Neptune Insurance Holdings Inc (NP) 2012 Q1 法說會逐字稿

Good morning, my name is Leah, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Neenah Paper first quarter 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question-and-answer period.

(Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, May 10, 2012. Thank you. I will now turn the call over to Mr. Bill McCarthy, Vice President Financial Analysis and Investor Relations. Please go ahead, Mr. McCarthy.

Okay, thank you, and welcome to Neenah's first quarter 2012 earnings call. Speaking this morning will be John O'Donnell, our Chief Executive Officer, and Bonnie Lind, our Chief Financial Officer.

We released earnings yesterday afternoon, and I'll briefly cover a few items before turning things over to John and Bonnie to cover results in detail. First, we will at times refer to adjusted numbers to more clearly highlight ongoing business results. Adjusted earnings in 2012 exclude integration costs for acquired brands and a pension settlement charge. In 2011, adjusted earnings excluded costs for our bond call. Adjusted earnings is a non-GAAP measure and is reconciled to GAAP in our press release.

Second, with the Wausau transaction, in addition to a strong portfolio of premium brands, we also acquired certain non-premium brands and grades of paper. Sales and profits from these grades are reported separately from Fine Paper in our Other segment.

Next, to recap a few headlines, first quarter net sales of $198 million were up 15% versus last year, with a key driver being the acquired brands. The Wausau transaction closed at the end of January, so first quarter results include two months of these added sales. Adjusted operating income increased almost 30%, double the rate of growth, with significant increases in both Fine Papers and Technical Products, due to improved costs, higher prices, and mix and efficiency gains. Adjusted earnings of $0.77 per share were up more than 40% due to both the higher operating income, as well as reduced interest expense.

Finally, let me remind everyone that this call may include forward-looking statements subject to risks and uncertainties described in our SEC filings and explained in the Safe Harbor disclaimer found in the Investor Relations section of our website.

With that, let me turn things over to John.

Thank you, Bill, and good morning, everyone. We were pleased with the strong start to the year in each of our businesses. In fact, together, Fine Paper and Technical Products delivered record quarterly income. Our future success will be based on continued progress in the three broad strategic objectives we've outlined in the past, making Technical Products a global platform for growth, providing strong financial returns in Fine Paper while capturing the incremental growth opportunities, and growing returns on invested capital.

Before getting into quarterly financial results, I would like to comment on each of these individually. First, Technical Products continues to evolve as an important global growth platform for the Company, and we expect to increase the size of these businesses by gaining share, supporting global growth of our customers, and introducing new products in both existing markets and new adjacencies.

Filtration remains our largest Technical Products platform, and this business continues to perform very well with double digit increases in sales of higher value transportation filtration grades, an expanding presence in targeted international geographies, and sales growth in adjacent products like single-serve coffee capsules. Our labels and nonwoven wall covering businesses are also well positioned in growth markets, and we're enthused about the opportunities we see to expand in these areas.

Turning to Fine Paper, we expect this business to continue to deliver very attractive returns while capturing growth opportunities to offset a challenging market. This year, the integration of the Wausau brands will be a primary focus and we're already ahead of our integration plans. The annualized run rate for acquired sales was over $100 million in the first quarter, and as we had indicated, our adjusted EBIT margin of 15% remains strong and was not diluted by the acquired brands.

We also continue to deliver double digit growth in image driven categories, such as luxury packaging and premium labels. These targeted categories represent less than 20% of our Fine Paper sales today, but are key to the future, as we expand in areas that provide a stronger platform for growth.

Our third objective is to increase return on invested capital. We're expanding margins with a growing mix of higher value products and will benefit from SG&A efficiencies and operating economies of scale as we grow. Excluding one-time items, consolidated operated margins topped 11% in the first quarter, the highest in five years.

At the same time, our capital investment process remains disciplined as we manage our assets and spending. The recent acquisition is a great example of how we can meaningfully grow return on invested capital and create value.

The success of our efforts in these three areas has been reflected in our strong shareholder returns. In addition, we increased our dividend in 2012 for a second consecutive year, and continue to view dividends as an important component of these returns.

So with that reminder of key strategic objectives, let's move to our first quarter results. Starting with Technical Products, sales of $106 million reflected volume growth in filtration, labels, and wall covering. That was largely offset by lower tape sales and translation headwinds from a weaker euro. On a constant currency basis, Technical Product sales increased 3%.

While the situation in Europe remains dynamic, our operations are based in Germany, a country whose economy has done fairly well. As an example, German exports of luxury cars grew over 10% in the first quarter and helped to overcome softer demand in the euro zone. Our German-based filtration business did well in the quarter, with volume-driven growth and an improved mix that increased margins.

Sales for labels and wall cover also grew by high single digits, helped by sales of new products and growth in Asia. In addition to these volume gains, sales for Technical Products benefited from product mix and higher pricing, which helped offset reduced tape sales. Tape declined versus last year when we benefited from a national rollout of a newly specialty product by a key customer.

Operating income was $12.5 million, up nearly 20%, or $2 million, and operating margins for the segment were close to 12%. Higher income in 2012 resulted from improvements in operational performance, higher selling prices, and growth in higher value products. Input costs were relatively flat year-on-year, however, cost for latex and specialty pulp have begun to increase, and I will cover that a little later in this call.

Turning to Fine Paper, sales in the first quarter were $86 million, up 28%, or almost $20 million. While the large majority of the sales increase was due to the acquired brands, that was not the only driver. Our CLASSIC brands grew in the quarter, significantly outperforming the market.

Sales of packaging and label products increased by more than 30% as a result of capturing significant new and used business. In addition to volume growth, Fine Paper sales for the quarter were favorably impacted by improvements in selling prices and mix versus the prior year.

Operating income was $10.8 million, and included $2.5 million of integration cost to support the transition of the acquired brands. Excluding these costs, adjusted operating income was $13.3 million, increased 27%. Benefits from higher volumes and net prices, mill efficiencies, and lower input costs more than offset increase SG&A and other costs.

In summary, both businesses delivered very good results in the quarter and I'm extremely pleased with the start to the year. I'll talk more about our outlook and integration efforts in the call, but now I'd like to turn things over to Bonnie to review corporate and financial items.

Thanks, John. As John just discussed, our businesses continue to perform well and we're also delivering value from corporate actions.

I will start with interest. Earnings continued to benefit from lower interest expense. In the first quarter, net interest expense was $3.6 million, down almost $1 million from last year as a result of lower debt levels.

Debt was $200 million at the end of March and was comprised of $158 million of long-term bonds, $23 million outstanding on our revolver, and the balance in Germany. Debt increased from $186 million at year end as we borrowed on our revolver to finance the Wausau transaction. Our capital structure and leverage metrics remain within our target range, and we have no significant short-term liquidity or refinancing requirements.

To further benefit from today's low interest rates, we called an additional $10 million of our bonds in April, and financed this call through our revolver. This saved about $400,000 of interest expense annually and didn't reduce our availability at all, since our borrowing base increased by almost the same amount from inventory and receivables associated with the Wausau brand purchase.

Consolidated selling, general and administrative expense was $19.5 million in the first quarter compared to $17 million last year. Spending reflected higher selling and marketing costs to support the acquired brands, as well as timing of employee benefits and other items. We expect our run rate this year to be about $19 million per quarter, up from prior levels due in part to support of the new brands. But with more than $100 million of new sales, our SG&A as a percent of sales is expected to decline by more than 100 basis points this year as a result of scale efficiencies.

Unallocated corporate costs were $7.8 million in the first quarter of 2012, and $6.2 million in 2011. Results in 2012 included a $3.5 million charge for pension settlement, and in 2011, cost included $2.4 million related to the early retirement of bonds. Excluding these items, unallocated costs were $4.3 million in 2012, and $3.8 million in 2011. We expect our run rate to remain around $4 million per quarter this year.

As Bill mentioned, results for the non-premium grades we obtained as part of the Wausau transaction are being reported separately. These products are valued by our customer base, but different from premium line papers. In the first quarter, sales of these non-premium type papers were $5.8 million, with operating income of less than $1 million.

Our effective tax rate was 29% in the quarter. This was lower than the 32% in the first quarter of last year, but equal to the 2011 full year rate. At quarter end, we had net operating losses of just over $90 million available to offset cash tax payments on income earned in North America. The amount of NOLs increased this quarter as a result of additional deductions that were available. As a reminder, in 2011, we used $20 million of our NOLs.

Next, I'll cover cash flow. We reported a use of cash from operations in the quarter of $14 million. However, this number is distorted by four significant unusual items totaling $21 million.

First, $7 million of our total payment for the Wausau brands was reassigned to finish inventories and is shown as a use of cash instead of as an investing activity where you might expect to see it.

Second, we paid $7 million for a one-time lump-sum pension distribution.

Third was a $5 million reduction to cash for the difference between actual and estimated tax deductions on stock-based compensation. This was completely noncash and was offset in the financing activities section of the cash flow statement.

And, finally, fourth was the $2.5 million for integration costs that we discussed earlier. Excluding these four items, cash from operations was a positive $7 million versus $1 million generated in the first quarter of last year. This reflected higher earnings, partly offset by increased working capital.

Working capital increased as a result of the 15% sales growth in the quarter and to support a smooth transition and good customer service levels for the acquired brands. We expect to improve working capital efficiency and reduce inventory levels as we progress through this year.

Capital spending of $3.5 million was at plan, and we expect full year spending of $25 million to $30 million, with higher spending in the third quarter as we add color capabilities to support the new brands and take our annual mill shutdowns.

Let me close with a comment on capital allocation, always a key area of focus. We paid down debt in the past few years to achieve a strong capital structure. Our businesses are expected to generate viable cash flows and we continually evaluate ways to deploy these cash flows, including deleveraging, organic capital investment, and potential acquisitions. We are following a disciplined process to identify and evaluate alternatives, and also we remain committed to dividends as an important part of our strategy to provide above-average shareholder returns.

With that, I'll turn things back to you, John.

Thank you, Bonnie. Now, I'll start with safety, which, as always, is our top priority. I'm pleased to note that we started this year well with fewer injuries and notable improvement in our recordable incident rate. Hourly and salaried employees across all of our facilities remain committed to driving improvement, and while our performance remains better than the industry average, we won't be satisfied until we are injury-free.

As I said earlier in the call, I am very pleased with how each of our businesses performed in the quarter and how they are positioned going forward. In Technical Products, we're growing our higher value offerings, mill teams are successfully driving efficiencies, and we're building innovation capabilities to capture growth and new adjacencies.

While the economic situation in Europe continues to inject uncertainty, our growth initiatives for 2012 remain on track. With that said, we're likely to see negative impact from currency translation this year due to a weaker euro. Approximately 60% of our Technical Product sales are in Europe and about half of that are located in Germany. And for perspective, every $0.05 change in currency rate impacts sales by about $2.5 million.

In Fine Paper, we're seeing the benefits of being the leader in this consolidated market, and we have been very pleased by customer acceptance and support for the Wausau transaction. Key internal integration activities in the quarter included a smooth transition that enabled receipt of customer orders from day one, the development of Neenah marketing and promotional materials for the acquired brands, added capabilities that are converting facilities to support the new retail channel, and qualification of new grades with stepped up production levels at our mills.

There were $2.5 million of cash integration costs in the first quarter, with roughly similar amounts expected in the second and third quarters, bringing us to the projected $7 million in total. We now qualified internally on grades that represent about 80% of the new premium volume, obviously focusing on the highest value grades first.

Qualifications of grades have gone very well and ahead of plans. In fact, we expect to be able to efficiently manufacture all the premium volume internally by the end of the third quarter after we complete the installation of a new color system at our largest mill.

Sales and margins of the new products are meeting expectations, and we continue to unlock benefits from the acquisition within our existing businesses.

In addition to growing our importance with large key customers by offering a broader portfolio of products, we believe there are added future benefits from expansion in the retail channel and with growing operating efficiencies that we'll naturally enjoy as our mills take more production in-house.

Before we end, let me touch briefly on input costs. As I mentioned in the past, both of our businesses have demonstrated the capability to offset impacts of higher input costs over time. Looking at the near term, input costs are beginning to rise. Lags in some of our North American pulp contracts will defer increases in pulp costs until the third quarter, but costs of latex used in Technical Products and pulp used in Germany will be higher in the second quarter.

Input costs in the second quarter for these items are expected to increase about $1.5 million versus the first quarter. Due to the timing of various customer pricing contracts, we would not expect to immediately recover all of this in the second quarter, but as I have said before, with performance-based and branded businesses, we ultimately expect to deliver on our financial return and growth plans, even as we manage movements in input costs.

So to wrap up, our teams are executing against our growth strategies effectively and delivering attractive financial returns. This has clearly translated into increased value for our shareholders and we are well positioned to pursue additional opportunities that can create meaningful value.

Thank you for your interest in Neenah. As this point, we will open the call up to your questions.

(Operator Instructions). There are no questions at this time.

Very good. Once again, thank you for your interest and participation today. We'll look forward to the opportunity to talk with you again on our next call in August.

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