Q1 2021 Schweitzer-Mauduit International Inc Earnings Call

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Welcome to Swm's first quarter 2021 earnings conference call hosting the call today from SWM is Dr. Jeff Kramer Chief Executive Officer. He is joined by Andrew Wamser, Chief Financial Officer, and Mark check and now director of Investor Relations today's call is.

Being recorded and will be available for replay. This afternoon. At this time all participant lines have been placed in a listen only mode and the floor will be opened for your questions. Following the presentation. If you would like to ask a question and at that time. Please press star one on your Touchtone phone.

Any point. Your question has been answered you may remove yourself from the queue by pressing the pound key if.

If you should require operator assistance. Please press star zero and we ask that you. Please pickup your handset to allow optimal sound quality it.

And it's now my pleasure to turn the floor over to Mr. Checking now Sir the floor is yours.

U M I N T L Dot com I will now turn the call over to Jeff.

Thank you Mark and good morning, everyone.

We were pleased to report a very strong quarter with positive momentum continuing and several key areas of the business, particularly across the fastest growing and most strategic product lines.

As we now operate and the new COVID-19 normal I want to again commend our global organization for staying nimble and adjusting to challenges as they arise this.

This quarter it has been around logistics as businesses around the world deal with very and constraints related to the positive poles of and improving the economy.

And while many areas of the economy will grapple with inflation and tight global supply chain. This year, we are confident and our ability to raise prices and manage costs to preserve excellent profitability.

We are equally confident and our ability to execute on the SCAP and integration and ultimately deliver another year of strong financial performance.

Bottom line, despite the heavy lifting behind the scenes to keep service levels high strong Ams organic sales growth and good execution and both operating segments drove 20% adjusted EPS growth and the quarter to one dollar too.

As you're likely saw we closed the SCAP acquisition on April 15th two weeks after quarter and so none of Scotland's financials are reflected in our results.

That said in addition to a more typical quarterly discussion I will elaborate on the exciting new capabilities, we added with Scapha as well as the expected acquisition accretion and overall annual earnings guidance, we are finally able to share.

Our annual guidance implies mid to high single digit earnings growth and 2021, which reflect some of the immediate accretion. We expect this year from joining the two firms and.

Importantly, we expect a significant step up and accretion for the following year as we complete our integration and begin our value creation activities.

I can confidently say that looking longer term, we have never been better positioned for sustainable top and bottom line growth as we are today.

And markets are demonstrating good demands operations are running well and our portfolio of products and services continues to expand further and our vision of being the supplier of choice of performance materials and integrated solutions for specialty applications.

Four amps overall sales increased 33%, including the benefit of the Tetra acquisition, while organic sales increased 15% and the quarter, we were particularly encouraged by the breath of strength across the portfolio.

And <unk> to this as medical but given SCAP is broader product line and services as well as their branding and the marketplace. We will be referring to this area and are invested communications going forward is healthcare to better represent our increased capabilities.

We saw a strong performance and our tradition consumer oriented finger bandage business as well as more specialty applications like packaging and face masks.

The health care Arena is very attractive long term given the need for specialized material and ageing demographics and we are excited to essentially triple our business to about $250 million annually with the addition of Scarper.

Simply put the more things we can do for our customer the better positioned we are to win more wallet share.

With the increased scale and breath, we will have with Scapha combined teams will have a far greater offering to present to our customers.

There will be opportunities to cross sell products and perhaps most importantly, bring a variety of value added services and capabilities like development formulations coding converting packaging and even regulatory assistant to our current customers, which goes beyond the materials value proposition. We currently provide.

Lastly, construction sales also increased and the first quarter high.

Higher activity and the oil and gas industry drove year over year games per parameter controls materials used and the Marcellus shell region as well as and increased focus on solar farms.

In addition, netting for highway infrastructure and other construction projects also grew nicely.

Further we saw gains and a building products.

And area. We also expect to drive value from through the <unk> acquisition as we will bring its well regarded specialty constructions tapes two business to our customers.

I think it is also important to address the bugging supply chain pressures that most industries are seeing and which we expect to experience during the remainder of the year is the global economy away and.

We are seeing and pricing and supply chain precious across many of our inputs as raw material manufacturers have been hit by temporary shutdowns availability constraints and the key inputs and shipping challenges just as global demand is starting to rebound.

With that said and as demonstrated by our strong 2020 results with COVID-19 pressures I am confident and our supply chain the ability to meet customer demands and handled the increased cost pressures, although there may be some choppiness due to timing.

All told and Ams sales drove over 40% adjusted operating profit growth and the segment and we look forward to continued strength and 2021.

Switching to engineered papers the business performed as expected and the first quarter. As we had previously noted we recently closed or spots with New Jersey facility and begun transitioning that facilities key customers to products made and other sites.

As part of this transition that customer work through legacy inventories before now restocking with new product, which had a temporary impact and the first quarter contributing to a total segment sales decline of 10%.

The transition is going and plan and we are realizing cost savings from this initiative.

On the positive side, we had solid performance and some specialty tobacco papers, and very strong growth and heat and not burn volumes as our customers continue to drive sales of these reduced risk products.

Of note. Despite the lower sales segment adjusted operating profit declined only 6% due to good manufacturing performance and cost savings from the site closure.

With that I'll turn the call over and Andy to review the financials and more detail.

Thank you, Jeff starting with Ams first quarter sales increased 33% with organic growth at 15%.

The organic growth calculation assumes we had one tetra for the entire first quarter of 2020, rather than the partial period ownership.

As Jeff discussed, we had strong demand and most of our and market.

Particularly transportation and filtration two of our higher margin areas.

Given the substantial positive swing and our transportation business. We think it is noteworthy that even without this and market our organic sales growth would have still been up about 10%.

Signaling the strength of the entire portfolio.

This strong sales and mix also led to excellent profitability.

Although we have some customers where timing of our contracts, we will limit our ability to recapture higher costs with price increases on some of our large contracts.

We are raising price, where possible and exploring multiple avenues to offset higher pulp prices.

Regarding adjusted unallocated expenses, we saw an increase of approximately $1 million during the quarter, mostly due to timing of administrative expenses. However, as a percentage of total sales was essentially unchanged versus the prior year quarter.

The expenses that were adjusted out all were due to the <unk> transaction and included advisory diligence and other related costs as we prepared to close the acquisition.

And upcoming quarters, we will book additional onetime expenses related to the deal, which we will also exclude from our adjusted financials.

On a consolidated basis sales for the quarter increased 10% or 3% on an organic basis and.

Adjusted operating profit increased 14% and adjusted EBITDA increased 13%.

First quarter 2020, GAAP EPS was <unk> 68.

Versus 72.

And most material comparison items relate to the <unk> acquisition expenses, which totaled 22 per share and included both the unallocated expenses within operating profit, but also the negative impact of a currency hedge to lock and the price of the British pound at the time when the deal was.

Announced.

Please refer to our 10-Q and our press release for additional details on this topic.

We also booked and <unk> 11 per share gain and the quarter from a favorable settlement related to our Brazil tax assessments, which was also backed out of adjusted EPS.

Normalizing for those items as well as the typical noncash purchase accounting expenses adjusted EPS was $1 two up 20% versus last year's first quarter.

In addition to the strong growth and operating profit our tax rate was slightly lower and our JV income was slightly higher as well.

The tax rate embedded in first quarter, adjusted EPS was 25% and 80 basis point improvement versus last year's first quarter.

While we normally provide annual adjusted EPS guidance in February and conjunction with year end results.

Recall that due to regulatory restrictions related to our acquisition of GAAP up a UK based public company, we were unable to do so at that time.

However, with the transaction closed we have issued 2021 adjusted EPS guidance of $3 75 to.

And to $4 and five.

This guidance includes expected accretion of approximately <unk> <unk> from the <unk> acquisition.

Which we will own for essentially three quarters.

Looking beyond this year, we believe <unk> will be significantly more accretive and 2022.

We estimate at least 50.

Adjusted EPS accretion next year as the business returns towards pre COVID-19 levels.

Consistent with our comments and February we expect our EP business operating profit to revert back towards the multi year trend and the mid $120 million range. After a particularly strong 2020.

We believe this pull back to normalized levels will be more than offset by anticipated profit growth and Ams due to expected strong organic sales performance.

Unfortunately, the rapid and unexpected rise and certain lines certain raw material cost is certainly temporary what would have otherwise been a much more positive outlook for 2021.

We believe that the cost headwinds that 10% earnings growth implied at the top end of the range is achievable and with represent a very positive outcome.

Before Jeff offers a more strategic perspective on Scapha I'd like to recap some of the financial aspects of the transaction and some key points on the expected accretion.

We acquired Scapa for approximately $630 million, including net debt.

We financed the deal with a new $350 million term loan b as well as our revolving credit facility.

Though of course, the closing is not reflected in our March 31 balance sheet.

Pro forma based on the covenants and our credit agreement our net debt to adjusted EBITDA at close was approximately four three times in line with our range at the time of announcement.

The table on slide eight is intended to help frame scaffolds recent financial performance and our expected accretion and 2021 and 2022.

Please note. These numbers are approximate and rounded meant to be illustrative and reflect a British pound exchange rate of $1 38 for all periods to improve comparability.

At today's exchange rates, Scapa generated approximately $440 million of sales and $55 million of EBITDA and.

And its fiscal year 2020.

Which ended in March 2020, and what we refer to as pre COVID-19.

And <unk> impacted both GAAP and healthcare and industrial segments.

As shown in fiscal 2020 results, which just ended in March.

While sales and the industrial business have been steadily recovering the healthcare business remains somewhat challenged with consumers around the world opting to minimize hospital and clinic visits as they postpone elective surgeries and procedures.

We believe elective surgeries will recover as consumers steadily return to more normalized lifestyles vaccinations increase and the backlog of delayed medical activities is fulfilled.

However for 2021, we want to remain conservative and our thinking.

We note that during the pandemic scaffold took actions to reduce costs. Thus, we expect to see improved margins. Despite lingering sales headwinds. In addition, we've identified $5 million of public company and related administrative cost synergies that we can execute and the near term and the potential for.

More cost savings and sales synergies down the road.

When considering our 2021 accretion estimate of <unk> <unk> per share. We note that this represents nine months of ownership.

Also in 2022, we do not assume a full recovery to arrive at <unk> 50 accretion.

<unk> sales ramp back towards to pre COVID-19 levels faster than we had assumed we would be and good positioned to meaningfully exceed our <unk> 50 accretion guidance, given higher margins on scaffolds and lower cost base and the realization of synergies.

From a high level modeling standpoint, we estimate interest expense for the transaction at approximately $22 million, and 2021 and $29 million and 2022 and what it assumes a low to mid 20%.

Our range for our tax rate.

Now back to Jeff.

Thanks, Andy.

I'd like to now reiterate some key strategic highlights of the Capa acquisition before closing our comments.

We first set out to diversify and reposition SWM for growth back in 2013 and.

And we May have made a series of highly strategic acquisitions, and the creation and expansion of Ams.

We have established a good track record for integration and execution and has built a 500 million diversified business on the vision of offering customers high performance materials designed for specialty applications.

Along the way, we expanded our product set capabilities and end market exposures, all with the goal of offering our customers a full suite of solutions to help solve their most pressing and product design and performance challenges.

Scapa, while larger than our other acquisitions is simply an extension and even and acceleration of the strategy we.

We have extensive overlap as far as healthcare construction and transportation and industrial exposures and with Scott and we took a significant step forward and broadening the full solutions platform, we want to bring to our customers.

Recall, we first added more significant downstream coating and converting capabilities. When we acquired Tegra and believes Scapa represents a step function increase and capabilities when it comes to fulfilling our vision.

We now bring customers more advanced upstream capabilities and innovation product design, and chemical formulations as well as more downstream offerings with coding converting and packaging.

Continuing our evolution as a full solutions provider.

As I said earlier the more we can do for a customer the more ways. We can help the better positioned we are to earn their business.

I would also note that while we have talked a lot about step a sizeable healthcare business, given our increased scale and the opportunities to bring new capabilities to a larger customer base.

I also want to focus on that like SWM SCAP is in a number of attractive specialty application serving a diverse set of end markets cable rafts construction tapes consumer products electrical harnesses for automotive just to name a few and.

And just like SWM scarp has built a reputation for quality and service and leadership and many of these key product lines.

And what does it all mean for Swm's long term financial performance.

I believe the short answer is it improves our growth outlook with nearly two thirds of our business being generated and expanding and markets. Our portfolio continues to shift towards a stronger organic growth profile.

We are better positioned than ever to drive positive sustainable long term results.

We look forward to another year of earnings growth solid execution and of course welcoming scapha into our global organization.

That concludes our remarks.

Donna Please open the line for questions.

As a reminder to ask a question and please press star one on your telephone keypad.

First question is from Chris Mcginnis with Sidoti and company.

Yes. Good morning, Thanks for taking my questions and nice start to the year.

Thanks, Chris.

Maybe just start with.

The double digit increase on the on the filtration products can you just talk about is that demand trend.

And still at that rate as you exited the quarter also you did talk about a little bit of pent up demand and some of those components are and some of those kind of end markets.

How much do you think that drove it versus a rebounding economy. Thanks.

Yes, so so Chris just a couple of things filtration continues to be one of those segments. So we have high confidence is going to be a long term growth for us it's been a great performer, even before COVID-19 and we're really confident that it's going to continue to do that.

Yes, it's still it's still and that I think it's exiting the quarter are strongest.

As we discussed and the results and so I have confidence that that demand is there.

Some of it is a little bit of pent up demand I think but it's a hard question to answer I think the water for instance, our increases and water is going back to that normal strong demand that we see I think that demand for purity et cetera that trend isn't going to change I think there has been a fundamental change and the air filtration.

Market, where demand is going to increase I don't think were going to go back to the old days and I think we're well positioned to take advantage of that I think youll see some less demand on the mask materials, but the filtration material I think will remain strong. So overall our process fluids filtration is snapping back was that goes into.

<unk> industrial et cetera.

So we like that position and.

It's going to remain strong.

For the remainder of the year.

Great I appreciate that.

Then just on the transportation obviously.

And it's been improving you think it stays and kind of growth or as we go throughout the year just given the impact COVID-19 had on it last year and you just talk about your expectations I guess for the year on that yes.

We again, that's another area that whole transportation marketplace, we like a lot I think we mentioned in my comments that we saw the surface protection component of that transportation industry up 50% that one is probably a little bit harsh for a long term demand, but we still think.

That that whole paint protection marketplace has a lot of growth. It's a penetration play and we're seeing a lot of attention into it now and I think that one is positioned well for the long term as well with double digit growth.

Okay.

And then just on EP.

And maybe a little bit about.

The down quarter and the impact of softwood.

And I get your thoughts around how that.

Now for the remainder of the year last year was a little weaker though.

Maybe you could just help us in any way on how you how you think about that for the remainder of the year on the volume side, yes.

Yes sure so.

We announced a 10% decrease in the business for the segment, but that was really driven by two major factors one.

Just a normal transition when you closed one facility you always and moved to a new product you always buildup inventory for to ensure that you have that material force smooth transition just in case, the transition's going smooth, but we just work that inventory down and so that's had some pressure on our IP type.

Materials. The second is we had a material drop off and volume of printing papers, which we use as a filler and it's a low it's a low margin business for us So volume wise it had a big impact, but profitability wise it didn't have a material impact and the same way.

And Thats why we still had.

Leverage in terms of top line versus the bottom line I think we've been very consistent we think the EP business is regarding just to the long term trend that we've shown over the last four or five years very consistent cash.

Flow is very consistent profitability last year, we said I think and our comments that part of that wasn't and be extra ordinary results was parked build to inventory build as people were handling materials supply chain constraints and that we expected it to revert to our normal and that's what we're seeing.

Okay great.

And.

And the accretion numbers, thanks for one providing the slide deck and growing.

This GAAP.

Congrats on closing that.

I guess, a couple of things and scaffold for and can you just talk about how that changes.

And I know, it's very early but how does it change your go to market strategy, how does it improve it, especially as you renamed and medical and healthcare.

And then just the confidence in.

And that rebounds, and and how much leeway in there and with that 50 net number and the 400 million in revenue and 22.

Yes, So let me address a couple of things I don't think it changes our strategy at all it's an evolution of our strategy. So the things that we are doing right. We have always been more of a performance type customer company, which means we need to provide solutions.

Problems that our customers bring to us and so our strategy has always been to reinforce that solutions orientation.

And bring additional capabilities that our customers are asking us to bring so Scarborough is exactly that we've always had a very strong position and what we used to call our medical business Scapa as has established itself as a leading outsourcing come.

<unk> for the healthcare industry with very strong relationships through a lot of customer overlap and so they bringing additional capabilities to our medical business that I think we're going to be able to leverage and that has been our strategy on the medical health care side on the industrial side.

And we don't talk about it as much but if you look at the markets, that's GAAP or brings and their ability to bring us adhesive capabilities and knowledge and skills highly complementary to many of our industrial marketplaces. So again very consistent with the strategy of bringing additional capabilities that our customers are asking us to bring too.

Them and.

And then giving us greater exposure to additional markets and additional customers. So.

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