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Schweitzer-Mauduit International Inc (SWM) Q1 2021 Earnings Call Transcript

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Schweitzer-Mauduit International Inc (NYSE: SWM)
Q1 2021 Earnings Call
May 7, 2021, 8:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to SW AMS first quarter 2021 earnings conference call. hosting the call today from SW M is Dr. Jeff Kramer, chief executive officer. He is joined by Andrew Wamser Chief Financial Officer and Mark Chekanow director of investor relations. Today's call is being recorded and will be available for replay this afternoon. [Operator Instructions] It is now my pleasure to turn the floor over to Mr. Chekanow. Now, sir, if the floor is yours.

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Mark Chekanow -- Director, Investor Relations

Thank you, Tina. Good morning. I'm Mark checking our Director of Investor Relations at SW. Thank you for joining us to discuss our first quarter 2021 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 to justify these comments for a number of reasons, which are discussed in more detail on our Securities and Exchange Commission filings, including our annual report on form 10k. And our quarterly reports on form 10 Q. In particular, the extent to which the covid 19 pandemic can continues to impact our business is uncertain and depends on numerous evolving factors which are difficult to predict, including the duration and scope of the pandemic and of actions taken in response to it. Some of the financial measures discussed during this call are non GAAP financial measures. reconciliations of these measures are the closest gap measures are included in the appendix of this presentation and the earnings release. Unless stated otherwise, financial and operational metrics 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 Jeff.

Jeffrey (Jeff) Kramer -- Chief Executive Officer

Thank you, Mark. And good morning everyone. We are pleased to report a very strong quarter with positive momentum continuing in several key areas of the business, particularly across all fastest growing and most strategic product lines. As we now operate in the new COVID normal, I want to again commend our global organization for staying nimble and adjusting to challenges as they arise. This quarter it has been around logistics, as businesses around the world deal with various constraints related to the positive poles of an improving economy. And while many areas of the economy will grapple with inflation and tight global supply chains this year, we are confident in our ability to raise prices and manage costs to preserve excellent profitability. were equally confident in our ability to execute on the skapar integration and ultimately deliver a novel year of strong financial performance. Bottom line. Despite the heavy lifting behind the scenes to keep service levels high, strong ATMs, organic sales, growth and good execution in both operating segments drove 20% adjusted epcs growth in the quarter to $1.02. As you likely saw, we closed the SCAP acquisition on April 15, two weeks after quarter end, so none of scaffolds financials are reflected in our results. That said, in addition to our more typical quarterly discussion, I will elaborate on the exciting new capabilities we added with skapar as well as the expected acquisition accretion and overall annual earnings guidance we are finally able to share.

Our annual guidance implies mid to high single digit earnings growth in 2021, which reflect some of the immediate accretion we expect this year from joining the two firms. Importantly, we expect a significant step up in accretion for the following year. As we complete our integration and begin our value creation activities. I can confidently say that looking longer term, we have never been better positioned for sustainable top and bottom line growth as we are today. Our end markets are demonstrating good demand, operations are running well. And our portfolio of products and services continues to expand furthering our vision of being the supplier of choice at performance materials and integrated solutions for specialty applications. For ATMs, overall sales increased 33% including the benefit of the techer acquisition, while organic sales increased 15% in the quarter We were particularly encouraged by the breadth of strength across the portfolio. In transportation, we're up 20% overall in this profitable and market with over 50% growth and paint protection films, as our customers are seeing returns to normalize demand, and restocking after a choppy 2020. Despite some of the swings in sales between COVID impact and the current recovery, we continue to see our transportation business as a consistent high growth business over the long term. global demand for the product remains high. Consumers are becoming increasingly aware of the offering and distribution and customer consumer access continues to increase especially in Asia.

We have also continued to invest in improving our technology and capabilities to stay at the forefront of the industry and are starting to deliver on the benefits of the added capabilities that came with the tecra acquisition last year. filtration was another 20% plus grow in the first quarter. Again, demand is recovering from COVID disruptions. Customers are restocking to some degree and the fundamentals across our business are strong, consistent with the past several quarters after inflation led the way with over 50% growth.

Importantly, though, we saw a solid double digit growth across our entire filtration business, which includes our water filtration products, as well as materials for other specialty applications such as semiconductor manufacturing. amss, existing healthcare business also had a great quarter. By the way, we have previously referred to this as medical. But given SCAP is brought a product line and services as well as their branding in the marketplace. We will be referring to this area in our investor communications going forward as healthcare to better represent our increased capabilities. We saw strong performance in our traditional consumer oriented finger bandage business, as well as more specialty applications like packaging and face masks. The healthcare arena is very attractive long term given the need for specialized material and aging demographics. And we are excited to essentially triple our business to about $250 million annually with the addition of skaffa. Simply put, the more things we can do for a customer the better positioned we are to win more wallet share. With the increased scale and breath we will have with skapar combined teams will have a far greater offering to present to our customers. There will be opportunities to cross sell products, and perhaps most importantly, bring a variety of value added services and capabilities like development formulations, coating converting packaging, and even regulatory assistance to our current customers, which goes beyond the materials value proposition we currently provide. Lastly, construction sales also increased in the first quarter. Higher activity in the oil and gas industry drove year over year gains for perimeter controls materials used in the Marcellus Shale region, as well as an increased focus on solar farms. In addition, netting for highway infrastructure and other construction projects also grew nicely.

Further we saw gains in our building products in an area we also expect to drive value from through the SCAP the acquisition as we will bring its well regarded specialty constructions tapes to the business to our customers. I think it is also important to address the budding supply chain pressures that most industries are seeing, and which we expect to experience during the remainder of the year as the global economy awakens. We are seeing pricing and supply chain pressures across many of our inputs as raw material manufacturers have been hit by temporary shutdowns, availability constraints and the key inputs and shipping challenges just as global demand is starting to rebound. With that said, and as demonstrated by our strong 2020 results with COVID pressures. I am confident in our supply chains ability to meet customer demands and handled the increased cost pressures, although there may be some choppiness due to timing. Also, EMF sales drove over 40% adjusted operating profit growth in the segment, and we look forward to continued strength in 2021. Switching to engineer papers, the business performed as expected in the first quarter. As we had previously noted, we recently closed spotswood New Jersey facility and begun transitioning that facilities key customers to products made in other sites. As part of this transition, that customer worked through legacy inventories before now restocking with new product, which had a temporary impact in the first quarter, contributing to a total segment sales decline of 10%.

The transition is going and plan and we are realizing cost savings from this initiative. On the positive side, we had solid performance in some specialty tobacco papers and very strong growth in heat not burn volumes as our customers continue to drive sales of these reduced risk products. Of note, despite the lower sales segment adjusted operating profit declined only 6% due to good manufacturing performance and cost savings from the site closure. With that, I'll turn the call over to Andy to review the financials in more detail.

Andrew Wamser -- Executive Vice President and Chief Financial Officer

Thank you, Jeff. Starting with ATMs, first quarter sales increased 33%. With organic growth at 15%. The organic growth calculation assumes we had own Tecla for the entire first quarter of 2020 rather than the partial period ownership. As Jeff discussed, we had strong demand in most of our end markets, particularly transportation and filtration to have our higher margin areas. given us a central positive swing in our transportation business, we think it is noteworthy that even without this enmarket our organic sales growth would have still been up about 10% signaling the strength of the entire portfolio. The strong sales mix also led to excellent profitability. Despite higher input costs. First Quarter adjusted margin in a IMS of 17.1% was on par with our highest ever first quarter segment margin. demonstrating the continued operational improvements we have made over the years and successful integration efforts or businesses we have acquired. We achieved the 140 basis points of margin expansion despite the initial impacts of higher resin costs, mainly from polypropylene. Looking ahead, higher input costs are expected to become more significant. However, we are actively raising prices, which should, which should provide an offset as we head into the third quarter. We are encouraged by the early signs of our ability to recapture the higher costs than most of our key product lines. For engineer papers, first quarter sales were down 10% with key factors being the spottswood site transition and associated customer inventory drawdown. As well as the continued the emphasis of lower margin products. During the quarter currency offered a slightly positive offset, mostly due to the rising euro on margin. Similar to ATMs, we saw initial impacts of higher raw material prices, mainly wood pulp, though we still achieved 100 basis points of operating margin expansion in the quarter to 25.2%. The cost reductions from the spottswood shut down and broader operator operating an SGA cost actions continue to support strong segment profitability. Although we have some customers where timing of our contracts will limit our ability to recapture higher costs.

With price increases on some of our large contracts. We are raising price where possible, exploring multiple avenues to offset higher port prices. Regarding adjusted unallocated expenses, we saw an increase of approximately 1 million during the quarter, mostly due to timing of administrative expenses. However, as a percentage of total sales was essentially unchanged versus the prior year quarter. The expenses that were adjusted out all were due to the skaffa transaction and included advisory, diligence, and other related costs as we prepare to close the acquisition. in upcoming quarters, we will book additional one time expenses related to the deal, which we will also excluded from our adjusted financials. On a consolidated basis, sales for the quarter increased 10% or 3% on an organic basis, adjusted operating profit increased 14% and adjusted EBIT, increased 13% first quarter 2020 gap you ups was 68 cents, versus 72 cents. The most material comparison items relate to the scabbia acquisition expenses, which totaled 22 cents per share, and included both the unallocated expenses within operating profits, but also the negative impact of a currency hedge to lock in the price of the British pound. At the time when the deal was announced. Please refer to our 10 Q, and our press release for additional details on this topic. We also booked an 11 cent per share gain in the quarter from a favorable settlement related to our Brazil tax assessments, which was also backed out of adjusted DPS. normalizing for those items as well as the typical non cash purchase accounting expenses, adjusted eppf was $1.02, up 20% versus last year's first quarter.

In addition to the strong growth in operating profits, our tax rate was slightly lower, and our JV income was slightly higher as well. The tax rate embedded in first quarter adjusted epcs was 20.5% and 80 basis point improvement versus last year's first quarter. While we normally provide annual adjusted ETS guidance in February, in conjunction with urine results, recall that due to regulatory restrictions related to our acquisition of skaffa, a UK based public company, we were unable to do so at that time. However, with the transaction closed, we had issued 2021 adjusted NPS guidance of $3.75 to $4.05. This guidance includes expected accretion of approximately 10 cents from the scabbia acquisition, which we will own for essentially three quarters. looking beyond this year, we believe SCAP will be significantly more creative in 2022. We estimate at least 50 cents of adjusted epsc accretion next year, as a business returns toward three COVID levels. Consistent with our comments in February, we expect our EP business operating profit to revert back toward the multi year trend in the mid $120 million range after a particularly strong 2020. We believe this pullback to normalize levels will be more than offset by anticipated profit growth in ATMs due to expected strong organic sales performance. Unfortunately, the rapid and unexpected rise in certainly certain raw material costs is certainly temporary, what would have otherwise been a much more positive outlook for 2021. We believe that the cost headwinds, the 10% earnings growth imply that the top end of the range is achievable and would represent a very positive outcome.

Before Jeff offers a more strategic perspective on skaffa I'd like to recap some of the financial aspects of the transaction and some key points on the expected accretion. We acquired scabbia for approximately $630 million, including net debt. We financed the deal with a new $350 million term loan B as well as our revolving credit facility. Though of course, the closing is not reflected in our March 31 balance sheet pro forma based on the covenants in our credit agreement. Our net debt to adjusted EBITDA at close was approximately 4.3 times in line with our range at the time of announcement. The table on slide eight is intended to help frame skaffa recent financial performance and are expected accretion in 2021 and 2022. Please note these numbers are approximate and rounded. meant to be illustrative and reflect a British Pound exchange rate of 1.38 for all periods to improve compatibility. At today's exchange rates skaffa generated approximately $440 million of sales and $55 million of EBIT da in its fiscal year 2020 which ended in March 20. And what we refer to as pre COVID. The pandemic impacted both scaffolds healthcare and industrial segments as shown in fiscal 2020 on results, which just ended in March, while sales in the industrial business have been steadily recovering. The healthcare business remains somewhat challenged with consumers around the world opting to minimize hospital and clinic visits, as they postpone elective surgeries. And procedures. We believe elective surgeries will recover as consumers steadily return to more normalized lifestyles. vaccinations increase and the backlog of delayed medical activities is fulfilled. However, for 2021, we want to remain conservative in our thinking. We note that during the pandemic scabbia took actions to reduce costs.

Thus, we expect to see improved margins despite lingering sales headwinds. In addition, we've identified 5 million of public company and related administrative cost synergies that we can execute in the near term, and the potential for more cost savings and sale synergies down the road. We can see during our 2021 accretion estimate of 10 cents per share, we know that this represents nine months of ownership. Also in 2022, we do not assume a full recovery to arrive at 50 cents accretion. escapa sales ramped back toward the pre COVID levels faster than we assumed we would be in good position to meaningfully exceed our 50 cents accretion guidance, given higher margins on staff as lower cost base and the realization of synergies. From a high level modeling standpoint, we estimate interest expense for the transaction at approximately 22 million in 2021 and 29 million in 2022. And what is too low to mid 20% range or tax rate. Now back to Jeff. Thanks, Andy. I'd like to now reiterate some key strategic highlights of the SCAP acquisition before closing our comments. We first set out to diversify and reposition SW M for growth back in 2013. And we have made a series of highly strategic acquisitions. In the creation and expansion of Ms. We have established a good track record for integration and execution, and had built a $500 million diversified business on the vision of offering customers high performance materials designed for specialty applications. Along the way, we expanded our product set capabilities and then market exposures, all with the goal of offering our customers a full suite of solutions to help solve their most pressing, product design and performance challenges.

Scapa, while larger than our other acquisitions is simply an extension, and even an acceleration of this strategy. We have extensive overlap as far as healthcare, construction, transportation and industrial exposures. And with scapple, we took a significant step forward and broadening the full solutions platform we want to bring to our customers. Recall, we first added more significant downstream coding and converting capabilities when we acquired tecra. And believe skapar represents a step function of increasing capabilities. When it comes to fulfilling our vision. We now bring customers more advanced upstream capabilities in innovation, product design, and chemical formulations, as well as more downstream offerings with coating converting and packaging, continuing our evolution as a full service solutions provider. As I said earlier, the more we can do for a customer, the more ways we can help, the better position we are to earn them business. I'd also note that while we've talked a lot about staffing a sizable healthcare business given our increased scale and the opportunities to bring new capabilities to our larger customer base. I also want to focus on that like SW n. Scatter is in a number of attractive specialty application serving a diverse set of end markets, cable wraps, construction capes, consumer products, electrical harnesses for automotive just to name a few. And just like SW M. SCAP has built a reputation for quality and service and leadership in many of these key product lines. And what does it all mean for us Wm long term financial performance? I believe the short answer is it improves our growth outlook. With nearly two thirds of our business being generated in expanding and markets. Our portfolio continues to shift toward a stronger organic growth profile. We are better positioned than ever to drive positive, sustainable long term results. We look forward to another year of earnings growth, solid execution and of course welcoming skapar into our global organization. That concludes our remarks. Tina, please open the line for questions.

Questions and Answers:

Operator

Just as a reminder to ask a question, simply press star one on your telephone keypad. Our first question is from Chris McGinnis with Sidoti & Company.

Chris McGinnis -- Sidoti & Company -- Analyst

Good morning. Thanks for taking my questions and nice start to the year. Thanks, Chris. Maybe just start with, you know, the double digit increase on the on the filtration products. Can you just talk about, you know, is that demand trend, still, at that rate as you exit to the quarter? Also, you know, you did talk about a little bit of pent up demand and in some of those components and some of those kind of end markets, you know, how much do you think that drove it versus the rebounding economy? Thanks.

Jeffrey (Jeff) Kramer -- Chief Executive Officer

Yeah. So So Chris, just a couple of things, filtration, continues to be one of those segments that we have high confidence is going to be a long term grower for us. It's been a great performer even before COVID. And we're really confident that it's going to continue do that. Yeah, it's still it's still in that I think it's exiting the quarter as strong as its, as we discussed in the results. And so I have confidence that that demand is there. Some of it is a little bit of pent up demand, I think, but it's a hard question to answer, I think the water, for instance, our increases in water is going back to that normal, strong demand that we see I think that demand for purity, etc, that that trend isn't going to change, I think there has been a fundamental change in the air filtration market where demand is going to increase, I don't think we're going to go back to the old days. And I think we're well positioned to take advantage of that, I think you'll see some less demand on the mask material. But you know, the filtration material, I think will remain strong. So overall, you know, our process fluids, filtration is snapping back, because that goes into automotive, industrial, etc. So we like that position. And I think it's going to remain strong for the remainder of the year.

Chris McGinnis -- Sidoti & Company -- Analyst

Great. I appreciate that. A lot of sense. Just on the transportation obviously been improving, you think it stays kind of growth, or as we go throughout the year, just given the impact that, you know, COVID had on last year, you just talked about your expectations, I guess for the year on that.

Jeffrey (Jeff) Kramer -- Chief Executive Officer

Yeah. You know, we we again, that's another area, that whole transportation marketplace, we like a lot. I think we mentioned in my comments that we saw the surface protection component of that transportation industry up 50%. That one's probably a little bit high for a long term demand. But we still think this, that that whole pay protection marketplace has a lot of growth, it's a penetration flight. And we're seeing a lot of attention into it now. And I think that one is positioned well for the long term as well, with double digit growth. And then just an EP, he just taught me a little bit about, you know, down quarter, the impacts of spottswood. And I get your thoughts around how that plays out for the remainder of the year. Last year was a little weird.

Chris McGinnis -- Sidoti & Company -- Analyst

Oh, you could just help us in any way on, you know, how you how you think about that for the remainder of the year on the volume side?

Jeffrey (Jeff) Kramer -- Chief Executive Officer

Yeah, sure. So, you know, we announced a 10% decrease in the business for the segment. But that was really driven by two major factors. One, you know, just a normal transition, when you close one, you know, facility, you always move to a new product, you always build up inventory for to ensure that you have that material for smooth transition, just in case, the transitions going smooth, but we just worked that inventory down. And so that's had some pressure on our Li p type, you know, materials. The second is we had a material drop off in volume of you know, printing papers, which we use as a filler. It's a low, it's a low margin business for us. So volume wise, it had a big impact, but profitability wise, it didn't have a material impact in the same way. So that's why we still had, you know, leverage in terms of top line versus the bottom line. I think we've been very consistent. We think the EP business is reverting just to the long term trend that we've shown over the last four or five years very consistent. cash flows very consistent profitability. Last year, we said, I think in our comments that part of that was in the extraordinary results was part built to inventory bills as people were handling, you know, material supply chain constraints, and that we expected it to revert to a normal and that's what we're saying. Great. And just the accretion numbers.

Chris McGinnis -- Sidoti & Company -- Analyst

Thanks for one providing the slide deck in filling this gap rather than closing that. I guess a couple things on scaffold fun. Can you just talk about how that changes? You know, I know it's very early, but how does it change and go from a good strategy? How does it improve it? Especially you know, as you're renaming medical health And then just the confidence, you know, that rebounds in? And how much leeway is there with that 50 cent number in the 400 million in revenue on 27? Thanks.

Jeffrey (Jeff) Kramer -- Chief Executive Officer

Yeah. So let me address a couple things, I don't think it changes our strategy at all. It's an evolution of our strategy. So the things that we are doing, right, we have always been, you know, more of a performance type custom company, which means we need to provide solutions to problems that our customers bring to us. And so our strategy has always been to reinforce that solutions orientation, and bring additional capabilities that our customers are asking us to bring. So skapar is exactly that. We've always had a very strong position in what we used to call our medical business. Scapa is, has established itself as a leading outsourcing company for the healthcare industry with very strong relationships do a lot of customer overlaps, and so they bring additional capabilities to our medical business that I think we're going to be able to leverage. And that has been our strategy on the on the medical healthcare side, on the industrial side. You know, we don't talk about it as much. But if you look at the markets, that scaffold brings, and their ability to bring us adhesive capabilities, and knowledge and skills, highly complimentary to many of our industrial marketplaces. So again, very consistent with the strategy of bringing additional capabilities that our customers are asking us to bring to them. And then giving us greater exposure to, you know, additional markets and additional customer. So, you know, I'm very excited about that, in terms of our, you know, accretion estimates, you know, we tend to be, I think, optimistic, but we're not a company that tries to get out over our skis, in giving forecasts. So I think what you see is a forecast, we have great confidence in and I think as you know, Andy mentioned it, you know, we can get some elective surgeries coming back, you know, that COVID starts to settle down. We think there's, there's upside to that number.

Chris McGinnis -- Sidoti & Company -- Analyst

Great. Thanks for taking my questions. And good luck in q2.

Jeffrey (Jeff) Kramer -- Chief Executive Officer

Thanks, Chris.

Operator

And we have no further questions. I'll turn the call back over to Dr. Kramer for closing remarks.

Mark Chekanow -- Director, Investor Relations

All right. Well, thank you, everyone. I want to close with again, we appreciate everything that you've you do to support us. I want to thank my global team. I want to welcome the skapar employees as they join us into a team. You can tell we're counting on new to add valuable contributions to us globally. And we're going to continue to do our best equitably and grow this company organically. So thank you very much.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Mark Chekanow -- Director, Investor Relations

Jeffrey (Jeff) Kramer -- Chief Executive Officer

Andrew Wamser -- Executive Vice President and Chief Financial Officer

Chris McGinnis -- Sidoti & Company -- Analyst

More SWM analysis

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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