. So those macro trends are I think may be escalated coming on to cover that because there is a heightened awareness and.
And all of the population as far as transportation filtration and we're not seeing a significant amount that's pent up inventory on pent up demand at this point that continues to recover and has recovered nicely. There is also a small amount of face masks and layer that we didn't.
Last year, we're doing about $4 million a quarter.
A snap and so it's a small and total what it does do is really provide another avenue and entry into indoor air quality Air pollution control industrial Air and.
Cemented neenah has a strong provider technically and that market.
And I guess just to follow up on that and the.
And you talked about those expansion of market are you already started and to that or.
And I guess can you just.
And I know that you just.
So all those online last year. So can you explain the higher power and how you approach that.
Sure so the easiest.
Penetrating and margins is never easy, but the easiest place to do it is already have customer overlap that back where we started where we have customer overlap and path to market overlap and so where we provide transportation filtration. Historically many of those same customers are also buying and.
Indoor air quality, and filtration media or air pollution control or industrial air type of media. So that's where we started we've continued to see nice demand and we're continuing to balance our resources and investments and some more of those vocal focal areas.
Right.
And I publishers products unless some of the calls.
On a number of earnings based on I apologize, if theres any overlap with Macquarie.
I guess, just and thinking about.
And maybe last quarter and what you said about sequential.
Sequential improvement and we still expected for the from the businesses for the remainder of the year or the.
And the issues around raw materials.
Possibly impact that.
And any demand trends are you worried about that with the escalating raw material prices.
Were you asking about demand and sequential improvements or thought on <unk>.
No top line.
Just because of the rising input prices have you seen any changes to book their demand environment.
Because of those price increases.
John.
The short answer is no, we're not saying that affect demand and <unk> Tec products has pretty much recovered and could see that in Q4 and Q1 from a demand standpoint, we expect it to return to kind of some of our normal seasonality, which typically starts more front end loaded and gets a little bit softer, particularly in Europe, and the summertime I would expect that.
Tech products demand and fine paper and packaging, which is where we had intended to message continuous sequential improvement, we're continuing to see that business come back. It's just at a more lag timeline, because it's really driven by some things like advertising that comes back a little bit slower, but we're really seeing that come back continuing throughout the year and.
And nice improvement and 50% of that segment, which is now consumer products and packaging and not solely dependent on commercial print, which is more of a lagging and net recovery.
And does that Lou.
Just on <unk>.
Packaging side.
Is that are you.
Benefiting from the e-commerce growth and.
And I guess are you growing with new customers and I can just expense discipline on top.
A little bit about that growth.
Sure.
And the packaging and and consumer products, which are really where we have stronger market dynamics. We've had some really nice recent wins.
Some of it and related to E. Commerce, a lot of that is related to sustainability environmental sustainability and our customers.
<unk> towards that and Thats continuing to accelerate they'll both and consumer products. We've been awarded new business that will start shipping significant new better alright, and connection it that will start shipping in the latter half of this year and then we have been awarded.
Nice new business, and our packaging area as well, primarily and the technology beauty and spirit vertical.
And that is driven by some of that is driven by dot com, particularly everybody on on Amazon.
Okay.
And then just your own process.
Can you just talk a little bit about and I know you just closed on that book.
On the integration there and I guess, how does the strength and your go to market strategy and can you just spoke a little bit more of the benefits from the acquisition.
Sure. So it costs and we are on the process of early integration and it's going really well and we talk about our growth platforms are one of those growth platform. The specialty coating, we do a lot of coding and saturation at me and asked other technology overlap chemistry overlap. How we go to market is similar to our supply chain, we have customer overlap.
And so some of the benefits as we work through integration and we're expecting about $4 million of synergies that will ramp and starting in the latter part of this year and be at that run rate by the back half of next year.
Fairly split between cost benefits and areas like transportation, and warehousing and procurement as well and revenue overlap and we have a significant amount of opportunities and North America in particular that neenah does a lot of business. If you think about our industrial segment tape and abrasives, and that's where we see a lot of calm and customers between.
Tape and abrasive and release liners.
And I appreciate that.
I would get you on Apple per book familiarity with that question.
Thank you Sir.
Yes.
[laughter] fair value.
Sure.
But from Q2 thank.
Thank you.
There are no further questions at this time I will turn the call back to Bill Mccarthy for closing remarks.
Okay. Thank you for your time today and my pleasure to get to know many of you through the years and I know I leave you in good hands with Kyle and Paul.
Okay.
Okay.
Okay.
Ladies and gentlemen, thank you for your participation and this concludes today's conference call you may now disconnect.
Okay.
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