Q1 2022 Schweitzer-Mauduit International Inc Earnings Call
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Operator: Thank you very much for your patience, ladies and gentlemen, the call will begin shortly.
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Operator: Hello and welcome to SWM's earnings conference call. Hosting the call today, from SWM is Dr. Jeffrey Kramer, Chief Executive Officer. He is joined by R. Andrew Wamser,
Operator: Chief Financial Officer and Mark Chekanow, Director of Investor Relations. Today's call is being recorded and will be available for replay later this afternoon. At this time, all participants have been placed in listen-only mode and the line will be open for your questions following the presentation. If you would like to ask a question at that time, please press star, followed by one in the telephone keypad. And if at any point, your question has been answered, then you may raise yourself from question.
Speaker 2: You please do ide by pressing staff and right to your tenna. Thank you, pad. If you should require operator assistance, please press staff, followed by joy. We ask that you pase pick up your handche for our optimal sound quantity. It is now my dad UD to turn the floor. aba to MR checkenal, So you may begin, Thank you. Thank you, jenna. Good morning, I'll Mark checken ll, Director of Investor Relations at SWM. Thank you for joining us to discuss fbm's first quarter 2022 earnings results.
You please do ide by pressing staff and right to your tenna. Thank you, pad. If you should require operator assistance, please press staff, followed by joy. We ask that you pase pick up your handche for our optimal sound quantity. It is now my dad UD to turn the floor. aba to MR checkenal, So you may begin, Thank you. Thank you, jenna. Good morning, I'll Mark checken ll, Director of Investor Relations at SWM. Thank
Operator: Please do so by pressing star followed by two on your keypad. If you should require operator assistance, please press star, followed by zero. We ask that you please pick up your handset for our optimal sound quantity. It is now my pleasure to turn the floor over to Mr. Mark Chekanow. Sir, you may begin. Thank you.
Mark Chekanow: Thank you, Jenna. Good morning, I`m Mark Chekanow, Director of Investor Relations at SWM. Thank you for joining us to discuss SWM's first quarter 2022 earnings results.
you for joining us to discuss fbm's first quarter 2022 earnings results.
Mark Chekanow: Before we begin, I'd like to remind you that the comments included in today's 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 in more detail in our Securities and Exchange Commission filings, including our annual report on Form 10-K and our quarterly reports on Form 10 -Q.
Mark Chekanow: Some financial measures discussed during this call are non-GAAP financial measures. Reconciliations of these measures to the closest GAAP measures are included in the appendix of this presentation and the earnings release.
Mark Chekanow: Unless stated otherwise, financial and operational metric comparisons are to the prior year period and relate to continuing operations. This presentation and the earnings release are available on the Investor Relations section of our website, www.swmintl.com. I'll now turn the call over to Jeffrey Kramer.thank you Mark, and good morning everyonei'm pleased to share that we are off to a good stock to 2000 and twenty-twoand that the two most critical themes we expected to play out this year are already materializing.
Mark Chekanow: Unless stated otherwise, financial and operational metric comparisons are to the prior year period and relate to continuing operations. This presentation and the earnings release are available on the Investor Relations section of our website, www.swmintl.com. I'll now turn the call over to Jeffrey Kramer.thank you Mark, and good morning everyonei'm pleased to share that we are off to a good stock to 2000 and twenty-twoand
Mark Chekanow: Unless stated otherwise, financial and operational metric comparisons are to the prior year period and relate to continuing operations. This presentation and the earnings release are available on the Investor Relations section of our website, www.swmintl.com. I'll now turn the call over to Jeffrey Kramer.
Jeffrey Kramer: Thank you, Mark, and good morning, everyone. I'm pleased to share that we are off to a good stock to 2022, and that the two most critical themes we expected to play out this year are already materializing.
Mark Chekanow: that the two most critical themes we expected to play out this year are already materializing.
Jeffrey Kramer: First and foremost, the pricing actions we discussed on our last earnings call have been successful in offsetting higher raw material costs.
Jeffrey Kramer: Second, demand remains robust across our portfolio, and we are expecting it to remain so for the remainder of the year.
Jeffrey Kramer: Though we had a tough comparison versus a very strong first quarter last year, organic sales were up an additional 5%.
Jeffrey Kramer: Eps though, was down versus last year, which can mostly be explained by the fact that inflation and supply chain issue did not begin impacting results until the second quarter of 2021 and then accelerated from there.
Jeffrey Kramer: Even though global uncertainties remain, we are pleased to say that we enter the second quarter with good momentum and are confident in reaffirming our financial guidance for the year.
Jeffrey Kramer: We continue to expect adjusted EPS of 350 to 395, supported by adjusted EBITDA growth of 20% to 30%.
Jeffrey Kramer: As such, we expect strong and accelerating free cash flows as the year progresses, which will [inaudible] the balance sheet throughout the remainder of the year.
Jeffrey Kramer: And last, but certainly not least, we remain incredibly excited about the pending merger of equals with Neenah
Jeffrey Kramer: We see strong value creation opportunities from the combination, ranging from the strategic benefits of a significantly expanded portfolio of complementary technologies and multiple avenues for cross-selling and geographic expansion, to more than 65 million of highly actionable cost synergies and increased long-term strategic optionality. I'll come back to the transaction later, but let me first review the quarter.
Jeffrey Kramer: Starting with AMS, sales were up 67%, including the benefit of the Scapa acquisition, with organic sales increasing 3%.
Jeffrey Kramer: Recall that in the first quarter last year, we delivered 15% organic sales growth, as many end markets surge back with post-Covid recovery sales with only minimal signs of the supply chain disruptions that would accelerate throughout the year.
Jeffrey Kramer: Given that comparison, and on the continued challenging supply chain conditions, we still posted organic growth as price increases implemented over the last several quarters were effective.
Jeffrey Kramer: On our last call, we highlighted that, due to the rapidity of escalating costs, we had previously been lagging with price increases, but we are confident that we have addressed the underlying challenges to this unprecedented pricing environment, and our results show that this quarter.
Jeffrey Kramer: In our discussions on pricing with customers, they have acknowledged that we have approached the issue in a measured way, and they recognize the extraordinary importance of our efforts to be reliable partners in an uncertain and strained environment.
Jeffrey Kramer: This trust and recognition of the value we provide has allowed us to maintain our competitive shares.
Jeffrey Kramer: Unfortunately, as most are aware, the global inflationary environment has not yet settled. So, we continue to proactively monitor the situation and have already initiated additional pricing actions to offset these pressures.
Jeffrey Kramer: Bottom line, we will continue to focus on offsetting inflation in 2022.
Jeffrey Kramer: To dive a little deeper into my earlier comments on demand. Demand remained strong across most of our end markets, with the key drivers of sales growth for the quarter: the infiltration, construction and industrial.
Jeffrey Kramer: Water and process filtration sales are healthy. The construction industry is active and sales of our broad range of industrial products are performing well.
Jeffrey Kramer: In fact, the main constraint on our ability to capitalize on an even greater degree of demand was availability of certain key raw materials.
Jeffrey Kramer: We continue to be impacted in the quarters by tightness in a variety of select materials that varied across the spectrum, from some specialty adhesives, to materials such as release liners.
Jeffrey Kramer: We have been actively sourcing from a variety of suppliers and are starting to see some relief going forward.
Jeffrey Kramer: One area, though, that has been a key sales constraint, remains the raw material shortage for our transportation films. As we've shared, there is a global shortage of a key ingredient up in the value chain that is limiting supply across all manufacturers. As the leading producer of transportation films, we remain the go-to source for customers worldwide for these materials, but C-type supplies until 2023. Although, there are recent announcements about raw material expansions, that should help alleviate the situation and move us back to aggressive growth.
Jeffrey Kramer: If we were to assess AMS segment sales, excluding transportation, organic sales would actually been up 7%, showing the broad sales strength of the portfolio.
Jeffrey Kramer: Importantly, as we enter the coming quarters and comparisons normalize, we expect quarterly organic sales growth to increase from first quarter levels.
Jeffrey Kramer: Switching to engineer papers. The quarter went as expected. Price increases, both contractual and to the market, were effective, as were the increased volumes we were able to secure with certain customers to help further offset higher pulp costs.
Jeffrey Kramer: Total sales increased 7% in the first quarter, with broad strength across the portfolio.
Jeffrey Kramer: Traditional products performed well and we saw continuum momentum in reduced risk heat-not-burned demand, with sales up over 25% in that fast-growing area.
Jeffrey Kramer: In particular, we are excited about many of the innovative products we have in development for a variety of customers.
Jeffrey Kramer: From sustainable, biodegradable filter solutions, to innovations in sustainable packaging and replacement of other single-use materials.
Jeffrey Kramer: And while I will discuss the Neenah transactions later, our customers across end markets have shared that they are excited about what the combined capabilities of both companies can contribute to accelerating this innovation.
Jeffrey Kramer: I would be remised in not mentioning the ongoing tragedy represented by the Russia-Ukraine conflict.
Jeffrey Kramer: I am incredibly proud of and inspired by the leadership of our SWM European and global community have shown in sending supplies and supporting the people impacted by this action.
Jeffrey Kramer: In regard to our customers, we have also been working with our EP customers, as they adapt their supply chains in response to this invasion.
Jeffrey Kramer: While we can only disclose limited details, we will be able to help certain customers, who relied on regional supply chains and manufacturing sites for both reconstituted tobacco and paper products, to continue production by switching their volumes to SWM facilities, both in the short term and in multiyear commitments.
Jeffrey Kramer: While we, of course, wish these actions were unnecessary, we are proud to support our customers and act swiftly to address unanticipated changes and challenges with our global supply chain capabilities.
Jeffrey Kramer: Turning back from Eastern Europe specifically, as we highlighted, we are released that the price increases and additional volumes have covered our higher pulp costs.
Jeffrey Kramer: But with the above conflict, energy costs remain a challenge.
Jeffrey Kramer: Much as we detailed in AMS, we continue to engage our customers on this inflationary element, including the implementation of surcharges and other pricing discussions.
Jeffrey Kramer: Given these ongoing actions and early signs of success, we remain confident that the EP segment will deliver stable operating profits in 2022, consistent with what was assumed in our guidance.
Jeffrey Kramer: With that, I'll turn the call over to R. Andrew Wamser to review the financials in more detail.
R. Andrew Wamser: Thank you, Jeff.
R. Andrew Wamser: Starting with AMS, first quarter sales were up 67% to 273 million, with Scapa adding approximately 105 million.
R. Andrew Wamser: Organic growth was 3%, versus a very strong prior year quarter, as Jeff mentioned.
R. Andrew Wamser: Given current pricing trends and demand levels, we expect organic growth reported for the upcoming quarters to accelerate from this level.
R. Andrew Wamser: Adjusted operating profit increased 24% or nearly 7 million, with the addition of Scapa and higher pricing, which more than offset higher resin input cost.
R. Andrew Wamser: While other cost components are also higher than last year, our price increases have been affected in offsetting those as well.
R. Andrew Wamser: We are pleased with how our price increases have recouped higher costs and we remain vigilant in watching costs and assessing needs for additional increases as appropriate.
R. Andrew Wamser: Simply put, in recent quarters, we have been, and we will continue to be, quicker to act than we were last year when inflationary pressures firster again.
R. Andrew Wamser: While margins were down versus the prior year quarter, we saw strong sequential improvement from the fourth quarter, up 540 basis points and expect sequential improvement to continue in the upcoming quarters.
R. Andrew Wamser: With significant year-over-year margin expansion anticipated in the second half of the year, as comparisons, ease and normalize.
R. Andrew Wamser: All told, despite some inflationary factors, our pricing is strong and we remain confident AMS will hit the growth expectations embedded in our guidance.
R. Andrew Wamser: For Engineered papers, first quarter sales were up 7% and would have been up 10% if not for unfavorable currency movements.
R. Andrew Wamser: We saw positive pricing and volume growth across the portfolio, and expect these favourable trends to continue.
R. Andrew Wamser: Adjusted operating profit was, however, down 5.6 million, with year-over-year margin contraction. While higher prices and incremental volumes offset higher pulp costs, with remaining year peak levels, energy and other inflationary factors drove the profit decline. We have already implemented surcharges to offset this dynamic inflationary environment, which has been particularly acute for energy costs.
R. Andrew Wamser: We are encouraged with early signs, for passing on these costs and, combined with our additional volume opportunities, as Jeff referenced, lend confidence in our ability to deliver stable operating profits for EP for the full year, consistent with our guidance.
R. Andrew Wamser: Like AMS, EP saw year-over-year margin compression, but delivered 100 basis points of sequential margin expansion, compared to Q4 2021, and expect continued sequential improvements in upcoming quarters.
R. Andrew Wamser: Regarding adjusted unallocated expenses, we saw an increase in absolute dollars, largely due to the addition of Scapa overhead. But, as a percentage of total sales, unallocated costs did decline 40 basis points.
R. Andrew Wamser: For the year, we would expect adjusted unallocated expenses to be approximately 65 million.
R. Andrew Wamser: On a consolidated basis, sales increased 41% to 407 million, and were up 5% on an organic basis.
R. Andrew Wamser: Adjusted operating profit decreased 7% to 42 million, with year-over-year margin contraction, but, on a sequential basis, margin was up 300 basis points.
R. Andrew Wamser: First quarter 2022 GAAP EPS was 5 cents versus 68 cents, while adjusted EPS was 89 cents versus a dollar. There were significant GAAP EPS items that were excluded from adjusted EPS, including 34 cents of restructuring and impairment expenses, mostly related to a non-cash asset write-down in AMS. We plan to re-invest a relatively small non-core piece of our construction business, thus the assets have been reclassed but held for sale and written down. Another adjustment was a addback for Scapa integration and Neenah merger expenses, which totalled 18 cents in the quarter. Lastly, non-cash purchase accounting increased to 28 cents per share, from 16 cents per share, due to the Scapa acquisition.
R. Andrew Wamser: Please see our non-GAAP reconciliation in the earnings release for additional details on these items and other non-GAAP adjustments, as well as our 10Q. As discussed, the first quarter was as expected, to be continued to be our toughest EPS comparison in 2022. Sequential gains are expected near term, with year-over-year comparisons becoming increasingly favourable as the year progresses. Given first quarter results, continued price increases already put in place for 2022, and solid demand fundamentals, we are reaffirming our 2022 financial guidance for adjusted EPS of $3.50 to $3.95, and adjusted EBITDA growth of 20% to 30 percent. After our challenging 2020-21, we are off to a good start and we expect even better results still to come.
R. Andrew Wamser: Anchored by strong profit growth in AMS and stability in EP. After our comments from the fourth quarter call, from a quarterly view, we continue to expect adjusted EPS to average approximately $1 per share and the second through fourth quarters, which would put full year adjusted EPS towards the high end of our guided range. Though, it's still early in the year and some uncertainties remain about the external environment, the aggressive actions we have taken to combat inflation are beginning to take hold and we believe we are well positioned to deliver on our financial goals.
R. Andrew Wamser: Moving to cash flow and leverage, first quarter operating cash flow was 5 million. This reflected a 15 million increase in working capital outflow compared to last year, due to the strong sales and higher input costs.
R. Andrew Wamser: First quarter`s typically our seasonally lowest cash flow quarter, and we project strong cash flow for the remainder of the year, as working capital normalizes and year-over-year profit improvements materialize.
R. Andrew Wamser: Though negative in the first quarter, we project free cash flow in 100 million range in 2022.
R. Andrew Wamser: Strong EBITDA growth and free cash flow are expected to support rapid de-levering beginning in the second quarter of 2022.
R. Andrew Wamser: While first quarter ended over 5x net leverage, the projected more favourable LTM financials in the near term are anticipated to drive net leverage down towards 4X by the end of the year, or approximately a full turn of leverage from where we sit today.
R. Andrew Wamser: I would expect about 1/3 turn of net leverage improvement per quarter as we go from Q2 until the end of the year.
R. Andrew Wamser: Despite leverage increases, we remained comfortably below our covenants and have approximately 156 million in liquidity, consisting up 56 million in cash and 100 million of availability on our revolver. Now, back to Jeff.
Jeffrey Kramer: Thank, Andy. Before turning my comments toward the merger with Neenah, I just want to reiterate the key, but simple takeaways from the quarter. First, we effectively raised price to cover raw material costs and continue to do so to recover other inflationary factors.
Jeffrey Kramer: Second, demand remained strong across all our segments, and we are working to address any of the remaining material supply chain challenges.
Jeffrey Kramer: And finally, with the tough first quarter comparison out of the way, the remainder of 2022 should be very favourable versus 21, with improvements, both sequentially and year-over-year.
Jeffrey Kramer: Given the price increases in demand outlook, we are reaffirming our guidance for a much stronger 2022, which will result in improved cash flow and rapid de-levering of our balance sheet. Now, shifting to the proposed merger.
Jeffrey Kramer: We couldn't be more excited about this combination, and I know our counterparty Neenah feels the same way.
Jeffrey Kramer: I'll frame my comments around strategic fit, synergies, and then benefits of scale.
Jeffrey Kramer: Together we will form the ideal specialty materials and solutions provider for customers worldwide.
Jeffrey Kramer: Generating attractive margins on nearly $3 billion in combined sales.
Jeffrey Kramer: The expanded value proposition and solution offerings we can bring to our customers is at the strategic heart of this merger.
Jeffrey Kramer: Our combined technologies target shared end markets, with strong megatrends, such as the need for clean air and water, personal health, health and wellness, performance coding solutions and sustainable alternatives.
Jeffrey Kramer: If we look deeper at the combined businesses' marketplace touch points, we see significantly enhanced positions in key product categories.
Jeffrey Kramer: For example, in filtration, Neenah`s filter media complement our media and support positions in air, water and industrial applications.
Jeffrey Kramer: Their medical packaging with our medical materials and health care solutions.
Jeffrey Kramer: Their tape backing, and coding and saturation capabilities, with our specialty tape applications.
Jeffrey Kramer: And their sustainable packaging with our botanical fibres position, to name just a few.
Jeffrey Kramer: In addition to these fortified strategic positions, we see top line accelerators like cross-selling a broader portfolio, increasing penetration of under-served geographies, and increased innovation and product development.
Jeffrey Kramer: Together, we offer significantly more capabilities to solve our customers' most challenging engineering needs, in segments with very favourable long-term growth trends, which we believe, ultimately, drives our ability to win in the marketplace.
Jeffrey Kramer: Now let's discuss synergies. We have conservatively identified over 65 million of annual run rate cost savings, and we expect to execute on over half within the first year, and the remainder over the next one to two.
Jeffrey Kramer: By any measure, delivery of these savings could drive hundreds millions of dollars in value creation for our shareholders.
Jeffrey Kramer: About half of these synergies are comprised primarily of SGNA reductions, including reduced C-suite in public company costs, as well as organizational optimization.
Jeffrey Kramer: Beyond the duplicative SGNA savings, I would highlight benefits of higher-volume purchases of raw materials and improved buying power with vendors and suppliers.
Jeffrey Kramer: We also see multiple opportunities to cross-source materials from each other's production sites and optimize our supply chains, given our global footprint.
Jeffrey Kramer: In addition to our internal estimates, we validated these synergy assumptions using a third-party adviser who will also help us implement them. So, we are highly confident in our plans to realize them quickly.
Jeffrey Kramer: Finally, in addition to the compelling strategic fit, and strong synergy opportunity, we see tremendous benefits of scale.
Jeffrey Kramer: The combined company will have an increased relevance to customers and suppliers up and down our value chains.
Jeffrey Kramer: And our combined capabilities will be the foundation of increased innovation, the most essential component of translating strong demand trends and needs for new products into accelerated top and bottom line growth.
Jeffrey Kramer: Furthermore, larger scale and expanded presence across markets increases our long-term strategic optionality, and we will have even greater resources to pursue value-creating growth investments to drive value creation.
Jeffrey Kramer: Other benefits of increased scale should be improved visibility in financial markets, a challenge for smaller companies today.
Jeffrey Kramer: We also expect to see increased stock liquidity, improved access to capital markets, and broader investor appeal, given the synergy-driven enhanced growth outlook.
Jeffrey Kramer: So, in closing, this combination has a highly complementary strategic fit, substantial synergies and compelling advantages of scale.
Speaker 4: Substantial synergies and compelling advantages of scale.
Jeffrey Kramer: Our strong-base businesses, combined with cost savings, are expected to form a merged company with EBITDA earnings power exceeding $450 million, with strong free cash flow, enabling us to make the investments in technology and manufacturing to advance our strategic content, while continuing to pay down debt and return cash to shareholders.
Jeffrey Kramer: I just want to reiterate that each company has a long track record of paying a robust dividend and understands the importance of that dividend to our investors.
Jeffrey Kramer: Furthermore, after a challenging 2021, we are committed to de-levering the balance sheet quickly, as the combined entity expecting year-end net leverage of the combined company to be approximately 4x, and trend lower from there.
Jeffrey Kramer: From a process standpoint, we filed our S-4 statement last night in conjunction with our 10 -Q.
Jeffrey Kramer: We remain on track for a second half close, and have kicked off integration planning with key cross-functional leaders across both businesses collaborating to frame out short, medium and long-term plans as we join forces.
Jeffrey Kramer: While I look forward to staying on as a consultant after the closing of the transactions, one of the reasons I have so much faith in this combination is because of my confidence in Neenah`s CEO , Julie A. Schertell, to lead the combined business.