Neptune Insurance Holdings Inc (NP) 2010 Q3 法說會逐字稿

Good morning. I would like to remind everyone that the presentation today contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect Management belief and assumptions regarding future events based on currently available information. Listeners are therefore cautioned not to put undue reliance on forward-looking statements as they are not a guarantee of future performance and remain subject to a number of uncertainties. Forward-looking statements, as they are not a guarantee of future performance and remain subject to a number of uncertainties and other factors that could cause actual results to differ materially from forecasts.

A more detailed description of these uncertainties and risks is provided in Neenah Paper's earnings release and filings with the Securities and Exchange Commission which you are encouraged to review. Except to the extent required by acceptable securities laws, Neenah Paper undertakes no obligation to update or publicly revise any of the forward-looking statements that you may hear today.

In addition, the Company may make certain statements during the course of this presentation that includes references to non-GAAP financial measures as defined by SEC regulations. As required by those regulations, if that were to happen, a reconciliation of these measures to what management believes are the most directly comparable GAAP measure would be posted on the company's website at www.neenah.com.

Thank you. My name is [Adrienne] and I will be the conference operator today.

At this time I would like to welcome everyone to the third quarter 2010 Neenah Paper earnings conference call.

(Operator Instructions).

I would now like to turn the call over to our Vice President, Financial Analysis and Investor Relations, Bill McCarthy. Sir, you may begin.

Okay, thank you.

Good morning and welcome to Neenah Paper's third quarter earnings call. With me today are Sean Erwin, our Chief Executive Officer, and Bonnie Lind, our Chief Financial Officer. Also joining us this morning is John O'Donnell, our Chief Operating Officer. John assumed this role in June and previously was President of our Fine Paper Business.

We released earnings yesterday afternoon, so hopefully you have all had a chance to review this. I'll recap a few headlines before turning things over to Sean, John and Bonnie to discuss the results in detail.

Both of our business segments once again performed very well with consolidated net sales growing 8% over a very solid prior year comparison and with operating income up 9% despite the impact of pulp prices. Earnings per share were $0.30 for the quarter, growing 30% from $0.23 per share last year, reflecting our strong business performance and additional benefits from lower interest expense as a result of the substantial de-levering that's occurred over the past year.

With that, let me turn things over to Sean.

Thanks, Bill, and good morning everyone.

We are pleased with the results again this quarter as they continue to show the success and progress of our teams in delivering on our key objectives of driving organic top line growth, expanding margins, particularly in Technical Products, delivering consistent and attractive returns in Fine Paper, generating strong cash flows in both of our businesses, and improving our return on invested capital. Let me begin with some highlights.

Consolidated sales of $162 million grew 8% versus the prior year. As mentioned last quarter, the quality of the top line growth our teams are achieving has been very good, with revenue growth driven by both volume increases and improved price and mix. In fact, benefits from improved mix and higher selling prices during the quarter totaled over $11 million. While there was not a lot of new price activity this quarter, we continued to see the impact of actions taken earlier to help offset pulp price increases. Also importantly, we saw benefits from the concerted efforts of our businesses to improve their product mix, with growing sales of more profitable higher-value products.

Turning to Fine Paper, our 6% revenue growth again outperformed the market with customers reporting that we continue to gain share in core premium writing, text and cover papers. We supplemented these increases with expanded sales in targeted growth markets such as sales to international customers which grew 15% and for luxury packaging and labels which was up 12%. Our mix reflected the focus on our market-leading premium brands such as Classic and Environment as well as the addition of Crane's line of cotton papers.

In Technical Products, our 9% top line growth was achieved in spite of a weaker euro which averaged €1.27 in the quarter and reduced sales by $6 million. On a constant currency basis, sales increased 16% with high single-digit gains in both volume and average selling price. Prices reflected the higher value mix which benefited from increased sales of proprietary specialty filtration grades and advanced key transfer products.

While our core businesses performed well, we also realized more than $4 million of incremental sales from our R&D efforts. This included new product introductions in high-end filtration and label applications and customization of products to meet the demands of our customers in rapidly-growing global regions.

So overall our teams delivered against our objective of organic growth despite normal seasonality this year through gains in share and improved mix, new business development efforts, and entry into new markets and geographies.

Consolidated EBIT of approximately $12 million increased 9% from last year. This is particularly noteworthy as improvements were achieved in spite of more than $11 million in higher cost per pulp. Profit and margin improvement was driven mostly by Technical Products as a result of actions taken to grow volume, improve mix, and increased selling prices and cost reductions.

Cash flow from operations remained strong at $14 million, consistent with levels in the first and second quarter. And debt net of cash was $208 million in September, down 34% this year and at the lowest level since the third quarter of 2006. Finally, addressing the last key objective I mentioned, our return on invested capital this year is approximately 9%, up substantially from 6% in 2009.

While margin improvement has been an important catalyst, we also continue to tightly manage our assets. Working capital as a percent of sales this year is 13%, down from a very respectable 16% last year as both business segments are exploiting our supply chain capabilities to operate more efficiently while maintaining excellent customer service. This is also evident when you look at our balance sheet which shows only a $2 million year-to-date increase in working capital on a $78 million increase in sales.

So overall our teams are executing well and making good progress against our key objectives.

Next I'd like to welcome John to the call and turn things over to him to cover each of our segments in more detail. John?

Thanks, Sean. I'll cover results and key initiatives in each of our segments, starting with Technical Products.

Sales of $95 million were up 9% in the quarter. This was led by double-digit growth in abrasives, graphics and identification and wall covering products, coupled with solid performance in our larger filtration and tape markets. Third quarter results reflected significant abrasives volume growth in Asia and other developing markets. Our heat transfer imaging papers are also benefiting from expansion in the international markets and we're seeing continued momentum behind recent product introductions such as [foam] tape, advanced filtration and specialized labels.

In addition to volume increases, higher selling prices and a good mix contributed significantly to results. Our mix reflected the substantial growth in graphics and identification products which include some of our more technologically complex and highest valued products. In filtration, our largest product line, demand remained robust, especially for more advanced products that use a combination of specialty paper and non-woven materials. As we mentioned last quarter, our current capacity for non-woven is fully utilized. Our investment in additional capacity remains on track to start up early in 2011.

Technical Products is a global business for us with over 75% of sales outside of North America. Our performance is reflective of the major supply positions we have with the market leaders, customers who are growing share and expanding in developing economies. While the second half of the year tends to be seasonally slower, our position with customers remains strong and we continue to make excellent progress delivering top line growth through market share gains, new product introductions and geographic expansion.

We're also very pleased with the bottom line performance. Operating income of $7 million for the quarter was up 35% from $5.2 million last year. Improved volumes and selling prices and the higher value mix more than offset almost $7.5 million of higher pulp and latex costs. Maintenance costs also increased compared to the reduced levels of spending last year, but this was more than offset by a record performance in our U.S. operations.

Turning to Fine Paper, sales of $67 million grew by 6% with about half of the increase coming from volume growth and the remainder from higher net prices. Sean mentioned the double-digit gains we achieved in targeted areas such as packaging, label and international markets, but our core business also did very well, growing 5% against the backdrop of an uncoated free sheet market that declined slightly in the quarter. Our improved volumes reflected growth in key brands like Classic and Sundance as well as added revenue and profit streams from Crane's premium cotton papers which we began selling in September this last year.

Recently we rolled out the most comprehensive digital program in the premium writing, test and cover category with one-of-a-kind colors and textures and the first digital black paper. The digital print market was clearly seen -- been an area of strong growth and we are excited about the opportunity this represents as we bring our premium products to this segment of the market. Late in the quarter we also introduced a new program where customers can now purchase envelopes directly from us, providing supply chain efficiencies for them while adding to our top and bottom line results.

Fine Paper operating income of $8.7 million was down from $9.6 million last year, but margins remained solid. Third quarter reflected pulp pricing that we expect to be the highest of the year, and this represented an increase in cost of more than $5 million versus last year. While pulp prices have started to moderate from its peak levels, they appear to be declining slowly. With fiber representing the largest component of cost, our Fine Paper team has done a great job offsetting the majority of these increases and preserving their attractive margins.

With that, I'll turn things over to Bonnie to cover corporate financial items.

Thank you, John.

As Sean and John have noted, our business teams have successfully grown our top line, and with an improved cost structure, we've enabled to expand margins this year despite significant headwinds from increased input costs. Our strong operating performance and sound asset management has allowed us to continue to reduce net debt and improve return on capital, and we remain on pretty solid financial footing.

Let me go through some of the corporate numbers now, starting with SG&A. Consolidated selling, general and administrative expense of $16.6 million was down $1.5 million versus last year. This is partly due to the timing of expenses last year as well as cost reductions implemented over the past year. As we've said previously, SG&A spending is expected to average approximately $17 million per quarter, in line with last year. Corporate unallocated expense which is part of total SG&A was $4 million, roughly in line with last year.

Net interest expense continued to decline and was $4.8 million in the quarter, down 11% compared to $5.4 million last year. This was primarily due to reduced debt levels. As a reminder, interest expense includes approximately $0.5 million for amortization expense and commitment fees related to our North American credit facility.

Our effective tax rate in the quarter was 32%. This rate varies based on mix of income between jurisdictions. With changes in mix this year and increased income from German operations, we expect our consolidated tax rate to be at approximately this level going forward. We will use available net operating losses to offset cash taxes due on income in the U.S., and consequently our consolidated cash tax rate is significantly lower than our book rate.

Taking a look at cash flow and the capital structure, cash from operations was $14 million which is in line with the first two quarters of this year, supported by solid operating income and effective management of working capital. Receivables increased at the end of the quarter due to strong September sales, but our days receivable and [passive] percentage remain well within target ranges. As Sean indicated earlier, our working capital as a percent of sales is 13% so far this year, a significant improvement from last year and an impressive number by itself.

Projected capital spending is estimated to be $16 million to $18 million, within the range of $15 million to $20 million we previously communicated. This amount includes about half of the $10 million cost for the new (inaudible) capacity in Germany. Spending in the third quarter was $6 million which is higher than our run rate so far this year as we typically spend more in the second half coincident with the timing of our scheduled maintenance and holiday downs.

Contributions to defined benefit pension plans are expected to be approximately $18 million in 2010 and pension and OPEB cash payments will be around $11 million higher than expected. With lower expected discount rates next year, we've begun accelerating funding this year to help minimize increases in 2011.

During the quarter, net debt declined $3 million and we ended the quarter with debt of $247 million and cash of $39 million. Net debt to trailing 12 months EBITDA is 2.3 times, almost half the level at the start of the year. We continue to have nothing drawn against our North American revolving credit facility and approximately $85 million of available borrowing capacity. I'd also note that we closed on the sale of our Ripon fine paper mill in late October, and that brought in an additional $9 million of cash proceeds, so our debt metrics and capital structure continue to be in great shape.

In addition, our strong and consistent cash flows supported by business performance, cash tax benefits and capital spending efficiencies resulted in a high cash flow yield and we remain committed to paying a meaningful dividend to our shareholders.

With that, I'll turn things back to you, Sean, to wrap it up.

Thank you, Bonnie.

Let me start with safety. Our safety performance continues to improve this year and our year-to-date reportable incident rate is 20% below last year. I am pleased with the progress we are making toward the world-class objective that we set a few years ago. Our safety programs and employee involvement remain active and we continue to operate under the belief that all injuries can be prevented and it is our collective responsibility to eliminate them.

Let me turn next to our businesses. As we've stated, the second half of the year is typically slower for us, and while GDP growth in the U.S. continues to reflect a slow recovery, we've seen no indication of any significant deviation from normal seasonal patterns. In fact, the German auto manufacturers, which are an important driver of our transportation filtration business, continue to reflect less than normal holiday-related downtime in December. We are seeing benefits from increased shares in our strong supply and development relationships with global customers and we are continuing to focus on targeted growth categories in each of our businesses.

We said this quarter would be a much tougher comparable since the third quarter last year also reflected strong results. Our teams performed well against these good prior year results and overcame more than $11 million in increased input costs. That's the reason I started the call by highlighting how pleased we were with the results this quarter.

The strategy we laid out to you a few years ago to transform Neenah Paper away from pulp, focusing on specialty and premium markets where we believe we can compete effectively and add value is proving to be the right one. Our core businesses are doing well and our research and innovation efforts which are an important part of this strategy are gaining momentum, with more high value products being brought to market and many others in the pipeline.

Financially we've been delivering important sustainable cash flows and have a solid capital structure. We are now well-positioned to move more actively to pursue investments that are good strategic fit and provide attractive financial returns. We remain confident about the potential of our businesses and the direction we are headed.

I'd like to thank you for your time and interest this morning and I now would like to open up the call to any questions that you may have.

(Operator Instructions).

And the first question comes from the line of Fred Buonocore.

Good morning, Fred.

Hi, yes, good morning all, and welcome to the call, John.

Thank you, Fred.

Just wanted to start out to clarify something or if you could remind me with respect to the seasonality, is Q4 typically a little bit weaker than Q3 or is the impact of the holidays typically or historically similar to the impact of summer downtime?

It's not dramatically different. We take more maintenance downtime in the third quarter, the costs of which are huge. That's typically let's say extra $1 million, $1.5 million of cost in the third quarter. But we tend to see -- October and November tend to be very strong months with December being weaker typically with the downtimes. We don't see the fourth quarter as significantly worse typically as the third because December offsets the mill downtime. As I mentioned in the comments, we're seeing positive things in terms of filtration plans. So we're -- you never know until it's over, especially in the environment that everyone's operating in right now, but it shouldn't be significant.

Right. So it sounds like you're saying that the trends with the German auto manufacturers and filtration could help sort of buck the seasonal trend?

Yes, yes, it could, and yet at the same time I think we've all heard some calls with some of the global firms that have announced earlier than us that some of them are forecasting a little weaker performance in the fourth quarter. And so we may offset some of that, it just depends on the order books.

Got it.

Right now we're -- our operating plans look pretty good for the fourth quarter.

Okay. And can you address in whatever way you feel comfortable how we should think about growth potential in 2011?

We have got a pretty solid playbook as to what we're doing as a company and the teams have good, strong objectives and we're going to hold them to that, that we expect to see growth in businesses where the markets are not overly robust such as writing, text and cover, and the R&D teams and our relationships with our customers should allow us to continue to grow. GDP we'll never ignore but we're more and more a global GDP company and not just a U.S. GDP.

Okay, that's helpful. And just one more, quickly, you talked about the substantial, or John talked about the substantial growth in the graphics and identification products. What are really the end-markets, the key end-markets there?

It's -- I don't want to jump in for John, so I apologize -- graphics and identification, it goes into different markets; labels are a big part of it, both our saturated label business, synthetic labels are in there which are on a specialty film or we put specialty coatings on it. Heat transfer has been rapidly growing; it's not a huge volume but it's our highest value per square yard business. We saw great growth in the quarter in our jeans label business, especially in Asia. That's been doing very well.

So it's a myriad of different markets. The core technology in these is our saturation and coating. And then we take it into various different markets.

Very good, that's helpful. Thank you.

You're welcome.

Now I would like to turn the call back over to Sean Erwin for any closing remarks.

All right. Well, this may be a record for the fewest calls, but may reinforce, as we said in the past, now that we're through pulp and being more consistent without restructuring, our results are pretty understandable and, as we said, we're pleased with them. And I'd like to thank you again for your interest in Neenah Paper and participation, and we look forward to talking to you early next year about the fourth quarter. So have a good day. Thank you.

This concludes today's conference call. You may now disconnect.