Neptune Insurance Holdings Inc (NP) 2011 Q3 法說會逐字稿

Good morning. My name is Tequila and I will be your conference Operator today. At this time I would like to welcome everyone to the third quarter 2011 Neenah Paper earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session.

(Operator Instructions)

I will now turn the call over Mr. Bill McCarthy, Vice President, Financial Analysis and Investor Relations. Sir, you may begin.

Okay, thank you. Good morning and welcome to Neenah Paper's third-quarter earnings call. With me again today are John O'Donnell, our Chief Executive Officer, and Bonnie Lind, our Chief Financial Officer. We released earnings yesterday afternoon and I'll recap a few headlines before turning things over to John and Bonnie to cover results in detail.

Consolidated net sales $175 million in the third quarter were up 8% reflecting volume growth and technical products, higher average selling prices in both segments, and translation benefits from a stronger euro. Operating income rose similarly, as higher selling prices and controlled spending were able to offset $5 million of higher input costs in the quarter. Earnings per share of $0.42 were up 40% compared to $0.30 per share last year. In addition to reflecting the growth in operating income, net income and earnings per share benefited from reduced interest expense due to significantly lower debt and a lower tax rate in the quarter.

Before turning things over to John, let me remind everyone that this call may include forward-looking statements, subject to risks and uncertainties more fully described in our SEC filings and also explained in the Safe Harbor Disclaimer found in the investor relations section of our website. John?

Thank you, Bill and good morning everyone. Through the first half of the year and now in the third quarter, our businesses have performed well. Before getting into the third quarter results specifically I would like to briefly review a few of our key strategies as well as our year-to-date performance.

Our focus has been to grow specialty markets where we have clear leadership and performance advantages. We expect that the majority of growth will come from filtration and other technical products businesses that today represent over 60% of our sales. Key objectives supporting the strategy include-- building a technical products portfolio that delivers sustainable double-digit margins; bringing profitable innovative products to market by working closely with leading customers; entering product adjacency's; and expanding and geographies that provide the opportunity to broaden existing capabilities into new revenue streams; delivering consistent and attractive fine paper returns; generating and deploying meaningful cash flows to create value; and finally increasing return on invested capital.

Year-to-date sales for technical products were up 12% with higher value products like filtration, specialty tapes and labels growing even faster. Our markets are growing, we benefit from a diversified product base, with major supply positions at market leading customers who are growing share and expanding globally. Main important investment in [melt blown] capacity in Germany earlier in the year and that is supporting growth in higher end filtration markets and key customers in many of our categories are partnering with us to bring innovative new products to market. Technical products year-to-date margins of 8% are up slightly from 2010 full year levels, despite more than $16 million of higher input costs in 2011. As we have mentioned, both of our businesses have demonstrated pricing power and over time have been able to offset the higher input costs.

In fine paper, our business has delivered a remarkably stable top line with attractive mid-teen margins and strong cash flows each quarter for the past 2 years. We continue to aggressively manage our costs while we target growth in areas such as luxury packaging, labels and international markets. With our leading brands we have a natural beneficiary as the market and product portfolios consolidate.

As a Company, Neenah generates attractive cash flows, and in 2011 we've used these cash flows to substantially reduce debt and also increase our dividend by 10%. Adjusted earnings per share are up 22% through September and reflect the benefit of lower interest costs. Finally, our trailing 12 month return on invested capital is up slightly from 2010 and we continue to closely manage this important metric by delivering profitable growth and by controlling our investments and assets.

In summary, our businesses are continued to execute successfully against our strategic objectives and are delivering good results. Consolidated year-to-date sales are up 7% while operating income, after adjusting $2.4 million of cost for the March [bond] call is up 9%. Both of our business segments are contributing to the growth. While the external environment in the third quarter didn't become any easier, we remain confident about our position in the markets where we compete and the direction our businesses are headed.

Okay, let's talk about third-quarter results. I will start with technical products. Sales of a $107 million were up 13% as volumes grew 4% and average selling prices increased 2%. The remainder of the increase in sales resulted from favorable currency translation due to a stronger euro. Growth was led by filtration which is our largest product group. Transportation filtration volume increased 11%.

In addition to good performance in Europe where we enjoy leading market share position, we are successfully growing outside the euro zone. With sales growth of more than 25%, including important increases in fast-growing markets such as China, Korea and Brazil. Sales to North America also increased reflecting growing demand for specialized products but like our cabin air filters, and flame retardant and long life media. Sales for other technical product categories were up as well. Growing a combined 8% behind increases in tape, wall covering and labels. The increase reflected continued double-digit growth in overseas markets for non-woven wall coverings, success of a new label products launched with Avery, and balanced with higher sales of lower value export tape rates.

While our top line performance grew, operating income of $5.6 million was below a very strong $7 million last quarter. The largest impact to operating income was the second consecutive quarter of significant input cost increases, especially for latex and energy. Input costs were up almost $4 million versus third quarter of last year and increased by almost $1 million just from the second quarter. While we have demonstrated that we can recover these costs over time, we are not able to fully address these higher costs in the third quarter. Costs were also higher in 2011 as a result of operating schedules. Lower machine utilization in the third quarter this year reflected both changes in the timing of our annual maintenance downs as well as downtime taken to manage inventory levels. While sales increased, we clearly saw more caution from our customers and we responded appropriately.

Turning to fine paper, sales in the third quarter were $68 million, up 2% versus last year as our higher value mix and improved selling prices were able to, once again, overcome a weak market environment. As I mentioned earlier, this business has consistently maintained a top line near $70 million per quarter over the past 2 years despite challenging market conditions. We have done this by continuing to lead the category consolidation of brands while identifying new and profitable revenue streams. Profits for fine paper followed the solid top line performance with operating income of $9.5 million, up more than 9%. This reflected the higher value sales mix and increased selling prices as well as improved operational costs at our mills.

Together, these were able to more than offset the impact of almost $2 million of higher input costs in the quarter. The 3 key focus areas that helped us deliver results for fine paper have been first, to continue to support our core brands and strengthen our supply chain capabilities to grow share. In today's challenging environment, we are seeing evidence of category consolidation which naturally pressures existing suppliers. As brand leaders we're positioned to benefit from this rationalization as we work closely with customers to support their product needs and strong supply chain solutions. We believe we've successfully grown our share again in 2011.

As mentioned in our August call, we recently revised our leading CLASSIC brands offering 2 new textures, 10 common colors, and 2 day market lead times. The intent of the revision was to make CLASSIC brand easy, consistent and available. In a nutshell, broadening the brands appeal by reducing complexity while maintaining its premium brand image. The initial market response has exceeded our expectations and helped contribute to the brands strong selling in the quarter.

Second, we have successfully captured new revenue streams. In 2011, the most significant item was the expansion of our sales portfolio to provide our customers the ability to amalgamate envelopes with their Neenah paper purchases. This has been a successful evolution in 2011 and we continue to look for opportunities to capture additional value by leveraging our core capabilities of branding and supply-chain efficiencies. Third, we are growing sales in targeted at the such as international, luxury packaging and labels.

In the third quarter, sales in these markets grew more than 6% led by strong growth in packaging, where we have realigned resources, introduced new products with unique characteristics. These complementary marketing adjacency's of packaging the label, further support the strategy to leverage our color, texture capabilities into segments where they are valued. That includes areas such as the cosmetics, jewelry, apparel, premium foods and beverages, as well as, other consumer goods markets where premium paper supports the customers brand image in the marketplace.

I am also pleased with the way our team continues to embrace technology to drive demand for products. We have developed tools for end users, designers and printers that they can use every day on their PC or iPad and iPhone and bring them into Neenah and select papers to meet their needs. Additionally, technology is delivering new vehicles for paper consumption as evidenced by the Apple apps, iPhoto '11 and iPhone cards, both of which deliver print on some of our most premium papers. So why the amount of overall printing may be declining? We're seeing opportunities in a variety of areas and we believe that specialized printing, where values -- where image is valued, will demand premium papers.

To wrap-up, as I said earlier, while the third quarter didn't get any easier with high input costs and added cautioning customer orders, we continue to execute against our strategies and our businesses continue to perform well. With that, I will turn things over to Bonnie to review corporate and financial items.

Thank you. In addition to followed performance of our businesses that John covered, results in the third quarter were further helped by lower administrative expense in corporate items such as interest and taxes.

Let me start with a recap of SG&A. Consolidated selling, general and administrative expense of $15.1 million was down from $16.6 million in the third quarter of last year. An allocated corporate expense of 2.6 was lower by about the same amount. The primary reasons for the decline were reductions in spending for outside services and benefits as well as some timing differences. Our expected average SG&A quarterly spending is about $17 million.

While we were lower this quarter, the fourth quarter should return closer to average, but in addition will include approximately $400,000 in fine paper for remaining promotional cost for the CLASSIC re-launch that was carried over from the third quarter. Total debt at the end of September was $191 million, down almost $60 million from year ago levels. The decrease reflects the impact of our bond call in March, as well as other reductions in debt from our ongoing cash flows. Net interest expense was $3.6 million, which is down 25% from $4.8 million last year, primarily as a result of the decline in debt as well as lower average interest rates.

Turning to taxes, our effective rate was 24% in the quarter, which is down from 32% last year. The current quarter included an adjustment to bring year-to-date rate to 31% in line with our expected full-year rate. The rate is dependent on the amount of income between segments. In 2010 our full year rate was 28%. Third-quarter cash from operations of $25 million was the highest quarterly amount in 2.5 years, and compared to $14 million in the third quarter of last year. Strong cash generation was the result of increased earnings and reductions in working capital throughout the quarter as we took annual mill down and prudently controlled our inventory levels. Surplus cash generated in the quarter was used to pay down $14 million in debt. Capital spending of $6 million was in line with $6.2 million last year.

Estimated spending in 2011, remains within the $20 million to $25 million range we previously communicated. Maintenance capital is a little less than half of this with the balance of spending for projects that add value by supporting sales growth or delivering significant cost savings. Our pension and employee benefit plans remain in good shape and in 2011 we expect to contribute around $13 million to defined benefit pension plans. Test spending is almost $2 million below last year. 2011 combined expense for pension and OPEB plans of $10 million is expected to be approximately $6 million less than the cash contributions and payments for these plans.

I'll wrap up with a few words on capital structure. Our businesses generate strong cash flows and with the changes we've made to de-lever over the past year or so, our balanced sheet is in sound shape. Debt to EBITDA is around 2 times and we have a substantial borrowing capacity on our revolver, and no significant short-term liquidity or refinancing needs. With the flexibility of our capital structure, we are in a position to explore new growth opportunities. We remain disciplined and committed to deploying our cash in ways that will create value for our shareholders. And return on invested capital continues to be a key metric when used to evaluate our investments and measure our success.

So with that, I will turn things back to you, John.

Thank you Bonnie.

As always, I will start with a comment on safety because, as always, keeping our employees safe is our top priority. Our goal is to maintain a level of safety considered to be top [cortile] in our industry. Our believe our safety record is better than average for our industry. Performance in 2011 is not up to our expectations. But our continued focus on safety, I'm confident our teams across each of our facilities will restore results to our high-performance expectation. We often talk about bottom line, and in safety, our bottom line is that nobody should go home hurt.

Lets move next to a few thoughts on the future. As a reminder, we typically take 1 week of downtime for annual maintenance in the third quarter and up to 2 weeks of holiday downtime in the fourth quarter. Second half of the year also tends to be seasonally slower with lower sales for technical products.

I'm sure Europe is a concern on many people's minds and I will speak to that next. Today approximately, a third of Neenah sales are in the euro zone with the largest amount in Germany. This continues to be the strongest country there. If Europe were to go into recession, we wouldn't be immune. However, our customers tend to be large, credit worthy global players and our receivables are in great shape. Likewise, the most constant revenues are denominated in euros. There is limited transactional exposure that would hurt us if the euro devalued significantly.

So overall, while the constant reflected in our customers order patterns may continue, our businesses and market positions remain on solid footing. Turning next to input costs, it appears that the majority of our costs crested in third quarter while market prices for pulp reached all-time highs in June, as we have mentioned in prior calls. Flags in some of our contracts resulted in us seeing these higher costs in the third quarter. In addition, latex prices increased by almost 15% in both the second and again in the third quarter. A portion of our technical products customers have contracts with price adjusters based on input costs. These contracts also tend to lag.

So we will see some benefit from these in the fourth quarter. In addition, we'll continue to work with other customers on businesses where prices are adjusted less frequently. More recently, prices for pulp and other materials begin to moderate. In the fourth quarter we expect to see pulp prices decline by $25 to $30 per ton and a modest 5% decrease in latex price. Nonetheless, these costs will still be well above the levels for the fourth quarter of 2010. As a reminder, on average, we consume about 170 thousand tons of fiber annually. We spend approximately $40 million in latex formulations.

As I hope you have internalized, our business performed well in the third quarter with high single-digit revenue and operating income growth, strong cash flows and a continued double-digit increase in earnings. Our share positions remains strong. Partnerships with key customers are bringing innovative new products to market, and we're exploring ways to use these existing capabilities to expand into adjacent markets and targeted geographies. Our balance sheet is in good shape, and as a Company we are well-positioned for the long run and enable to pursue opportunities that are a good strategic fit, meet our disciplined financial return metrics and create value.

Thank you for your interest in Neenah and at this point we'll open up the call to questions.

(Operator Instructions) Your first question comes from the line of Mark Weintraub with Buckingham Research.

Good morning, Mark.

Hi, this is actually John [Golen] in for Mark today.

Hi, John.

Just very briefly, I'm sorry, did you say latex you expect to be down 5%, is that sequentially?

Yes.

Sequentially.

Sequentially.

Okay, terrific, and over on the product price side, can you update us on any price increases you have announced or that are being or will be implemented in the fourth quarter?

On our Fine Paper business, which is the smaller of the 2 businesses, the Fine Paper business had price increases earlier in the year. Those have been executed and there are no further ones announced currently in this year. On the Technical Products business, the contracts are typically -- lag the input costs and they're negotiated customer by customer. So, we have them -- some by quarters and some on an annual basis. So those will be ongoing as I mentioned in the transcript.

Terrific.

Alright, thank you.

Your next question, comes from the line of Stuart Benway with S&P Capital IQ.

Good morning. You talk about labels as being a growth area for you and you mentioned Avery as a customer. But that Company saying that demand is weak in various categories for them.

Sure.

Are you getting share with them and possibly others? And is that from new products, or what is happening there?

Yes, and I will tell you that -- Avery can obviously speak to the label category better than we could speak to the label category, but in the niche areas where we participate, and I know our business continues to grow with Avery on the Fine Paper side of our business where we do significant line labels, so big colors and textures and image on that. On the Technical Product, our growth always comes through innovation so we continue to find new product solutions, which we have with them. That's really where our growth is coming from. We will probably talk about different size of businesses, if you will, but we've seen some significant success on our label products over the quarter.

And do you have a fairly broad customer base there or?

Yes, I would say we have a fairly broad customer base, but we've got probably a more performance oriented product niches in our Technical side, and on our Fine Paper side we have both a strong domestic and international wine label business.

Okay. I think in the past, maybe mostly in papers, you said when prices rose -- when costs rose, when your costs rose that you generally try to keep your prices relatively stable and you wouldn't raise them very quickly. I think you have raised them some here early in the year. You say you have no more coming, so would you expect any potential price declines next year to be also slow in coming?

Yes, I would say that -- and again, the Tale of Two Cities in the Fine Paper business, they typically have more sticky pricing, so the increases we announced we actually enjoyed more price in this past quarter in Fine Paper that we did input costs. So, I would say that those are slow to go up in percentages and slower to be reduced. A lot of our contracts in the Technical Product side are tied to escalators. So many of those will continue to move. Again, timing lagged, and customer by customer going forward, but we would tend to suggest that our Fine Paper business with the brand portfolio tends to be more sticky pricing.

Okay, and you kind of went through maintenance sort of quickly there. Is there a particular quarter that is the highest for you in maintenance? It seems like it's shifted. I don't know if it was from 2 to 3 or 3 to 2, but what tends to be your highest maintenance quarter?

Yes and that's a great observation. Third quarter is typically our highest maintenance quarter where we have our downs, but what we've historically had is, we've had some downs depending on the timing and the work that we are doing that might roll into June, so actually show up into the second quarter. So, this year we had the predominance of our maintenance downs occur in the third quarter of the year, but that is our highest maintenance quarter.

So what we have is, we have, in the third quarter, we have higher maintenance spend and we have downtime related to the maintenance. And then in the fourth quarter what we have is not higher maintenance spend, but we do have holiday downtime.

But that should be fairly significant -- I mean fairly consistent year-over-year.

Yes.

I mean sometimes the calendar varies a little bit but --

Correct, correct.

But the maintenance can really swing you guys because you're not that big of a Company sometimes.

Yes.

And so, can you give us CapEx for the year?

$20 million to $25 million.

And the trend next year?

Yes, that's -- we're --

That'll be -- that -- $20 million to $25 million is the level of spend that we've had on annual basis. And a reminder, $10 million is like -- around $10 million roughly for sustaining.

And so the meltblown won't be a significant factor? Making it go higher this year?

No. Meltblown was a great example of past sustaining spend where we're focusing our capital spending on value-added products. So we invest in meltblown -- we'll continue to invest in new mix enhancing investments in the future. Meltblown just happens to be this years poster child, if you will.

Okay, thank you.

Your next question comes from the line of Matt Sherwood with Cooper Creek Partners.

John, strong quarter.

Thank you, Matt.

Thank you.

Just had a quick question. Can you just reiterate the sequential change in corporate expense?

Yes. Typically we, as I said, we look to spend about $17 million a quarter in SG&A. I don't know if you're talking SG&A or corporate, but in SG&A what we've spent this year is we had $17 million in the first quarter, $18 million in the second quarter, and $15 million in the third quarter.

Yes.

And then the -- if your question is particularly to the unallocated corporate, we had 6 which included the bond call so more normal around $4 million, we had $3.9 million in the second quarter and then we had $2.5 million in the third quarter. And that decline, quarter-on-quarter and really year-on-year because it's about the same, is about a third, a third, a third of lower purchase services for things like tax consulting, stocks work, you know, lower purchase services. We had about a third from lower benefits costs, with lower medical costs in the quarter than what we previously had and, then, just other things that are more timing related. Lower spending, but more timing related.

So you would you expect $1 million of the $1.5 million decline to come back in the fourth quarter?

I would.

Got you. So that'll be -- And then, just on -- okay, great. That's all I've got. Thanks a lot.

Okay.

Thank you.

Your final question comes from the line of Lawrence Stavitski with Sidoti & Co.

Morning, Larry.

Morning guys. Can you talk a little bit more about your international markets and, specifically, who you are targeting? You kind of group that into that 6% in the third quarter. Can you just expand on that a little bit?

Okay. We are obviously growing our Technical Products business in emerging markets. The filtration business is probably the largest growth, up 25% in those markets, I think we mentioned as well. From a Fine Paper standpoint, our growth has predominantly been in Asia and South America, will be probably 2 of our largest markets for. If you go across the category of abrasives, Latin America is going to be an important market for us. So trying to give you some flavor and tie it back to a product category if I could.

Okay, great. That's pretty much it. Thanks guys. Good job on the quarter.

Thank you.

Thank you.

Okay, once again thank you for your interest and participation today. We look forward to the opportunity to talk with you again on our next call in February. Thank you.

This does conclude today's conference call. You may now disconnect.