Q1 2022 Neenah Inc Earnings Call
<unk> order placed into the fourth quarter signaling continued market strength.
We are also demonstrating strong progress against our growth drivers, including our most recent acquisition, a pasta, which continues to exceed our expectations and deliver record performance.
Release liner capacity expansion project is underway and we are pleased with how this will serve as the foundation for growth going forward.
With greater availability of input increased stability of labor and continued implementation of our operational excellence program, we expect to see manufacturing performance improved throughout the year.
Lastly, we will continue to drive innovation and launch new products that customers value that expand our addressable market and that creates the opportunity for higher margins.
As an example.
In April we launched a new medical packaging solution capable of withstanding all types of sterilization technologies, including radiation.
This is significant as single use medical devices continue to gain popularity due to their ability to lower costs increase efficiency and reduce the spread of infection.
Our new product allows customers to serve multiple market need is technology agnostic and provides an alternative polymer based packaging.
All of these efforts.
Wrong pricing and volume favorable mix, improving operating performance and new product lead to improved margins throughout the year.
So while it continues to be a challenging environment I'm very pleased with the actions and results our teams have demonstrated.
We are directly addressing the challenges delivering results and positioning the business for further growth and margin expansion.
We are confident in our earnings guidance and our trajectory is on pace.
Our strategy is clear and we are demonstrating progress towards both near and long term goals.
With that I'll turn it over to Paul to cover financial results and then I'll wrap up with some comments on our long range strategy and the planned merger with SWM.
Thanks truly does that begin I would like to highlight a few enhancements to our quarterly results communication.
We've streamlined the earnings release to help focus on the road and items for the quarter.
<unk> is a new bridge graphic shows the key drivers of adjusted EBITDA and posted a supplement to our investor website.
Consolidated sales reached $285 million up $58 million from last year's comparable quarter.
Casa accounted for $39 million of the increase volume, including at Chaucer was up 17% while prices were up another 13%, partially offset by currency and mix of about 5%.
Both segments demonstrated continued volume growth, which excluding a tossup was up 3%.
Adjusted EBITDA was $30 million compared to $25 million in last year's fourth quarter and $36 million in last year's first quarter.
Q1 year over year pricing actions were favorable by $30 million, which were ahead of the input cost increases of $29 million.
We're expecting that differential to keep increasing over the remainder of the year.
It's also interesting to note pricing for all of 'twenty, one was $19 million.
Highlighting the momentum, we're seeing with our pricing actions.
Adjusted EBITDA margins increased by 130 basis points on a sequential basis.
This is the second quarter in a row of sequential margin improvement driven by the increased momentum in our pricing actions.
The primary driver of the shortfall in profitability from last year's exceptionally strong first quarter was an unfavorable $15 million year over year variance in operating costs, including higher distribution expense.
The input availability issues, we've experienced over the last few quarters combined with labor availability challenges drove the inefficiencies, which result in slower throughput higher weight more downtime and higher conversion costs, a few additional things to note.
The unfavorable it includes cost associated with the January fire in our Brownfield, New York facility, which had about a $2 million impact in the quarter.
This compares favorably to the $3 million. We had originally estimated thanks to the efforts of the team to work with customers modify existing inventory and startup the asset earlier than expected.
Distribution costs were $3 million unfavorable year over year, reflecting the challenges in the freight and logistics marketplace.
We drove improvement throughout the first quarter and manufacturing cost and expect the unfavorable variances to 'twenty, one to improve and ultimately turned favorable by the end of the year as the actions we've taken in our facilities are showing traction.
There are a couple of important points to be made here in terms of Q1 performance versus 'twenty, one and operating costs.
Q1 of 'twenty, one operating performance was the best quarter in the last few years.
Although were $15 million unfavorable to Q1 of 'twenty one on a sequential basis from Q4, we're showing improvement and as I said expect that improvement versus prior year to continue throughout 2022.
Another important point to be made is that we're about on plan with variances to plan, primarily from the brownfield fire and distribution cost less.
Lastly, we're beginning to see very slight but noticeable improvements in raw material availability and expect that to continue throughout the year.
Turning to segment results technical product sales were 186 million up 28% from 2021 and up 6% excluding at Asa and the facility closure last year.
Pricing accounted for growth of 13% and volume was favorable.
But mix and foreign exchange were both unfavorable.
Adjusted EBITDA was $20 2 million down from a very strong $24 9 million last year, reflecting the impact of raw material availability and the related operating inefficiencies.
Technical products is bearing the brunt of the specialty chemical availability challenges and the related operating inefficiencies.
Pricing momentum is very strong which is expected to drive expanding net price over input cost favorability for the rest of the year fine paper and packaging sales were almost $100 million up 21% from last year's level with pricing up 14% and volume up 7%.
Adjusted EBITDA was $14 5 million for the quarter down slightly from last year's $15 3 million, reflecting the impact of the availability issues and the Brownsville fire.
We continue to perform above our original expectations driven by the strength of the commercial print packaging and consumer products businesses.
In both segments. We believe we're on track to offset the 21 unrecovered input costs as well as offset expected 2022 inflationary pressures over the next few quarters.
We ended the quarter with liquidity of $160 million and leverage of three nine times.
Cash flow from operations was a use of $2 million.
Driven by working capital increases, reflecting the higher input pricing and selling costs and higher cash tax payments Capex was $8 3 million versus $4 8 million last year, primarily driven by spending for our growth initiatives.
As we work our way through the year, we expect the increased cash from operations and reduced leverage to around three times.
From a capex perspective for 2022, we expect to be at 4% to 5% of net sales as we invest for growth.
SG&A is up $6 million over the first quarter of 2021.
Most of that increase is the impact of the pasta business.
Secondary driver of increased incentive compensation accruals, reflecting the strong start to the year.
For 2022, we anticipate that our full year normalized tax rate will be in the low to mid <unk> as a percentage of pretax income.
Our effective tax rate was 21% of pre tax earnings in the first quarter of both 2022 and 2021.
Our effective rate is lower than the statutory rate primarily as a result of benefits from U S. R&D tax credits.
Looking ahead, we were very pleased to see pricing offset input costs in the quarter. Additionally, we've seen progress in operation from Q4, 'twenty, one to this quarter and sequentially each month throughout the first quarter as our supply chain teams initiatives are addressing the inefficiencies.
<unk> from the availability issues as a result, as Julie said, we are reaffirming our full year guidance.
Here are a couple of additional considerations for upcoming quarters.
Top line remains robust and demand is strong.
We're not yet seeing input costs moderate, particularly with pulp and energy we've implemented immediate surcharges were necessary to offset those increases were also accelerating pricing actions to minimize the timing lag between input cost increases in our pricing as a result, our pricing mechanism.
Our working faster than ever before.
In terms of specialty chemicals costs continue to increase but at a rate slower than last year.
Additionally, many downstream chemicals are still very tight, although we're seeing some progress and availability.
We have minimal direct exposure from the Russia, Ukraine conflict with no asset or employees located in those countries and virtually no revenue.
We're continuing to address indirect impacts from the conflict, including European energy and logistics disruptions.
Turning to margins, we expect to maintain our recent improvement near term with gradual continued improvement beginning in the back half of the year as we address our operating challenges and execute our pricing action.
Of note Q2, 'twenty two will look more like Q1 of 'twenty two while the year on year comparisons in the back half of the year are expected to be more favorable versus prior year.
As a headwind to our margin and growth initiatives. The euro is having an unfavorable impact on our U S dollar results.
For each penny of appreciation of the U S dollar to Euro exchange rate, we are impacted by approximately $650000 of earnings on an annual basis.
Our teams, including operations R&D purchasing and sales planning have responded very constructively to address the availability issues. As a result, we're seeing improvements in operation, which we expect to continue throughout 2022.
And on that note I'll turn it back to Julie.
Thanks, Paul I'm very pleased with how the Mena team is focused on delivering results and executing as we said we would.
During this volatile time, we've been able to aggressively grow our topline with improved pricing volume and mix.
Implement new and flexible pricing strategies that are showing early signs of success in offsetting record level input costs.
Diversify our portfolio with continued strong growth in air and industrial filtration, we lease liners and premium packaging.
And strengthen our position with customers by leveraging a global supply chain that addresses their local needs.
Formulating product chemistries to meet customer demand and launching new products that expand their addressable market and provide sustainable alternative solution.
As a result, we are seeing early traction on margin expansion and we are reaffirming our full year guidance, which is supportive of our longer term goals.
5% top line growth.
10% bottom line growth and greater than 15% EBITDA margin.
Now shifting to the announced merger with SWM. This is a transformative inflection point for both Nina and SWM and we are extremely excited about the possibilities and the potential of the combined company together.
Together, we will form a leading global specialty materials company with an improved growth profile compelling synergies and meaningful scale.
Have you the merger as an and not an or meaning we will deliver the benefits of executing our combined business plan and we will see incremental growth and value from the planned merger.
We think about the benefits of this merger in three key areas.
Strategy synergies and scale.
First we believe the merger accelerates our long term strategy will enhance the growth dynamics of our business and drive attractive margin and cash generation.
The combined companies should be well positioned and diversified and high growth categories, such as filtration protective films release liner healthcare and sustainable packaging.
With strong market position and strong macro trends what makes this combination even more powerful is that the two companies complement each other like don't overlap.
By bringing together the strength of our complementary product offerings technologies and geographies. The combined company will be poised to deliver powerful benefit.
Including a comprehensive suite of products solutions and expanded toolbox to deliver innovative answers for our customers challenges in.
And a stronger global present to best serve our customers where they compete.
Early feedback from customers is overwhelmingly positive and we look forward to delivering on our combined promise.
Second element of synergy.
The combination for that a compelling and unique opportunity to optimize our organization enhanced margins and drive meaningful value.
We are expecting at least $65 million of incremental EBITDA from initial cost synergies with the potential for more.
At any reasonable multiple this would create hundreds of millions of dollars of shareholder value for the combined company.
These synergies are expected to be unlocked quickly with a run rate at approximately 50% within the first 12 months and achieving the full run rate within 24 to 36 months after close.
During the diligence process, we engaged a third party to validate the synergy potential and we are confident in our ability to deliver this value.
Let me provide a bit more detail on the sources of the cost synergies.
About half of the synergies will come from reduced SG&A, bringing two public companies together creates a meaningful opportunity with the largest single source of savings generated by eliminating redundant public company costs.
Duplicate costs, such as the C suite board of directors outside agencies and other purchase services are readily known and quickly achievable.
Optimizing procurement will also drive a significant source of savings we.
We buy many similar items, creating an opportunity to concentrate purchases.
Lastly, we expect savings in our operations, such as vertical integration opportunities freight and warehousing optimization and other cost efficiencies.
As an upside to the cost synergies. We also expect to capitalize on the industrial logic of the combination to accelerate growth and drive incremental revenue.
From cross selling to geographic expansion to the innovation potential sales synergies should be sizeable over time.
Lastly, the merger will enhance the scale of the combined company from a commercial standpoint, having a greater presence with customers and suppliers creates opportunities and places us among the leaders in specialty materials.
Additionally, the increased size provide strategic optionality for portfolio management unlocking the opportunity to reshape the business.
Scale also helps from a capital market perspective, as a larger company. The merger presents the opportunity to increase liquidity and trading volume broaden index participation lower our cost of capital and increase shareholder visibility.
All of which should lead to value creation for our shareholders.
From a financial point of view the new company is projected to have around $3 billion in revenue and EBITDA of $450 million on a pro forma synergize basis.
Each company on its own has a history of strong cash generation.
Post merger, we plan to drive cash to support Delevering the business.
On a pro forma basis, the combined company would approach four times leverage by the end of the year based on our current earnings guidance.
Another priority use of cash as an ongoing commitment to a strong dividend. We recognize this is important to our investors and we will communicate our new company dividend policy in the weeks following the closing of the transaction.
The key to unlocking value in any transaction is integration efforts are well underway to plan for a successful launch.
We have formed a team of top talent comprised of both Mena and SWM employees as well as outside consultant, who will help enhance and accelerate our efforts.
We are developing team charters, an action plan to ensure a smooth integration quick synergy realization and a seamless day, one for our customers suppliers and employees.
We've created a transformation office, which will report directly to me and be accountable for driving synergies and ensuring a successful integration of the two organizations.
Thus far things are off to a great start and the teams are working exceptionally well together.
Estimate not only to the talent in both organizations, but the complementary nature of our culture.
These are exciting times were better and stronger together and as we embark on the next stage of each company's journey the potential is tremendous.
Over the next few weeks in advance of a shareholder meeting by each company investors will have the chance to review the S. Four registration statement that gives additional information and details to further articulate why we believe this is a compelling transaction.
We remain on track with the closing in the second half of 2022 as previously announced.
To conclude we remain laser focused on executing our business strategy managing through a challenging supply chain environment.
Servicing our customer and taking the necessary actions to drive growth and margins.
As we enter a new era, we are well positioned to deliver value both near and long term and we thank you for your continued support of our business.
This is a pivotal time for neenah I could not be more proud to be a part of these efforts as we create a stronger future for our customers our employees and our shareholders.
With that we will turn the call over to questions.
As a reminder, if you'd like to ask a question at this time. Please press Star then one on your telephone keypad.
Our first question today is from John <unk> with CJS Securities. Your line is open.
Hi, good morning, everyone and thanks for taking my question and nice job on pulling back.
The pricing there.
My first question.
Yes.
Regarding inflation in logistics, so I think what I heard is that youre seeing moderation of stability going forward.
Is that is that could you clarify if that's actually what you're seeing and if there's any places where you're increasing headwinds or risks in your supply chain.
Yes, I think I think John what we said was we were actually not seeing those things slowed down so.
In the prepared remarks, we talked about.
Seeing the rate of increase in chemicals less than it was before and we're seeing that we really haven't seen pulp and energy slowdown like we would've wanted to I think the comment we were making so we're really pleased at how quickly we were able to get pricing out there to offset that and start to see that pricing.
Cost turn so we've sped up our pricing mechanisms with the with the intention of offsetting changes and increases faster.
Okay got it I appreciate that clarification.
My second question is where are your utilization today and how much more could you sell if you have more throughput available I know you have.
Manufacturing efficiency issues that are going on right now how much more is.
Likely to be freed up as you get through the year and kind of what what is the demand on that and beyond that if any.
Sure.
Varies it varies by business as you would imagine if I think through our businesses starting with filtration, we've unlocked capacity and our melt blown line for incremental revenue driven by our operational excellence program in Neenah operating system. So we're seeing continued upside there that's our fastest growing highest margin business.
So we have opportunity to continue to grow and melt blown and we've invested in a new melt blown line, which will be the fourth of the esterline in our German facility.
That will be up in early 2024. So we're planning ahead and running ahead of any capacity challenges there.
Second area I would hit on his release liner because that's a business that's growing at historically grown about 8% a year and we expect to continue to grow at that level. We've got a coders continuing to ramp up in Mexico and again another investment that we've made that will start up in Q3 of 2023.
To support that high single digit growth and release liner. So we have upside there those are two key growth platform for us.
If I go to our industrials business, it's really about driving margin in industrials more than volume. So while we are somewhat sold out I'd say in that business. We have the opportunity to continue to drive improved mix and margin and that's the key focus in industrial and then in fine paper and packaging were pretty.
We're pretty tight on capacity that business rebounded to a greater degree than we expected post COVID-19 and the acceleration of that team from a packaging and consumer product standpoint has continued to perform really well. So the opportunity. There is again to continue to offset any pressures on the commercial print side with accelerated growth.
In packaging and consumer products, which the team has done a nice job of.
Okay, great that's a lot of good detail.
I was wondering if you could just give us a little bit more color.
You mentioned on portfolio rationalization and optimization in your prepared remarks post merger.
Have you thought about addressing.
Some concerns that we've heard from investors about the about ESG.
And being able to meet those internal mandate some of these funds.
Sure I would start with as.
As we've talked about the merger I'd be remiss, if I didn't give a big thank you to Jeff Kramer the CEO at SWM and his entire leadership team for their support and collaboration through this early process that we've had the opportunity to spend time together.
<unk> discussed many of these questions and I would tell you our focus is on driving our growth platforms and accelerating our strategic performance in those areas.
We're going to continue to always look for ways to drive value, which includes looking at the opportunity to optimize the portfolio to a higher degree towards the growth and margins and what fits and what doesn't fit in that future. The benefits of scale in this opportunity really gives us more options to make those decisions.
Changes that we wouldn't have as a standalone company or would be much more challenging as a standalone company. So as we come together, we will be focused on portfolio optimization, and how we drive to fewer larger growing business units and the combined company.
Okay, Great and then the last one for me just at a high level I mean.
You can see this in the news recession fears are growing you're hearing it from a number of pundits and analysts that are out there I was wondering what your thoughts are on the business in your end markets is a great start.
Adversely affect demand and kind of what's your positioning and thoughts are around that as you head into year end and beyond.
Yes, we continue to see really strong demand and I think it's really important that we're looking at volume and not just revenue because of all the pricing activity. So we've really focused on understanding our volume trends.
Leading indicators volume was up 3% in the quarter and that's Comping, a really strong Q1 of 2021. It was up 7% in fine paper and packaging and that was really driven by packaging of consumer products Tech products was up overall, but it was mixed as I mentioned really driven by volume growth in filtration and digital trans.
Her and release liners and focused on margin and industrial solutions.
Where we want more volume, we're definitely seeing that we are not seeing leading indicators at this point of volume slow down, but we continue to monitor it very closely.
Great. Thank you George.
Thank you.
Our next question is from Chris Mcginnis with Sidoti <unk> Company. Your line is open.
Hi, good morning, Thanks for taking my questions and nice quarter.
I apologize.
I apologize.
I have been asked already.
Jumped on a little late but.
Joe you were just talking about the strength.
Packaging side and can.
Can you just.
Is it are you at the point, where you kind of get.
Given the new introductions that you would be investing in that business in terms of expanding.
Capacity there.
Yes, well, we invest in different ways in the business and so we have definitely driven bias towards R&D investments in the fine paper and packaging and I think thats, where were seeing a nice pipeline of opportunities they've launched a number of new products that continue to gain traction and they have a very healthy.
Pipeline for future opportunities and it's really a nice part of our business because it is so cost effective and efficient because it operates on the same asset as our consumer products business and as our commercial print business. The other thing I would mention about packaging as we think about the future potential as.
I believe we will find opportunistic synergies and revenue synergies and packaging with the SWM merger, whether that's cross selling.
<unk> capabilities from lighter weight papers that we need to grow packaging some of the distribution networks that each company has I think there's even greater opportunity to leverage that in the future.
Sure. Thanks that makes a lot of change.
Just in relation to the merger.
Have you learned anything new since the public announcements in terms of whether its customer reaction.
Any more details around the synergies in the business that you're somewhat discussed already.
Well I would tell you the customer reaction has been overwhelmingly positive and it's been across both segments fine paper and packaging as well as technical products I was expecting it in technical products, but our fine paper and packaging customers have reached out with.
And understanding of the opportunities for a greater portfolio. So I think that's really exciting for the fine paper and packaging team as well as technical products.
We've learned anything more on the synergies, we've announced a $65 million of hard synergies, we view that as incremental EBITDA opportunity highly achievable around this building we refer to them as bankable just so it's really clear and we have to go and get those.
And drive margins, but in addition to that there is revenue synergies that are significant cross selling opportunities geographic opportunities technical capabilities and vertical integration opportunities that we haven't even begun to tap into yet and as the integration teams have started to form and work together they're identifying.
Even additional opportunities.
I am extremely excited about the upside potential.
And maybe just around the supply chain challenges that you did talk about is there a way to maybe size the loss business.
Due to that.
Okay.
Yes.
That's a tough one for us Chris because we've been scrambling for a couple of things. So we've been substituting different kinds of products together for and so you've seen the effect on mix were actually actually pleased to see that we had a favorable impact from mix on the bottom line, which is what we've really been trying to focus on so.
From a topline and a capacity perspective, we've been doing what we can to position the business and the assets to two.
To respond to what's happening with the demand, but what were seeing is order backlog is out.
We're taking orders out to the back half of the year right now so from an overall capacity perspective, it's a little tough to estimate how much we are.
We are.
What we are foregoing from the topline and that impact.
Fair enough.
And then so are you at parity with the price cost equation at this point given the pricing increases.
Well, we this is the quarter, we offset input cost. So we had pricing of $30 million in the quarter and input costs of $29 million. So we hit that point of inflection and we expect that to continue through the year really accelerating and expanding in the back half of the year Q2 likely looks more similar to Q1.
But then we start to expand more dramatically in Q3, and Q4, and we've announced additional pricing actions into Q2 and Q3 to drive that because we as Paul mentioned inflation is still continuing to move upwards.
Perfect I appreciate that.
Joy, Paul Thanks for the kinds of Andy and good luck in Q2.
Thank you.
We have no further questions at this time I will turn it over to Carl Anderson for any closing remarks.
Thank you for your time today to recap our call demand for our products remains strong across our product categories and we're seeing the results from the execution of our pricing strategy to offset the inflationary pressures.
Hampshire margins, we continued to make strong progress against our strategic agenda.
And our near and long term goals, including the significant step of our announced strategic merger of equals with US. Some details of the transaction can be found in the S. Four statement, which was filed yesterday.
We look forward to interacting with many of you at our upcoming investor events, including both Deutsche Bank and Stifel conferences in early June Thanks, and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for purchasing.