Q2 2021 Schweitzer-Mauduit International Inc Earnings Call
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Welcome to Swm's second 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 Chicken out.
Director of Investor Relations today's call is being recorded and will be available for replay later this afternoon.
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It is now my pleasure to turn the floor over to Mr. Chicken now Sir you may begin.
Thank you Missy and good morning on Mark <unk> director of Investor Relations and SWM. Thank you for joining us and discuss our second quarter of 2021 earnings results before we begin I'd like to remind you that the comments included in today's conference call include forward looking statements actual results may differ materially from the results suggested by these comments for a number of reasons, which are discussed.
And more detail and our Securities and Exchange Commission filings, including our annual report on form 10-K, and our quarterly reports on form 10-Q.
And to these headwinds.
In addition to rapid increases and raw material cost and logistical shipping and challenges. We also experienced limited availability on some specialty TPU residence actually capping, which should have been and even stronger sales and earnings performance without these limitations.
As we demonstrated over the past 12 months, our global supply chain teams have done and continue to do and outstanding job and balancing and these pressures and servicing our customers.
Our customer base is increasingly realizing that innovation to innovation and quality, our supply chain flexibility and reliability are significant competitive strengths and our key benefits of working with us <unk>.
Bottom line is that we are very pleased with our strong sales performance the demand outlook and our global team's ability to continue to deliver impressive results against the dynamic set of supply chain hurdles.
And of course, if that wasn't enough. We have also been quite busy integrating our largest acquisition to date scapha.
We closed the transaction and mid April and we are already excited by what we see as we bring the 2 organizations together.
Our investment thesis of adding complimentary industrial and healthcare businesses with increased global reach new customers and expanded capabilities is solidly intact as we plot a bright future together.
And Hey M. S. Overall sales increased 90%, including the benefit of the <unk> acquisition, while underlying organic sales increased and impressive 18% and the quarter, we saw excellent and growth and many of our highest value and most strategic product law.
Lines.
And transportation and we were up nearly 60%.
As you recall 2020 was a chopper year for our pay protection films business with significant disruption and the automotive market.
But this business has snapped back sharply.
Underlying demand fundamentals remains strong and consumers are driving rapid growth for these high value paint protection products.
In fact sales could have doubled if not the limited access to some specialty residents used and manufacturing processes.
And round numbers, and we had unlimited access to raw materials, we could have generated up to $10 million of additional sales and our transportation business.
Our teams are working diligently to secure additional sources. So we can maximize sales of these high value products.
Longer term this error remains 1 of the brightest sparks and our growth picture and or expanded capabilities and coding and converting from our last 2 acquisitions give us new opportunities to improve our technical and competitive position and this highly attractive specialty application.
Filtration grew over 25% and the quarter day.
Demand was well balanced across the portfolio with the fastest growth and a water and process liquid filtration products.
We continued to truly liked the overall macro trends for this and market.
Our water customers continued to relate bullish outlook to our commercial teams as they restock from depleted inventory levels.
Increased activity of processing sites and can say positive outlook for additional capacity coming on line, especially for projects and the Middle East Africa, and Southeast Asia regions.
Needless to say with a heavy demand for semiconductors and widely publicized shortages our process filtration materials used and chip manufacturing are experiencing high demand as well.
And not to leave out outgrowth tradition, which is a key beneficiary of societies focused on improved air quality and our new Covid real reality.
We grew strong double digits and this product line on top of a 40% growth, we saw and last year's second quarter.
Construction sales also increased over 25% and the second quarter.
Similar to the positive fundamentals and the first quarter higher activity and the oil and gas industry drove year over year gains for perimeter control materials used in the Marcellus shell region.
Solar farm activity continued to increase significantly as well as our sediment control products aren't important perimeter protection component and these environmentally beneficial projects.
But some of the fastest growth came in a residential and commercial building products and infrastructure related products for highway developments.
Which sizeable proposed infrastructure spending plans moving forward and Washington, and increasing focus on sustainable energy projects macro trends remaining positive here as well.
Ams.
<unk> existing healthcare business face to tough year on year comparison as last year, we bend it from the unprecedented demand from materials used and face mass production and related to Covid.
Outside of that tough comparison, we saw a good gains and several specialty products using advanced wound care, then so films and medical packaging demonstrating the broad health of our business.
As noted we closed on the <unk> acquisition during the quarter. So only have very early but positive to use to share.
Our combined technical development manufacturing and commercial teams are extremely excited about the projects, we've already identified to bring new products and technologies to our growing customer base.
We believe are significantly expanded false solutions offering as best in class and the healthcare industry when it comes to skin friendly products.
And Scotland's leading industrial coding and adhesives capabilities highly complimentary to our industrial products.
This acquisition fit squarely into our strategic intent of adding capabilities, which our customers are requesting and which build on our strengths.
Regarding staffers performance, we are pleased that it needs and is meeting our expectations and is on track to deliver on the financial results, we outlined and our accretion expectations on our may invest a call.
And he will add more call us shortly but and short we are encouraged by the recovery, we see from the year ago period, when Covid first began to impact the business.
For context, and excluding currency fluctuations in GAAP accounting conversions overall sales were up approximately 40% versus last year second quarter, and we're just below 2019 levels.
Scupper industrial is seen similar as demand increases as our other growing and markets.
Healthcare seeing upturns, but at a more moderated right as consumers have not yet to resume normal patterns with respect to elective procedures and more discretionary hospital visits.
We continue to expect consumers to resume bore normalised levels of healthcare activity and 2022.
As most industries are reporting supply chain pressures were challenging.
We have found creative solutions to the constraints on logistics and shifting as well as access to some raw materials as lead times expanded.
And we have been aggressively raising prices our increases to date have been successful and we will continue to take actions to recoup higher costs as appropriate across our portfolio, though and there is an inherent lag and the price cost recovery of these actions.
We expect we will continue to make us navigate some choppy waters for the near term until more normalised conditions return.
Given the COVID-19 related sales volatility over the past year, we have found it useful internally to use high level comparisons versus versus first half 2019 to further tests the underlying health of the business and I thought it might be helpful to share them externally as well.
These figures are on apples to apples basis, so they exclude the impact of the Scapa and Tegra acquisitions.
Filtration and healthcare are each up over 25% versus first half 2019.
Transportation was essentially fat flat, although without current supply constraints would have been up approximately 20% and construction was up over 5%.
Although the noise of the past 18 months can make comparisons difficult we want our investors to understand that the underlying demand across amis has proven quite robust.
Switching to engineered papers quarterly bottom line results were softer than last year, though many of the factors were expected.
Volume performance was actually a positive 3% with 4% sales growth.
It was mixed and raw material increases that were and challenge.
On mix, we saw a lower volumes compared to last year and several large companies continue to adjust inventories to reflect changing supply chain and COVID-19 outlooks.
As you may recall, when we outlined our annual guidance, we were expecting tough comparisons versus 2020, when several large customers built inventory ahead of uncertain supply chain risks related to COVID-19.
These inventory build benefited the second and third quarters, and where a key factor and last year's strong profit performance as EEP delivered well over the mid $120 million EBIT range, we had seen in recent years.
Fact, and into our guidance was a return to more normalised profit levels.
Segment profits will also impacted by higher raw material costs and supply chain constraints similar to IMS.
And response to rapid increases we have raised prices across multiple product areas with success and even more contractually specified customers.
We consider this success evidence of the very strong positive relationships, we have with our customer base.
And finally, the last inefficient inefficiencies related to the transition of newly developed products from the spots were facility to other sites also flow through the P&L, but that transition is now fully complete.
On the positive side innovation within this segment continues to be a positive offset.
Our and heat and not burn product line continues to see rapid growth and we continue to work on new developments with key customers.
We are also seeing initially small, but encouraging early orders and our new hemp and botanical product line as interest continues to increase across this specialty product line with favorable legislation helping to fuel demand.
I believe it's important to emphasize that this is recently a more dynamic and changing marketplace that plays into our innovation strength.
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 90% with organic growth at 18%, which and Jeff noted could've been even stronger had it not been for limited Reds and supplies.
We had excellent sales performance, particularly and our transportation filtration and construction and market.
Signaling the broad strength of our diversified portfolio.
Adjusted operating profit increased 60%.
Selecting the high organic sales growth and the incremental profit from Scapha.
Segment, adjusted operating margin contracted 250 basis points to $13 and 2% and large part due to the higher resin costs and the addition of <unk> business.
Higher resin costs, mostly from polypropylene had a negative effect on operating profit on several million dollars and the quarter net.
Of the price increases that were affected and that period and.
At a high level, we recruit about half of the cost inflation and expect additional price increases will further help us recoup the higher cost as the year progresses.
Regarding Scotland profit contribution the acquisition boosted Amev segment adjusted operating profit by over 9 million.
However, as noted on a release approximately 1.5 million on Scotland's SG&A costs, we're booked and our unallocated costs not with and Amev. So please be cognizant of that when assessing our segment financial results.
And aggregate Scapa added nearly 8 million of adjusted operating profit roughly equal and the interest expense associated with the deal.
Consistent with our internal expectations that transaction was neutral to adjusted EPS and the quarter, which we expect and our plan for 10 cents per share accretion for the full year.
And summary for Ams, despite significantly higher input costs and supply chain limitation that constrained our sales growth organic sales increased by 18% and adjusted operating profit, excluding scapha increased more than 15% of over 3 million.
We believe this growth reflects the resilience and strength of our business.
For engineered papers second quarter sales were up 4% with 3% volume growth and favourable currency and 6% more than offsetting the negative price mix effects during the quarter.
The negative price mix was mostly a function of lower LLP volume, which carry high prices and profitability.
On margin similar to Ams weeper impact of higher raw material prices, mainly wood pulp.
And Jeff referenced we have successfully and.
Negotiated price increases with our contracted customers and advance of the annual reset terms.
Higher pulp costs impacted profit by a couple million dollars and the second quarter contributing to some margin pressure.
The lower volume and spots would transition and efficiencies from the other factors that drove the lower operating profit dollars and margin.
While the top LLP comparisons will continue and to the third quarter as expected the.
The recently implemented price increases are expected to mitigate higher costs. During the second half of 2021 and the spots with transition and efficiencies are now behind us.
Regarding adjusted unallocated expenses, we saw an increase of nearly $5 million. During the quarter. However is noted 1.5 million of the increase with scaffolds unallocated costs booked and hour unallocated costs.
The remainder of the increase related and 2 timing and certain administrative expenses and increased investment and finance HR and.
Support the growth of the business.
As disclosed and the earnings release, approximately $12 million of Scapa related deal and integration costs were exclude from adjusted unallocated expenses and the quarter.
On a consolidated basis sales for the quarter increased 49%.
11% on and organic basis.
Adjusted operating profit increased 3% and adjusted EBITDA increased 9%.
Second quarter of 2021, GAAP EPS was 6 versus 68.
The main material unusual comparison items relate to the Scapha acquisition expenses, which totalled 57 per share and included 39 cents a deal costs and 18 of higher non-cash purchase accounting expenses.
Please refer to our 10-Q and press release for additional details on this topic.
Normalising for those and other items and adjusted EPS was 90 and.
In line with last year's strong second quarter results.
And while operating profit increased we had a slightly lower tax rate and our jv's contributed nicely the supply chain challenges and incremental and <unk> from the Scapa acquisition offset those favorable elements and resulted and flat adjusted EPS.
To put some of the supply chain and costs headwinds into perspective, we estimate the cost inflation on residence and wood pulp that we did not recoup through price increases had an impact of over 10 cents per share on EPS.
And the Lord sales on transportation films alone was more than a 10% impact as well.
When combined we estimate these 2 factors had more than a 20 cent negative impact on adjusted EPS and the quarter.
This estimate signal the magnitude of the financial impact and while the cost and challenges are real you can see how strong our business fundamentals are when normalizing for these factors.
We also highlight that are year to date adjusted EPS of $1.92 is up 10% or 10% over last year.
Regarding cash flows year to date operating cash flow was approximately $20 million down 30 million from prior year and free cash flow was approximately 2 million with a similar dollar decline.
The $30 million cash flow decreased year to date was due to $13 million of cash costs related to fees and expenses with this gap of acquisition and a $20 million increase and working capital outflows driven by very strong sales.
We expect working capital cash flow to be more favorable as the year progresses, and expect very strong free cash flow generation through the remainder of the year.
Net debt finished and second quarter, just about 1.2 billion net debt to adjusted EBITDA from the terms of our credit agreement was 4.4 times at the end of the second quarter and we expect to do to lever towards 4 times by the end of the year. Please.
Please refer to our earnings release and 10-Q, 4 additional details on our debt structure and.
And now back to Jeff.
Thanks, Andy.
So to wrap up and we are proud of the results, we delivered and the strength of demand across our expanded portfolio.
While supply chain challenges, where evidence and the quarter our team again demonstrated their value and experience.
We believe that through all the supply chain and and inflationary noise, which we believe will prove temporary the underlying demand fundamentals of our business are quite strong.
Given our financial strength and capable teams. We are also able to press ahead on strategic growth initiatives across the business and areas like sustainable products advancing.
Advancing our transportation filmed capabilities and technologies.
Investments to support growth infiltration innovation and reduced risk tobacco and other specialty fiber applications like hemp materials.
To underline these opportunities, we're also investing and manufacturing 4.0, and advanced analytics, so that our operational capabilities will continue to meet increasing customer expectations.
The <unk> acquisition only serves to further enhance our portfolio innovative technology and help us further penetrate attractive markets.
We look forward to the second half of the year addressing the external challenges presented to us and capitalizing on the strong demand receipt and so many areas of the business.
So that concludes our remarks Misty if you could please open the line for questions.
At this time, if you would like to ask a question pastime and 1 on your telephone keypad and again at Astana and number 1.
And have a question from the line and crashed again at Cydonia.
Cydonia and company.
Yeah, and good morning from take time and thanks for taking my questions and then.
I guess, just a lot of detail around the inflationary environment and the impact.
And thanks for that and.
I guess and and thinking about continued demand going forward any impact theory that you see as you kind of implement the price increases and back and it kind of and Pete gross and all thanks.
Yeah. It's always a good question I think what we're seeing is universally everybody is raising prices because we're not the only people impacted by it I think you always need to watch carefully if there's going to be some impact about share loss, we might see some shedding of some low value added customers, but for the most part I think are cut.
Rumors really value our relationship and understand this is probably a short list of environment, So I'm not seeing.
Huge pressures right now at that point, but what state and real close to it I think the only challenge that we will continue to see and the coming quarter might be around some of those supply constraints, we're seeing with some of the specialty teeth.
<unk> resins, I mean, we're going to see it continue to see good growth that we might not be able to fulfill all the demand that we're expecting to see.
Great and.
Just thinking of scaffold and can you just I may and this and as you mentioned is just around and how that business is trending and rebounding and then.
Yeah. It sounds like you are targets are still on track if I am correct.
Yeah and.
As we said I think they're rebounding pretty much and the industrial side, just like all of Amev somebody and we're really excited about what we brought in from the industrial side, it's really complementary and the market applications are similar to ours and and we're seeing that to be strong demand year on year will also seeing good comparisons year on year and the healthcare.
So I think it was the 1 place that we've always cautioned had some sensitivity to the COVID-19 environment is this.
Advanced wound care from.
Discretionary hospital visits et cetera that seems to be slowly moderating, but not at the rate that we had hoped because of the uptick and COVID-19, but we are expecting that to return to more normalised levels, and the coming year, and and Chris and it needed to add a little bit more color for Ya mean, so just for context.
We had about $95 million and sales.
And the quarter and if you kind of look at where they were year over year, and that's up 40% and Jeff mentioned and his script. So.
And we thought about the business sort of returning back to the 2019 sort of levels were exactly right there and and.
And we talked to the business in terms of thinking about what their order book looks like even particularly and industrial the order book is exceptionally strong. So we talked a lot about Smith from a supply chain challenges that we've had even mostly at and legacy SWM business, but even SCAP is having.
I would say some on supply chain challenges and their results would be even stronger as well. So I would say the punch line is that the business is on track a really good second quarter, particularly and things and the context of where they were and 2019 and being a 40% year over year. So bottom line it's on track.
Great. Thanks for taking my questions and good luck and next quarter.
Great Thanks growth.
Okay and no further questions at this time.
Okay, well, then let me wrap up with a couple of closing comments.
Heard I'm incredibly proud of the performance at the teams and turned it over the year I didn't specifically and May cost Covid comments on during the call because I think we're all aware of the challenge and foreseeing globally I think our team continues to do a great job of benefiting each other and taken care of each other and making sure we're a.
Well a supplier our customers. So I just want to close the call again thanking on global teams for the outstanding job they do.
I'm really proud to be part of this team. So thank you all.
Thank you and gentlemen, and and take close today's conference high May now disconnect.
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