Q2 2019 Earnings Call
Second quarter 2019 earnings conference call.
Hosting the call today asked of him.
Dr., Jeff Cramer, Chief Executive Officer, He is joined by Andrew ones.
Financial Officer, and Mark checking now director of Investor Relations.
Today's call is being recorded and will be available for replay after this afternoon.
At this time, all participants have been placed in a listen only mode and the floor will be open to your questions. Following the presentation.
If youd like to ask the question at this time.
Please press star one on your Touchtone phone.
If at any point of your question has been answered you may remove yourself from the queue by pressing the pound key.
If you should require assistance. Please press star zero, we ask that you. Please pick up your handsets will allow optimal sound quality is now my pleasure to turn the floor over to Mr.
Checking now Sir you may begin.
Thank you Dan Dan Good morning, everyone I'm, Mark checking out director of Investor Relations at S.W.M.. Thank you for joining us to discuss our second quarter 2019 earnings results.
Before we begin I'd like to remind you that the comments included in today's conference call includes 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 Exchange Commission filings, including our quarterly reports on Form 10-Q , and our annual report on Form 10-K .
Some financial measures discussed on this 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, unless stated otherwise financial and operational metric comparisons are to the prior year period and relates to continuing operations. This presentation and the earnings release are available on the Investor Relations section of our website Www Dot F.W.M.I.M.T.L. Dotcom I'll now turn the call over to Josh. Thank you Mark and good morning, everyone.
Yesterday, we reported second quarter sales of $270 million, which were equal to last year.
And adjusted EPS of one dollar six up 6%.
There was a positive quarter highlighted by both segments delivering proper growth.
And that's continued to demonstrate organic sales gains and good margin expansion consistent with our expectations of a strong 2000 and my team.
A combination of fixed cost reductions efficiency gains and some easing of war material contributor to the improvement.
He peed delivered solid performance as well.
Positive price mix was key for this segment more than offsetting lower volumes and unfavorable currency.
Contributing to sequential improvement after a challenging first quarter start to the year and showing profit growth over last years second quarter.
I would also like to call attention to several press releases, we issued in recent weeks.
Well, we officially announced two strategic growth projects.
An Asian capacity addition, in our fast growing transportation business.
And the new product introduction, no filtration business, where we leveraged both our E b assets and they about sales channels.
Overall, we are pleased where we stand at mid year.
And free cash flow is tracking as expected towards $100 million.
One note.
Second quarter GAAP earnings did reflect a significant one time expense from a pre 2000 tax assessment related to our operations in Brazil that Andy will detail later in the call and which is excluded from our dollar six of adjusted EPS.
I'll now review our businesses beginning with the en masse.
Segment profits were up 13% during the quarter and 17% year to date.
And I would like to note that this was pure organic growth.
Sales growth of 2% or 3% excluding currency impacts was led by transportation filtration.
And fundamentals remain strong for these fast growing product lines.
During the quarter and most hit a milestone with segment profit margin exceeding 20% for the first time.
Within transportation, we continue to see healthy global demand for our surface protection films.
Recall, we commissioned our first international film wine in Europe last year and that line is now fully operational.
This has led us to announce a follow on capacity investment at our recently expanded and upgraded facility in China.
Paint protection films had been one of the fastest growing applications across the M.S. portfolio.
And we remain fully committed to maintaining industry leadership on this important technology.
This latest investment puts us in a strong position in the local Asian market and once completed we will be the only manufacturer of these films with production sites across three continents.
Infiltration, our old water again, what our business with double digit growth.
As we said last quarter customer indications are positive regarding this near term outlook, while our continued long term bullishness in this space is supported by the underlying need for improved access to drinking water on a global basis.
Our customers see ongoing capacity additions on the horizon.
And the continued strength of the replenishment cycle is evident in our growth.
In recent calls we have mentioned the launch of a new specialty filtration product, but until recently you have provided limited details for competitive reasons.
However, we officially announced our product offering in late July after participating in several filtration trade shows during the summer in Asia.
Our new paper serves as a critical component in the manufacturing process of reverse osmosis water filtration cartridges.
It represents a new product from us in this important sub segments.
With the high level of quality, we have achieved initial feedback from our customers is that all people offers improved processing performance given our consistency in manufacturing defect free and uniform material.
This launch is an example of the synergies between our am SVP operations at this highly engineered product is produced by our paper operations in France, and <unk> and sold through our global A.M. Best commercial organization, which already markets several other products into the Aro marketplace.
The addition of this membrane backing paper increases our competitive position.
As we offer an unmatched bundling cup capability enhances our value proposition as a preferred supplier and further strengthens our customer relationships.
We look forward to a multi year ramp up as we expect to grow within this expanding filtration sub segment industry.
Rounding out the HMS segment.
After a strong first quarter medical sales were off slightly during the second quarter, but remain up to year to date.
Infrastructure and construction also declined modestly in the quarter.
Moving to engineered papers.
Well there was some divergence between volume decreases offset by price mix positives. We were generally pleased with the overall results with sales up 2%, excluding currency pressures and with operating margin increasing.
L. IP and other tobacco papers was stable in the quarter despite industry declines in part due to customer inventory movements.
A 9% volume decline consistent with our first quarter results reflected another tough tough comparison for heat not burn recon products as our customers were launching products last year and filling their supply chain.
We expect that these comparisons should ease significantly in the back half of the year.
We also saw lower volumes and non tobacco papers, particularly in printing and writing and every year, we have strategic we de emphasized given its lower margin profile.
Traditional RTL was well. It's also saw but was partially offset by a wrapper and binder recon products, where new product introductions into the Asian small cigar market are performing very well.
So to recap.
Well volumes will lower our price mix more than offset those losses, given the portfolio shift towards our higher value products with total sales up 2% without the negative currency impact.
I would also note that while we did benefit from higher contract prices that we set earlier this year to recapture a higher wood pulp costs.
That most of the price mix benefit was on the mix side.
Cost pressures across our raw material basket was less acute ended the first quarter, we perform well from an efficiency standpoint, despite the lower volumes and continue to look at our capacity and other cost reduction programs to keep the attractive 20 plus percent margins, our EAP segment generates.
I'll now turn the call over to Andy to discuss our financial results in more detail.
Thank you Jeff.
Starting with Amat second quarter sales increased 2% to $127 million and adjusted operating profit.
Increased 13% to $25.5 million.
While currency impacts on and that sales are relatively small compared to our E. P segment sales would've been up 3% without the negative impact of foreign currency.
Margin expansion of 190 basis points put adjusted operating margin just over 20%.
And note this increase was compared to our strongest quarter of 2018, when adjusted operating margin was approximately 18%.
Sales growth combined with our actions to reduce fixed costs.
And the benefit of softening polypropylene resin costs drove the gains.
Regarding polypropylene market prices continued to contract during the second quarter and flow through our PML.
The engineered paper segment net sales were down 2% to $143 million, However were up 2%, excluding the 4% negative impact from foreign currency.
And adjusted operating profit was up slightly to $33.8 million.
While the euro exchange rate remain unfavorable compared to 2018.
The negative comparison should ease in the second half of the year at current levels hold.
We're pleased to report that positive price mix of 11% more than offset the volume decline of 9% in the quarter.
Similar to the first quarter, we continued to shed lower margin non tobacco paper volumes and we again faced a tough comparison for heat not burn.
On the positive side, our tobacco paper portfolio, including L. IP held up well.
The net mixed effect of these trends was decidedly favorable and combined with contractual price increases that went into effect earlier. This year what are the key to our operating profit growth.
Adjusted operating margin for the segment was 23.6% up 70 basis points versus last year.
Wood pulp costs were up modestly versus prior year and while there has been some recent pullback and wood pulp prices. There is a delay on the benefit flowing through our PML.
Separately, though we continue to see some pressure from other input costs, such as energy chemicals and labor.
Corporate unallocated expenses increased moderately versus last year.
The deferred compensation pressure, we experienced in the first quarter from the rapid increase in our stock price reversed in the second quarter.
It was offset by other corporate expenses for I T investments and some consulting fees for various corporate projects.
On a consolidated basis net sales were essentially flat.
Without the impact of currency would have increased 2%.
Adjusted operating profit was $50.6 million up 6% and adjusted EBITDA was $60.2 million up 4%.
Shifting to consolidated earnings second quarter, 2019, GAAP EPS was 66 cents versus 83 cents in the prior year and included a 24 cents impact from tax assessments in Brazil related to pre 2000 activities.
We provided significant details in our 10-Q.
But to summarize the assessments relate to local passes on raw materials, and social security type benefits for employees.
We've been working with local tax authorities in resolving these matters for approximately 20 years.
With one case going in our favor and want again.
We note that a large portion of this expense represents interest and penalties, though we plan to pursue appeals potentially utilize offsetting tax credits.
Andrew apply for programs that may minimize the final impact.
However, at this point GAAP required the booking of the full potential expense.
We have excluded expenses associated with the tax assessments from our adjusted EPS.
The remainder of our non-GAAP adjustments, mainly relate to our typical noncash purchase accounting expenses and Amat.
Adjusted EPS was $1.86 cents versus one dollar a year ago up 6%.
Recall that second quarter 2018 earnings were our strongest of the year and represented a challenging comparison.
Thus, we were pleased to deliver solid earnings growth in the quarter.
Results were driven by the operating profit increased in both segments, which was partially offset by higher interest expense from our third quarter 2018 debt financing.
As reflected in our GAAP adjustments, we have split out interest expense on our debt from the interest expense associated with the tax assessments in Brazil.
Our normalized second quarter tax rate was 21.6%.
Moving to cash flow and liquidity year to date 2019 free cash flow was $37 million.
Per our typical seasonal pattern, we expect cash flow to be stronger in the second half of the year and finish at approximately $100 million or above.
Capex was approximately 9 million in the quarter and $18 million year to date, which analyzes within our $35 million to $40 million guidance.
As a reminder, our higher capital spend in 2019 versus 2018 reflects certain growth investments in amat.
Particularly the capacity expansion for transportation films in IP investments to support enhanced business intelligence capabilities across the business.
From a leverage perspective for the terms of our credit facility. We were at 2.5 times net debt to adjusted EBITDA at the end of the second quarter unchanged from year end 2018, and we would expect leverage to tick lower as we get as we close out the year.
Now back to Jeff.
Thanks, Andy.
Our quarter and year to date performance are tracking as planned with both segments delivering operating profit growth and margin expansion during the quarter.
We remain excited about the growth prospects in a mess and are executing on several strategic growth initiatives in transportation filtration.
We want to underscore that these initiatives as well as other recently completed projects were all part of our ambitious vision as we made acquisitions over the past five plus years.
We targeted companies, we believe could benefit from our intention to deploy growth capital, particularly for international capacity expansion and innovative new product development.
And also our operational excellence capabilities to integrate and deliver on cost reduction synergies.
While we continue to look at M&A to add scale and diversify the company. We are pleased with where the business stands dependent strong year to date profit growth without the benefit of acquisitions.
On the ERP side, we are strategically managing the profitability of our business in the face of tobacco industry headwinds, which stable to positive trends in several high value product lines.
And we continue to focus our efforts in these areas as well as opportunities to improve efficiencies and cost structure.
Lastly.
Well raw materials inflation was a drag on our results in 2018, both all resin and wood pulp costs appear trending in the right direction.
And absent a rise from current levels should be favorable in the second half of the year.
We appreciate your continued interest and support.
And that concludes our remarks.
The Rinder. Please open the line for questions.
Thank you ladies and gentlemen, if you have a question at this time.
No your Touchtone telephone if your question has been answered.
So from Q.
Please.
Okay.
Our first question comes from Steve Chercover from D.A. Davidson Your line is open.
Thanks, and good morning, everyone.
Good morning.
So my first question is on new.
Paper filtration products are they in a trial phase are they full blown commercial production.
They are they are fully commercialized at this stage, we've been scaling this product up over the past several months and are fully qualified at several customers.
That's that's good okay and then.
Sure the first half the price mix was offset.
Yeah, again sticking with paper, 9% volume decline.
In the second half do you expect the volume declines be more in line with the attrition.
And can you maintain such a rich mix.
So we expect our mix continued to be positive overall, if you recall the volume declines are oh, its a summary of our a couple of different things one if we have deliberately deemphasize our printing and writing papers.
In our non tobacco paper segment, so we're down materially in that.
Second is in heat not burn if you recall in our reconstituted tobacco products last year. The first half of the year arm one of our customers was filling that product pipeline and so we didnt think those volumes are going to be sustainable and we believe the second half of the year those comparisons should ease up and we have seen a little bit of weakness in our more traditional recon business, but we're seeing some positives in our wrapper and binder. So we expect to still see some volume pressures in the second half, but we also expect to see a good product mix and margins.
Okay and.
Keying in on the word sustainability of the margins in Amat.
Are they sustainable.
Yeah, We think we've hit a you know a little bit of a peak second quarter always traditionally is a good solid quarter for us. So we expect them to ease off but I think what you would you should be seen as the general trend is exactly where we're predicting it to go we're seeing our efficiency gains we're seeing some high margin products launched and getting good shares and Matt. So I think the second half margins will be lower than this peak margin in the in the quarter, but will be up year on year materially.
Thank you.
Can you give us a sense of the capital required to Commission ATP you film line and it will there be any freight perhaps tariff.
Savings from by producing in China.
Yes, so a couple of things one these lines are not materially expensive to install we have the facility. So we expanded our sue Joe plant with that with these things in mind is that we have the capability to just add a novel line into it. It's in the few millions of dollars of capital when we start to put that in.
In terms of tariffs, we don't see a huge impact at this time, but you know the tariff situation is really changing on a day to day basis. So it's hard to know I think the important thing to and so we don't see a big impact right now in our current businesses, but it's important to note that I think we're well prepared for the future as this uncertainty I think will continue for many years and so having the flexibility to manufacture on various continents gives us a lot of flexibility of where we produce products for certain markets.
Okay and since they are not particularly capital intensive.
Are there are barriers to entry beyond first mover advantage.
Yeah. There is a lot of barriers to entry in this market. If you think about what these films are going to.
These are very high performance.
Films and they have to have a certain level of optical clarity physical characteristics to be able to drape on complex shapes without putting air bubbles in it has to be defect free meeting no gel particles, no pigeonholes et cetera, and so I think it's easy to manufacture a thermoplastic polyurethane film, it's not easy to manufacture a high quality transportation surface protection films.
Okay and last question are there any contractual price.
Give backs that you have to.
You know.
And your as inputs such as pulp retreat.
Not that we see this year no.
Okay. Thanks, Jeff.
Okay.
From them.
Dan.
Dr. <unk> from Sidoti <unk> Company. Your line is open.
Hi, good morning.
Just.
One question and I appreciate the time, so can you talk a little bit more about what you're seeing in your construction.
End markets it looks like in the second quarter, they didn't really rebound to the level you expected I'm just looking at the commentary we had on the first Q1 9 call. So I wanted to learn a little bit more about what you're seeing in every part of that you can share detailed commercial building a resident residential construction and then what are you seeing that sort of for example, so I don't really soil erosion, a blanket cycle for the highway construction I'm trying to figure out where this weaknesses door and then has your viewpoint change about how you're looking at that end market for the second half and into next year I think when you made the Conway to acquisition you were targeting still at 3% to 4% growth just want to see if that's still a realistic and we're just going through kind of a short term blip or there something else that we need to think about longer term. Thank you.
Yeah, we think its more of a short term blip up some of the weakness has really been in our soil.
Stabilization businesses and and it's actually a result of two things if we think about it.
Really this extreme weather has really materially impacted the overall business and it's impacted it for two ways, which is interesting one which is more obvious as you have flooding and rains that you can't do that big construction projects you have surface. So they don't need the surface quite get as much et cetera.
The second piece surprisingly is the extreme weather is actually had impact on the heat production and he is actually used as one of the fill or in the blankets and so there's actually been some limited capacity from our end use customers and being able to actually make the blankets because of a different raw material not ours. So it's kind of a one two punch on that so that weakness has been there for the first half we would expect to see a little bit stronger to be honest in the second quarter, but I think you see the extreme weather continues even even today and yesterday you see these storms passing through we expect it to be solid in the second half of the quarter and I'm, a little bit more cautious now and how I predicted the cost of these weather patterns.
But it's still a very important part of our product line, we still all the leading supplier in this we had very strong customer relationships. So I think it's more of a blip than anything else and just to provide context I mean, it's only down low single digits. So this isn't it's not that material.
Yes, no that's incorrect incredibly detail I really appreciate you sharing that thinking good luck with the rest of the current quarter.
Thank you.
Ladies and gentlemen, if you have a question at this time.
Tone telephone one moment.
I'm showing no further questions at this time I'd like to turn the call back over to Dr., Jeff Kramer for closing remarks.
All right well I appreciate again every body support I thought it was a very solid quarter I hope everybody has noticed thing that we're executing on the things that we've said that we will be executing on and we'll continue to.
Do the best we can to perform and meet our everybody's expectation. So thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may disconnect and have a wonderful day.
[noise].