Schweitzer-Mauduit International, Inc. (SWM) on Q1 2021 Results - Earnings Call Transcript
Operator: Welcome to SWM's First Quarter 2021 Earnings Conference Call. Hosting the call today from SWM is Dr. Jeff Kramer, Chief Executive Officer. He is joined by Andrew Wamser, Chief Financial Officer; and Mark Chekanow, Director of Investor Relations. Today's call is being recorded and will be available for replay this afternoon. At this time, all participant lines have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. It is now my pleasure to turn the floor over to Mr. Chekanow. Sir, the floor is yours. Mark Chekanow.
Mark Chekanow: Thank you, Tina. Good morning. I'm Mark Chekanow, Director of Investor Relations at SWM. Thank you for joining us to discuss our first quarter 2021 earnings results. Before we begin, I'd like to remind you that the comments included in today's conference call include forward-looking statements. Actual results may differ materially from the results suggested by these comments for a number of reasons, which are discussed 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.
Jeff Kramer: Thank you, Mark, and good morning everyone. We were pleased to report a very strong quarter with positive momentum continuing in several key areas of the business, particularly across our 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 varying constraints related to the positive polls 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. We are equally confident in our ability to execute on the Scapa integration and ultimately deliver another year of strong financial performance. Bottom line, despite the heavy lifting behind the scenes to keep service levels high, strong AMS organic sales growth and good execution in both operating segments drove 20% adjusted EPS growth in the quarter to $1.02. As you likely saw, we closed the Scapa acquisition on April 15th, two weeks after quarter end, so none of Scapa's 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 Scapa, 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 reflects 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.
Andrew Wamser: Thank you, Jeff. Starting with AMS, first quarter sales increased 33% with organic growth at 15%. The organic growth calculation assumed, we had owned Tegra 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, two of our higher margin areas. Given the substantial positive swing in our transportation business, we think it is noteworthy that even without this end market, 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 AMS of 17.1% was on par with the highest ever first quarter segment margin, demonstrating the continued operational improvements we have made over the years and successful integration efforts for 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 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 in most of our key product lines. For Engineered Papers, first quarter sales were down 10% with key factors being the Spotswood site transition and associated customer inventory drawdown, as well as the continued de-emphasis of lower margin products. During the quarter, currency offered a slightly positive offset, mostly due to the rising euro. On margins, similar to AMS, 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 Spotswood shutdown and broader operating and SG&A 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 and exploring multiple avenues to offset higher pulp prices. Regarding adjusted on allocated 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 with essentially unchanged versus the prior year quarter.
Jeff Kramer: Thanks, Andy. I'd like to now reiterate some key strategic highlights of the Scapa acquisition before closing our comments. We first set out to diversify and reposition SWM for growth back in 2013 and we may have made a series of highly strategic acquisitions in the creation and expansion of AMS. We have established a good track record for integration and execution and have 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 end 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 Scapa we took a significant step forward in 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 Tegra and believed Scapa represents a step function increase in 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 coding, 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 their business. I'd also note that while we have talked a lot about Scapa's 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 SWM, Scapa is in a number of attractive specialty application, serving a diverse set of end markets, cable wraps, construction tapes, consumer products, electrical harnesses for automotive, just to name a few. And just like SWM, Scapa has built a reputation for quality and service and leadership in many of these key product lines. And what does it all mean for SWM's 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 end markets, our portfolio continues to shift towards 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 Scapa into our global organization. That concludes our remarks. Tina, please open the line for questions.
Operator: Our first question is from Chris McGinnis with Sidoti and Company.
Chris McGinnis: Yes. Good morning. Thanks for taking my questions and nice start to the year.
Jeff Kramer : Thanks, Chris.
Chris McGinnis: Can we maybe just start with the double-digit increase on the filtration products? Can you just talk about – is that demand trend still at that rate as you exited the quarter? Also you did talk about a little bit of pent-up demand in some of those components – or in some of those kind of end markets you know. How much do you think that drove it versus the rebounding economy? Thanks.
Jeff Kramer: Yes. 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 to do that. Yes, it's still in that. I think it's exiting the quarter as strong as it's – 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, et cetera, 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 the filtration material I think will remain strong. So overall, our process fluids filtration is snapping back because that goes into automotive, industrial, et cetera. So we liked that position and I think it's going to remain strong for the remainder of the year.
Chris McGinnis: Great. I appreciate that, makes a lot of sense. Just on the transportation, obviously, it's been improving. You think it stays at this kind of growth? Or as we go throughout the year, just given the impact that COVID had on it last year, can you just talk about your expectations, I guess, for the year on that?
Jeff Kramer: Yes. 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 is probably a little bit high for a long-term demand, but we still think that whole paint protection marketplace has a lot of growth. It's a penetration play and we're seeing a lot of retention into it now. And I think that one is positioned well for the long-term as well with double-digit growth.
Chris McGinnis: Great. And then just on EP, could you just talk maybe a little bit about the down quarter, the impact of Spotswood? And I guess your thoughts around how that played out for the remainder of the year. Last year was a little weaker, though. If you could help us in any way on how you think about that for the remainder of the year on the volume side.
Jeff Kramer: Yes, sure. So, we announced a 10% decrease in the business for the segment, but that was really driven by two major factors. One, just a normal transition when you close one facility, you always – and move to a new product, you always build up inventory for – to ensure that you have that material for a smooth transition just in case. The transition is going smooth, but we just work that inventory down. And so that's had some pressure on our LIP-type materials. The second is we had a material drop-off in volume of printing papers, which we use as a filler. 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 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 build to inventory builds as people were handling material supply chain constraints and that we expected it to revert to a normal and that's what we're seeing.
Chris McGinnis: Okay, great. And just the accretion numbers, thanks for one, providing the slide deck and in-filling the Scapa Congrats on closing that. I guess just a couple of things on Scapa. One, can you just talk about how that changes? I know it's very early, but how does it change your go to market strategy? How does it improve it, especially as you're renaming medical healthcare? And then just the confidence in that rebounds and how much leeway is there maybe with that $0.50 in the $400 million revenue on 2022? Thanks.
Andrew Wamser: Yes. So let me address a couple of 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 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 Scapa is exactly that. We've always had a very strong position in what we used to call our medical business. Scapa has established itself as a leading outsourcing company for the healthcare industry with very strong relationships through 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 medical healthcare side. On the industrial side, we don't talk about it as much, but if you look at the markets that Scapa brings and their ability to bring us adhesive capabilities and knowledge and skills highly complementary 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 a greater exposure to additional markets and additional customers. So, I'm very excited about that. In terms of our accretion estimates, we tend to be, I think, optimistic, but we're not a company that tries to get out over our skis in, in giving forecast. So I think what you see is a forecast we have great confidence in. And I think, as Andy mentioned, if we can get some elective surgeries coming back that COVID starts to settle down, we think there is upside to that number.
Chris McGinnis: Great. Thanks for taking my questions and good luck in Q2.
Andrew Wamser: Thanks, Chris.
Operator: And we have no further questions. I'll now turn the call back over to Dr. Kramer for closing remarks.
Jeff Kramer: All right. Well, thank you everyone. I want to close with, again, we appreciate everything that you do to support us. I want to thank my global team. I want to welcome the Scapa employees as they join us into a team. You can tell we're counting on you to add valuable contributions to us globally. And we're going to continue to do our best to execute positively and grow this company organically. So thank you very much.
Operator: Thank you again for joining us today. This does conclude today's presentation. You may now disconnect.
