Q3 2021 Neenah Inc Earnings Call
With net sales up 40% over last year adjusted earnings were <unk> 38 per share excluding 19th of unusual cost in.
In Q3 2020, the adjusted earnings per share were <unk> 55.
And excluding <unk> <unk> of unusual cost.
Details of these adjusting items along with a reconciliation to GAAP amounts can be found in our press release with that I would like to turn things over to Julie.
Thanks, Kyle and good morning, everyone before we begin to discuss third quarter results, Let me start with employee safety week.
We continue to make solid progress on this core value of our business.
At the end of the third quarter, we have reduced our injury rate by 40% since the start of the year and all time record for Neenah.
While encouraged by these results we remain vigilant in our efforts to achieve our target of zero incidence turning to business performance third quarter results were broadly in line with our expectations.
Starting with the topline demand for our products was extremely strong and we delivered record sales of almost $270 million.
Up 40% from last year and up 22%, excluding the Costa acquisition.
Additionally, a tosser continues to deliver strong performance with September being their third record revenue month since the acquisition.
From a bottomline perspective margins were challenged by a number of factors first as expected and mentioned in our last call. The primary factor was rapidly escalating input costs, which continued to increase throughout the quarter to a greater degree than originally anticipated.
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Compounding these cost increases were supply chain disruption and shortages of certain chemicals, leading to operational disruptions and an unfavorable sales mix.
Operating labor availability in the United States also impacted our business driving manufacturing inefficiencies and higher cost.
Lastly, we experienced unforeseen flood damage at our Pennsylvania facility related to Hurricane Ida impacting results by approximately six cents per share.
In the third quarter, the net impact of selling prices and raw material costs reduced operating margin by over 300 basis points and EPS by over 35 per share versus the prior year.
To this point input costs have continued to increase at a rate faster than the resulting benefits of our pricing actions. However, we expect to see further improvement and recovery in Q4 and 2022.
We are clearly on a path to recover these input costs as neenah has historically done.
To address these challenges we are taking a number of actions first multiple price increases have been implemented in all businesses as well as incremental energy and fuel surcharges.
To address the impact of chemical availability. Our R&D team has worked closely with customers to qualify alternate products to meet market needs.
Over the last few months, we have reformulated over $200 million of annual sales.
Demonstrating the agility and material science Knowhow, we have at Neenah, and a key value we bring to our customers.
Additionally, we've streamlined our product portfolio to simplify operations and improve our cost position, including over a 30% reduction of grades and our fine paper and packaging business.
Unlocks capacity improves our cost structure and ensure as we provide a premium level of service our customers expect from Nina.
We are also working to improve our operating labor challenges by implementing a broad range of initiatives to attract and retain top talent, including referral fees and additional incentives.
So while its clearly a challenging environment I am encouraged with our Swift action and execution to drive margin improvement into Q4 and 2022, while at the same time working closely with our customers to meet their needs.
Before we move on to financials I want to take a moment to recognize bill Cook the chair of our board of Directors, who recently received the <unk> C. D Public company director of the year Award.
This is quite a ladder and we are grateful to bill for his guidance and service to Nina under Bill's leadership, we have strengthened our corporate governance and increase our board diversity with 50% of our board identifying as women or underrepresented minorities, congratulations bill well deserved.
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With that I'll turn it over to Paul to cover financials, then I'll wrap up with some comments on our strategy later in the call.
Thanks, Julie let's dive right into our discussion of price and input costs for the third quarter.
Our actions have resulted in price increases each month of the quarter as our initiatives take hold.
The overall impact of that pricing acceleration for the third quarter was $8 million over 2020.
We expect these pricing actions will gain momentum in the fourth quarter and into next year.
In terms of input cost increases during the third quarter, we saw input costs rise, even higher than our expectations to about $17 million over the prior year of which we were able to offset about half directly with our pricing initiatives for the fourth quarter, we're expecting an input.
Cost increase of over $20 million versus 2020.
We expect to recover about two thirds in the fourth quarter through our accelerated pricing initiatives.
We're now expecting in over $40 million increase of input costs for the full year of 2021 versus last year.
As we've said, we expect to fully offset the raw material cost increases through 2022 with our pricing actions.
Julie mentioned the unfavorable mix overall the mix effect for the quarter was an unfavorable $4 5 million.
Contributing to the unfavorable mix, where the supply constraints.
Let me share some thoughts about what we're seeing in today's input markets fiber prices have peaked globally and in some regions have started to give back some of the gains. So Europe has yet to fall from the peak and while the rate of decline in North America has slowed it remains well above highs from previous cycles.
Chemical input prices rose in the third quarter on strong demand supply is beginning to recover from natural disasters and unplanned outages, while pricing of some basic chemicals is starting to show signs of leveling off as we start the fourth quarter a number of materials remain a tight some.
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Energy has risen dramatically through the third quarter and remains very volatile globally with the most significant impacts to our business being seen in Europe.
And lastly, the challenging global shipping market continues as congestion at many ports adds cost pressures U S transportation market remains tight with national spot rates recently, reaching the highest level of the year.
Diesel prices have been climbing hitting their highest levels at the end of the third quarter. It.
It looks like those transportation cost pressures and availability issues will also left into 2022.
In regards to Appleton facility was closed at the end of the quarter recall, we expect this action to save us approximately $7 million to $8 million a year beginning in the fourth quarter of 2021, Here's a quick review of the third quarter financial statements.
<unk> sales reached $268 million up $77 million from last year's comparable quarter.
<unk> accounted for $36 million of sales in the quarter.
We saw very strong growth in a number of areas, including filtration packaging and industrials.
Adjusted earnings were $12 7 million compared.
Compared to $15 9 million in last year's third quarter.
The primary driver of the variance was the favorable pricing of $8 million.
Offsetting by input cost increases of $17 million, netting an unfavorable 9 million, whereas Julie mentioned, a 300 basis point impact on margins or about 35 a share.
We were able to offset most of that gap through favorable volume and fixed cost absorption as well as the impact of the <unk> acquisition.
Consistent with our discussion last quarter, we expect to see margins begin to improve from here as those pricing actions robust volume and other efficiency initiatives begin to offset the input cost increases and availability issues.
Technical products sales were $173 million up 46% from 2020 and up 15%, excluding a tosser adjusted.
Earnings were $10 8 million down from $13 3 million last year, reflecting the impact of raw material cost increases along with labor and raw material availability.
Technical products is bearing the brunt of the input cost increases and is most impacted by timing with filtration annual pricing taking effect January one.
Fine paper and packaging sales were 95 million up 32% from last year's level and above our original expectations of recovery, reflecting the strength of the packaging and consumer business. Adjusted earnings were $6 6 million from the quarter up from last year's 6 million with pricing.
Offsetting about 75% of the input cost increases we expect to fully offset the input cost increase with pricing initiatives during the fourth quarter in this segment.
Turning to the balance sheet and cash flows liquidity remained strong while year to date cash flow from operations of $40 million was down from the $80 million recorded for the first nine months of last year. The difference was primarily due to working capital, reflecting the strong top line.
Trailing 12 month, adjusted EBITDA reached $122 million as of September 30, compared to the 101 million. We recorded last calendar year as we see the benefit of our continued growth and the impact of the <unk> acquisition.
As a result of the strong EBITDA growth and free cash flow adjusted net leverage was three four times at quarter end and is expected to drop a bit by year end absent any other actions.
Working capital from higher input costs will continue to moderate cash flow through the end of the year and availability issues will pressure mix and efficiencies.
Year to date, Capex was $19 million versus $12 million last year.
We're expecting capex to end up in the low to mid $30 million range as safety growth and cost reduction initiatives are implemented in Q4.
In addition to returning cash to shareholders through our strong dividend during the quarter. We bought back 71000 shares for $3 4 million at an average price of $47 and <unk> 85 per share.
Additionally, the board has authorized a <unk> annual increase to the dividend beginning in the fourth quarter.
Our dividend remains critically important and we're pleased to have raised the dividend every year for the last 11 years SG.
SG&A was $26 1 million versus $19 1 million last year.
<unk> accounted for about $4 million of the increase the remainder was the result of cost reduction initiatives executed in 2020.
While we typically expect our full year normalized tax rate to come in around the low to mid <unk> as a percentage of pre tax income. The 2021 full year rate is expected to be near 20% when considering the magnified benefit of research credits in the current year.
Our effective income tax rate was 48% of pretax book income in the third quarter of 2021 as compared to 23% in the third quarter of last year. This increase resulted primarily from the effects of nonrecurring items relating to the closure of the Appleton facility.
Looking forward, we had expected cost to stabilize in Q4, However, recent increases in energy, particularly in Europe, and stubbornly high chemical costs globally are now expected to continue through the fourth quarter with volatility and availability issues lingering into next year as.
As Julie mentioned, our teams are working to offset these input cost with additional pricing initiatives surcharges and cost reduction actions. So for the fourth quarter, our seasonally weakest quarter. We now expect the impact of input cost to be over $20 million above last year of which we expect to <unk>.
Offset about two thirds directly with our pricing initiatives in spite of these pressures because of the increased pricing recovery, we expect the third quarter margin to be the most challenged through the year and expect to see improvement in the fourth quarter that being said this is a very volatile year and things are changing quickly.
And unpredictably no matter, what we will continue with our actions to offset the cost and availability issues as we have done historically to sum it all up as the year stands now we expect input cost for the full year to be up over $40 million.
Of which will have offset about half directly with pricing, we expect to offset the other half in 2022, as our pricing initiatives, particularly in filtration take effect.
And on that note I'll turn it back to Julie.
Thanks, Paul in addition to addressing our actions driving the business today I wanted to discuss how we are also focused on executing for the future.
Core to our strategy its growth and we continue to leverage our assets and technical capabilities.
Nique material science, Knowhow and unmatched customer relationship to extend our presence in large growing market.
Our four growth platforms filtration specialty coatings engineered materials and imaging and packaging provides a strategic framework, which guides our investment decisions organizational focus and resource allocation.
All are positively influenced by large macro trends such as increased emphasis on health and wellness and a growing preference for sustainable alternatives.
Our products are used in a variety of categories with diverse end use applications, giving us multiple pathways to create value.
As evidenced by our strong top line. We are confident we are focused where neenah has a right to win as a reminder, we have set all time records and filtration packaging and release liners. This year three of our four targeted growth platform.
I'd like to highlight a few areas of momentum aligned with these growth platforms.
Demand for our filtration products is very strong with top line up year to date over 25% from 2020, and 20% from 2019 levels continuing a trend of record breaking performance.
We are seeing strong demand across all end markets, especially in life science and industrial applications, where sales are close to double pre pandemic levels.
As we continue to extend our high performance media for air and liquid acoustic and thermal applications.
We have introduced two new platforms, Neenah guard and mean appear which provide the highest level of filtration efficacy available in the market.
Leveraging these platforms, we expect to continue to grow and diversify and attractive categories such as building HVA.
Gas turbines gas get process fluids and medical testing.
Turning to our specialty coatings platform, we are focused on driving record growth and release liners.
We are pleased with the fastest performance and a strong Q3 in line with our investment thesis.
Integration is progressing according to plan and synergy delivery is on track <unk>.
Progress continues on our recently announced capital expansion for a new state of the art Coder in our Mexico facility expected to start up in 2023.
This investment will support our growth expectation for the business, which historically has been around 8% annually.
Lastly, <unk> was awarded the E Mail data 2021 gold medal for sustainability and achievement, demonstrating our leadership commitment to sustainable manufacturing practices.
In engineered materials, we continued our cadence of innovative product introductions launching two new products this quarter that provide sustainable alternatives.
First we recently lost a new recyclable paint products made with sustainable fibers. Unlike classic base tape this product breaks down along with the box during the recycling process.
Making the product, 100% recyclable and unique to the market.
We also expanded our dispersed sub product line of sustainable label tags and patches.
First in water and are used in applications, such as food rotation labels and reusable plastic containers.
This product extension continues our approach to combine superior functionality and sustainability.
Last but not least we celebrated a record quarter in our packaging business.
Almost 20% over pre pandemic levels.
Demanding customers appreciate the unique and sustainable packaging solutions need to provide including plastic replacement alternatives for applications in our targeted verticals of beauty and cosmetics alcohol high end retail and electronics.
Evidenced in these examples is solid progress in both M&A and innovation to key enablers of our strategy.
With M&A, we maintain a robust pipeline of targets. We also remain committed to maintaining a healthy balance sheet and strong cash flows.
Innovation is a key part of our strategy, taking a market back approach, we are leveraging the ideas and insights of our customers employees and independent research to inform our efforts.
We are encouraged by the depth of our pipeline and expect our pace of development to continue to increase over time.
Lastly, the neenah operating system as a consistent framework of principles practices and tools through which we will continue to drive meaningful and sustainable margin improvement.
As a reminder, this global manufacturing initiative is based on lean principles and methodologies.
Improvement will be gradual.
As we execute many specific measurable projects facility by facility.
We are pleased with our progress and are on track with our plan.
As these initiatives take hold we expect to see both top and bottom line benefits and the merits of a more diversified mix of specialty products.
In summary, we have focused efforts to drive significant value as we close out this year and launch into 2022, including net pricing actions, which we expect will offset the 2021 recovery shortfall of approximately $20 million.
A full year of our <unk> acquisition.
Valued at an additional $5 million of EBITDA in 2022.
Closure of our Appleton facility, which will generate over $6 million of incremental EBITDA next year.
And focused organic investment innovation, and M&A efforts and our targeted growth platforms.
And while we don't expect input costs to decrease dramatically in the near term, we do expect them to begin to stabilize at current levels and in some cases retreat throughout 2022.
Our goal is to grow the top line by 5% and earnings by 10%.
Driving EBITDA margins in excess of 15%, while generating investment returns above our cost of capital.
Despite the near term input costs and supply chain pressures our teams are leaning in to drive the business forward.
I am encouraged by our progress toward these goals and confident we have the right strategy and initiatives in place to deliver.
I'd now like to open the call for questions.
At this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad.
Cause for just a moment to compile all over it.
Q&A roster.
Your first question comes from the line of Jon <unk> with CJS Securities. Your line is open.
Hey, good morning, everybody and thank you for taking my questions.
Morning, John morning, John Good morning.
Paul I was wondering how the sequential input costs.
The increase compared to your forecast I guess at the prior.
And the last quarter, I think you had called out $7 million.
How much more of it more than that.
Yeah.
Yes, we had expected somewhere between 7% and $8 million. When we gave when we talked about this last time.
It came in at 11, so it came in higher than the seven to 8 million we.
We had expected some kind of abatement in the rate of escalation in input cost, but they continued right up through the quarter. So that was the difference I think.
Good news on that whole thing is that we were out and we still got half we had expected to offset half of the $7 million to $8 million with pricing. We ended up offsetting half of the 11 with pricing. So we got a better impact.
11 billion impact, we had got a better impact on pricing than we had expected.
Okay, great thanks for that color.
Hearing you correctly.
I think the closure of the Pennsylvania facility was a <unk> <unk> impact you still would've made a consensus numbers, even with that headwind that had it not been for that Scott.
Is that right.
That's correct John that we didn't close the facility, but it was down because of the hurricane and flooded and that was about 6%.
A share impact so yes absent that we were at or slightly ahead of consensus.
Got it thanks liquid things in perspective.
My second question is how much do you expect tech products margins to jump when you have your price increase to take effect.
In Q1, especially those annual contracts that we've been waiting for.
Yes.
We expect both of our businesses to get to mid teen EBITDA margin or mid teen margins and Theres a number of areas that we're focused on to do that you hit it right on the head technical product is where we have the longest delay in pricing because we have annual agreement for filtration. So a lot of that pricing.
Seeing next year that $20 million debt.
Paul referenced that's in our technical products business.
In addition to that from a margin impact standpoint, we've talked about $5 million of incremental EBITDA from a tosser that will hit technical products at an incremental value of $6 million from the closing of our Appleton facility that will hit technical products. So all in the over $30 million with the majority of that.
Hitting technical products.
Okay.
Okay, Great and then did I hear you correctly that you expect the paper segments that get to a full recovery.
Cost increased from Q4 and kind of be at that mid teens already.
Yes.
Our expectation is that we get to the full full pricing recovery in the fourth quarter, we made lag mid teen margins, a little bit because we are seeing availability mix and labor.
Mark on effect of all of that stuff rolling through efficiency. So that may drag the margin down a little bit. So we weren't saying, we get to 15% in fine paper in the fourth quarter, but will be on the path for it.
Okay great.
And one more if I could you did a lot better than paper than what you would just can you sustain that sales momentum to get more volume or the price that's driving that strength.
Its both really strong volume in our fine paper and packaging business and it's a pretty diversified business with about a third of that being in commercial print or the more traditional paper side, a third of it being in packaging, which had record performance and that team has done a great job winning new large piece.
A business that then continue over time.
And then about a third of it in consumer products, which has stronger underlying market dynamics than commercial prep. So the diversity of it.
Really helps from a sustainability standpoint in the packaging business growing really helps from a sustainability standpoint, you lock into some of those specifications and then you have those for a fair amount of time.
Yes.
Okay, great. Thanks, guys appreciate it.
Sure.
Your next question comes from Chris Mcginnis with Sidoti and company. Your line is open.
Hey, Chris Good morning, Thank you.
Good morning, Thanks for taking my questions.
Nice top line on the.
Quarter.
I guess, just maybe to start with.
Maybe with a task or can you just maybe talk about your organic rate and maybe I was wondering maybe notable end markets that are are you seeing much stronger demand from that from X from Thomson.
Sure the tosser integration is going extremely well.
<unk> had record revenue in three of the months that we've owned them and we only purchased them in April so nice continuous improvement they are ramping up at <unk> in Mexico, Thats ramping up ahead of schedule they've qualified a new business with new customers. Some of those former <unk> customers and some of the former <unk> customers.
<unk> and so there's a nice cross selling opportunities and the synergies are on track as well and they are very very strong team I couldn't say enough how strong that team is from a leadership standpoint.
As far as the what's driving it in an end market standpoint, it's a very diverse.
End market that they serve whether that hygiene roofing medical appliances tapes labels theres, a tremendous amount of diversity, which is one of the things we really like about that business. It doesn't see a lot of.
Seasonality or cyclicality dependent on specific end markets its really at overall nice nice trends that they support.
Great.
Just within packaging I think you referenced that was up over 20%.
Those new wins are you able to build on those and remember you earlier in the euro highlighting that growth is going to come now it's here.
Have you won more contracts that are just as strong.
Throughout the year can you just maybe expand a little bit more on.
And the rate of growth there.
Sure I love going over on that side of our floor in the building because they are always talking about new business and new wins and you're exactly right. Once you penetrate a large customer or even a vertical.
And you're in the door and you've qualified on one product year. The income that you get the opportunity for the next project for packaging.
I would also tell you that strong macro trend of environmental sustainability is working extremely well for Nina who are often the preferred supplier for packaging to plastics or other less environmentally friendly materials.
That's really growing nicely as well.
Great.
And just within filtration or with NTP, you're just talking about maybe new product growth.
The filtration segments changed a little bit maybe.
And maybe talk about that rate of growth from new products somehow thanks.
Sure I think one of as referenced in our prepared remarks, Neenah Guard and Nina pure that's just our branding of some of the new industrial and life science applications that we've launched when Covid hit and we had the opportunity to support the community with face Matt.
We knew it was opportunistic from a face mask standpoint, but it helped us penetrate new customers and new market.
So from there we can grow primarily in air and liquid and process fluids and building HVAC a lot of those areas that have very strong trends right. Now for everybody is looking for a healthier quieter world in our filtration product helps support that.
Okay.
Right.
Last question, just when you talked about the re formulation of that $200 million in revenue of products I guess on an annual basis.
When the interim analysis were formulated offering is that a lower margin.
Impact to your margin profile and do you think is availability.
Maybe it comes up.
The product becomes more available that margin profile should increase can you just talk a little bit about that Bruce formulations impact on the business.
Yeah. It does not have a significant impact on our margin what it does surprise us it gives us options and it gives our customers options. So one of the ways Neenah wins in the marketplace is our agility and flexibility and our intimacy with our customers and what their needs are.
So it is during these times when supplies are tight when customers really remember how theyre treated the fact that we've been able to reformulate.
Has saved them quite a bit and really created a success for us and for them, but from a margin standpoint minimal impact.
Okay great.
For taking my questions and good luck in Q4.
Thanks, Chris.
Your next question comes from Jon <unk> with CJS Securities. Your line is open.
Alright, thanks for taking the follow up I was just wanted to clarify something.
You said Julien you said, you expected, 5% topline growth and 10% earnings growth was that in reference to 2022 or is that just the long term goal and then you also mentioned at 15% plus EBITDA margins.
Got it.
Way to go over that a run rate of our long term goal.
That's our long term goal I mean right now.
We're targeting that 5% top line, 10% bottom line, 15% EBITDA margin, but over time, it'll be five business over time as well.
Okay got it and you have them.
Slide 22, just in terms of euro closed yet.
Yes.
So while we haven't given specific specific guidance on 'twenty, two but we are expecting we've done a lot of things this year to really position the business and we're expecting to get that net $20 million impact on pricing, we're expecting to get the benefit from it toss that we're expecting to get the benefit from the closure of that facility.
<unk> in Wisconsin.
So all of that is going to roll through in 'twenty. Two so we're expecting to definitely put ourselves on that path. If you go and you look at the first quarter of this year before the World went crazy or the first quarter of last year before the worldwide Crazy, we had very strong margins in the business and so as we are.
As we think about how we go forward I think that all of that combined with the actions we've taken to put us on the path to get to those margin growth and bottom line goals.
Okay.
Got it thanks guys.
Sure.
So there are no further questions at this time I will now turn the call back over to truly sure Charles Chief Executive Officer.
Thanks.
Let me wrap up we've made a lot of decisions and taken many actions to reposition Nina and we've made tremendous progress on our targeted growth platform.
We recognize it's still hard to see all of that on the bottom line. So I want to summarize for you we highlighted in our prepared remarks and in some of our Q&A some of those decisions and actions and how they will impact us pricing recovery of $20 million in 2022.
Incremental EBITDA from a tosser, a $5 million, an incremental $6 million from closing the Appleton facility.
It's around $30 million of impact to our bottom line in 2022.
There could be some things that break the other way and the environment is definitely volatile.
But in the short term to have this kind of upside is significant for neenah and for our shareholders.
Longer term, we have a very focused strategy for growth.
For platforms that will continue to invest in those platforms.
We also announced record performance in three of the four platforms and capital investment to unlock capacity in two of the <unk> platform. This year.
So there are clearly identifiable actions. We took this year that will drive significant value in the short term and decisions and investments we've made for our continued growth and margin accretion longer term.
We're looking forward to updating you on our continued progress next quarter and we hope to have the opportunity to talk to many of you at the upcoming virtual conferences hosted by Baird Next Wednesday November Tech.
And have a great day.