Neptune Insurance Holdings Inc (NP) 2014 Q1 法說會逐字稿

Good morning. My name is Kimmie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Neenah Paper first-quarter 2014 earnings conference call. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, May 8, 2014. 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. Good morning, everyone, and welcome to Neenah's 2014 first-quarter earnings call. With me on the call today are John O'Donnell, our Chief Executive Officer, and Bonnie Lind, our Chief Financial Officer.

We reported earnings yesterday afternoon, so everyone should have had a chance to get familiar with our results. I'll recap a few headlines and then turn things over to John and Bonnie to review business activities and financial performance in detail. Following our prepared remarks, we'll open up the call for questions.

Net sales were a record $225 million, up 6% from a year ago and reflecting growth in both of our business segments. Operating income was up similarly, as very strong performance in Technical Products more than offset Fine Paper earnings that were lower due to an unusual spike in natural gas prices that increased costs by more than $3 million, or $0.12 per share.

Nonetheless, consolidated operating income grew 5%, and earnings per share increased 7% from $0.74 last year to $0.79 on an adjusted basis. Adjustments were $0.01 per share in both years, last year as we integrated acquired Fine Paper brands and this year as we restructured to improve costs in Technical Products. Adjusted earnings are a non-GAAP measure and are reconciled to GAAP figures in our press release.

Finally, I'd like to remind you that our call will contain forward-looking statements. Risks and uncertainties that could cause actual results to differ materially from these statements are outlined in our SEC filings and in the safe harbor disclaimer on our website.

And with that, I'd like to turn things over to John.

Well, good morning, everyone. 2014 is off to a very good start, building out the momentum that we reported in February. In the first quarter, our technical products business led the way with record sales and profits behind strong volume growth in each of our major product categories. We also executed well in Fine Paper with good top-line results and improved manufacturing operations.

Nonetheless, this good performance could not overcome the impact of almost $5 million of higher input costs in that segment, primarily for energy prices that were even higher than we had foreshadowed on our last call.

In addition to the good top line in earnings, our teams continued to do a nice job managing capital. Helped by improved working capital efficiencies in the quarter, we generated almost $13 million more free cash flow than last year. With increased earnings and capital efficiencies, return on invested capital improved and continues to be at a very attractive level of more than 12%.

These results confirm that we're successfully executing against our strategic priorities. First, we're continuing to develop and grow meaningful positions in our core, profitable niche markets. Filtration media sales grew 11%, led by transportation filtration growth in Europe, which is, by far, its biggest market. We're leading with innovative, high-performance products and are leveraging these technologies to grow with existing customers and expand both in international and adjacent filtration markets.

New customer qualifications for beverage filter materials, execution of announced price increases and our commitment to continue building presence and share position in North America and China all supported our strong top-line growth.

In addition, we recently entered into a relationship with a small nonwovens manufacturer in India as a responsible way to increase our understanding and presence in this growing market while supporting our customers' global needs.

We're also excited about the opportunities we see in premium packaging. In the first quarter, sales of these products grew by more than 30%. Our focus is on end-use premium vertical markets like spirits, jewelry, electronics and cosmetics. We're significantly increasing our presence in these markets in a capital-efficient manner as we expand our offerings and allocate existing resources towards these growth opportunities.

With an estimated market size of about $300 million, premium packaging has a long-term potential to develop into a much more meaningful part of our Fine Paper segment in the future.

Other core markets, like premium fine papers and backings, comprised of specialty tape and abrasives, also performed well and will be covered later in the call.

A second strategic priority is to increase our Company growth rate and portfolio diversification in an efficient manner as we gain scale. You can expect continued investments behind faster-growing markets like filtration, premium packing and other performance-oriented technical products.

Our recent melt-blown expansion is one example, but many products in those markets also utilize wet-laid nonwovens technology, where different levels and types of synthetic fibers are used in manufacturing instead of wood pulp. We currently make wet-laid nonwovens in two of our Germany facilities and recognize opportunities to expand this technology globally through organic investments and complementary acquisitions.

Our acquisition bias remains in markets that value these type of performance technologies, and we're well positioned financially to pursue value-adding opportunities that are a good strategic fit and provide a meaningful platform for future growth.

Last, but not least, we expect to deliver attractive returns to shareholders and are committed to making cash returns a meaningful component. As we grow our earnings and cash flow, in addition to investing in high-returning organic opportunities that help support a rising share price, we are returning more cash directly to shareholders.

We have doubled our dividend in the past three years and expect to utilize our growing cash flows to increase it further as we move toward an attractive yield of over 3%. At the same time, we expect to maintain the share buyback program to take advantage of buying opportunities.

In summary, our teams are executing well, and this continues to translate into solid financial returns and attractive returns for our shareholders. With our strong balance sheet and cash flow generation, we're in an enviable position and able to pursue multiple avenues to create value.

With that, I'll turn things over to Bonnie to review financial results for the quarter.

Thanks, John. As you've heard, our good start to the year was led by strong Technical Products segment performance, so I'm going to start there. First-quarter Technical Product sales were a record $118 million, up 10% compared with last year. Higher volumes accounted for 8% of the growth, with the remainder due to favorable currency translation of 3% from a stronger euro partly offset by a lower price mix.

Impressive growth was seen across all categories, as filtration sales grew 11%, specialties also gained 11% driven by growth in labels, and backings revenues were up 7%.

While an improving economic environment in Europe certainly helped, we had good performance globally, with increased sales in the US and in Asia. Selling-price increases on many products also started to kick in during the quarter.

Operating income of almost $14 million was up more than 40% from just under $10 million in the first quarter of 2013. Input costs were mixed, with increased costs for energy and fiber offset by lower costs for other materials. Higher profits this year resulted from strong top-line growth bolstered by improved manufacturing efficiencies and lower administrative costs.

In 2013, you may remember John discussing the operational challenges we experienced early in the year. These items have now been addressed.

Bill mentioned we had a small amount of restructuring costs in the quarter, about $300,000, as we implemented changes to our organization to reduce costs. As we complete these programs, we expect additional charges of around $400,000 in each of the second and third quarters. These programs have less than a two-year payback, with returns starting late in the year.

Moving to fine paper, quarterly sales were $102 million, up 2% versus last year. With demand in uncoated freesheets down 3%, we continued to outperform the market, as our shipments were down only 1%. We demonstrated good performance in our core brands and impressive growth in premium packaging, while also benefiting from an added month of sales of the Southworth brands acquired in late January last year.

Our higher sales value sales mix and increased selling prices offset volume impacts and continue to allow us to deliver top-line growth.

Operating income was $13.3 million, down $3 million from the prior year. The reason for the decline was almost $5 million of higher input costs, primarily for natural gas, but also for pulp.

Both gas prices and usage increased due to the severe winter weather in the United States. Our teams were able to offset almost half of this impact with better manufacturing efficiencies and a higher value mix and selling prices. As John will cover later, energy prices have now moderated, but we're expecting to remain above last year's levels.

In our Other segment, sales were $6.1 million, compared with $6.8 million last year, and operating results were around break-even in both periods. As a reminder, these nonpremium grades came as part of the Wausau brand acquisition in 2012 and continue to be valued by our customers. While less profitable than our core brands, they help cover fixed costs and are expected to be close to break-even on the bottom line.

Unallocated corporate costs of $3.8 million in the quarter were in line with last year's spending of $4.1 million. Total SG&A of $19.9 million was down from $21 million in 2013, but in line with our historical and projected spending levels. With record sales and lower costs, SG&A efficiencies improved significantly versus last year.

Let's move now to a few corporate items. Net interest expense of $2.8 million was up slightly compared with $2.6 million last year, as our debt increased following the issuance of our very attractive 5.25% notes last May. Since most of our debt is not pre-payable, we expect annual interest expense of around $11 million this year.

The effective tax rate in the first quarter was 35%, lower than last year's rate of 38%, but equal to the 2013 full-year rate. For 2014, we expect to remain at this level. With the remaining net operating losses of more than $30 million, we don't expect to pay US cash taxes this year.

As we've communicated previously, our pension plan is well funded, and we expect to reduce contributions in 2015 when our cash tax payments will increase. Therefore, we don't expect a material net change to our consolidated cash flows and attractive returns as a result of these items.

In the first quarter, cash from ops was $15 million, compared to $2 million in the prior year. The improvement is notable, as cash flow in the first quarter are typically, or historically, low as we rebuild inventories and receiveables from lower year-end levels. However, this year, increased working capital efficiencies helped deliver higher operational cash flows.

Capital spending was $4.3 million in the quarter, compared to $4.7 million last year. For the full year, we still expect spending to be near $30 million.

Debt was $205 million at quarter end, down $7 million from year end, but up from $187 million a year ago. Most of the debt consists of $175 million of senior notes issued last May.

Cash and equivalents were $77 million, up almost $4 million compared to year-end and up nearly $75 million versus March 2013.

As John mentioned, with strong, stable cash flows, substantial borrowing capacity and significant cash on hand, we're well positioned to act on opportunities that will add value.

With that, I will turn things back to you, John.

Thank you, Bonnie.

We have a solid start to 2014, with very good performance in our technical products businesses in what has been, historically, the best quarter of the year. The global economic environment appears to be turning upward in Europe. Despite showing signs of caution, it's still improved from where it was a year ago. All our markets remain competitive, and the secular challenges in Fine Paper have not gone away. Our market position remains strong, and we're continuing to grow share in key categories and expand in profitable adjacent markets and geographies.

I started the call with a recap of a few strategic priorities and direction, but before I talk about our outlook, I'd like to comment on what our employees are doing each day to drive value and activate those strategies.

First, we ensure that we continue to be aligned with leading blue-chip customers who are winning in their markets. Our joint development efforts with many Technical Products customers are helping us to share in their growth and grow in our share.

Next, we're working closely with our customers to provide them with supply chain solutions that support their growth efforts. This includes designing flexible programs that ensure that our product is there when they need it.

We continue to invest in brands and capabilities. Our fine paper brands are known for their high quality, and when image matters, like at the recent Oscars ceremony -- when the envelope was opened, we were inside. This year, we relaunched our Environment brand, well known as a leader in green premium papers.

And in Technical Products, we continue to invest in assets and capabilities that meet the unique specifications and needs of our customers.

Cost reduction and efficiency improvement is never-ending, and our teams are focused on relentlessly pursuing ways to enhance our competitive position. We have incentive programs for all employees, focused on maintaining quality while significantly improving productivity, waste and cost efficiencies.

Finally, we're growing through an expanded global presence. Many of our customers are global, and we are looking for ways to increase our participation with them as we expand beyond our home base. That expansion may come through organic investments, M&A or new market relationships, like the one I mentioned earlier with a small company in India.

While these may not always seem glamorous or exciting -- well, except for the Oscars, of course -- it is the relentless commitment of our teams day in and day out that delivers the consistently good results that you are seeing each quarter.

Let me take a moment and comment on a few items impacting the rest of the year. As we've noted a few times on this call, input costs were a large headwind in the quarter, notably for natural gas prices in the upper Midwest, where our US fine paper mills are located. As the weather in the US has moderated, natural gas prices have declined. While they'll be down by more than $1 million versus the first quarter, second-quarter prices will still be $1 million more than last year. Pulp price increases, while moderating, are still inching up in the quarter as well.

For the full year, we expect input costs to be up by approximately $5 million across all our businesses. Energy costs will remain higher every quarter this year, both for natural gas in the US and for electricity in Germany following a new green energy tax. Pulp prices are forecasted to decline later in the year and could help to offset increased energy costs if this occurs.

Regardless, as we've said before, our businesses have demonstrated that they can offset input cost increases over time through selling prices and other actions. With the price increases we've implemented this year in both segments, this should continue to be the case.

Bonnie mentioned we expect to spend up to $30 million for capital projects. As we invest behind attractive growth and cost-savings opportunities, our capital spending has increased each of the past four years to support our growth, but remains a very manageable 3% to 4% of sales and in line with depreciation. The bulk of our spending goes to investments with high returns, and we continue to look at organic capital as one of the best choices for deploying cash.

As I mentioned in February, a key investment this year will be to increase capacity in one of our filtration machines in Germany. This will occur in the fourth quarter. In addition to the capital costs, we'll incur up to $1 million of higher costs due to added downtime to complete the project. We're also moving our annual maintenance down in the mill to the fourth quarter, which will shift an additional $1 million of costs from the third quarter to the fourth. Annual maintenance downs at most of our other facilities will remain in the third quarter.

By executing this high-returning investment, we'll support our ongoing efforts in filtration, and we'll have optimized [and balanced] saturation and media capacity in the mill. Plans are in place to ensure no disruption to sales or customer service levels this year as a result of the project.

Let me close with what I said earlier. We're in an enviable position. Our good business performance and strong balance sheet allow us to pursue a number of ways to deliver value to shareholders.

And as a reminder, our priorities for uses of cash remain, first, making attractive organic capital investments; second, value-adding M&A; and third, supporting meaningful direct cash returns to our shareholders.

Success in business comes from making good choices, and our current position enables us to choose from these alternatives with an "and" and not an "or" as we look at value-adding ways to utilize our financial capacity. I'm encouraged and excited by all that's going on at Neenah, and I hope you are as well.

Thank you for your interest this morning. At this point, I'd like to open up the call to any questions.

(Operator Instructions). Evan Wingren, D.A. Davidson.

Relative to our expectations, I think Technical Products outperformed us by quite a bit. I was hoping to get some granularity on the margin improvement year over year. And maybe is that a function of that melt-blown line that you started up? Just some commentary on that would be appreciated.

You bet. A couple of things -- first, I mentioned in the transcript that we had less-than-exciting performance in the last quarter, so I think we got a year-over-year comp change because our performance was poor. We've corrected all those, and I think that's really a positive.

Filtration is the major driver of the change in the quarter. Had very, very strong volumes, and as we've talked before, this is a category that's grown 9% over the last 10 years on an annual basis. As Europe starts to recover and the optimism of our customers continues to grow, we start to see the pipeline refill from that standpoint.

It'd be shortsighted of me not to give them credit for all the cost-reduction efforts that they've put in place, so we see strong utilization of the assets with the volumes, strong cost-reduction activities as well.

In regards to melt-blown, the melt-blown drives the enhanced mix, so melt-blown combined with our historical paper products give us the opportunity to sell up a mix into more premium mix, especially in products like cabin air, and we continue to see those grow as well. So I'd hate to give it all to a recent capital investment when it's really a strong volume performance in our filtration business, year-over-year comps. and a relentless pursuit of cost reduction.

Sure. Thank you for that. And then maybe on filtration a little further, can you just kind of maybe give us a high-level update on the competitive environment in your current filtration markets, which I think primarily is transportation, and then maybe those that you're trying to enter as well?

Well, I think the -- really, focusing from a competitive standpoint, transportation filtration is probably the one that we should spend the most time on. In Europe, we've got a leading market share. There's three major players in transportation filtration -- Ahlstrom, [H&B,] predominantly in the United States -- and so our strongest position by far is in Europe, which is great, because that's where our current existing capacity resides.

Two other very large markets, the US and China, are our opportunities for growth. We represent about a 15% share globally, but a 42% or so in Europe. So that opportunity for us to continue to follow and pursue those strong customers as they grow in those markets is what we see as the long-term opportunity for us in transportation filtration.

Many of the other markets, like beverage filtration and some of the others -- we're really focused on entering into niche markets. So there's a variety of competitors in each of those, and I think I'd probably cause more confusion than I would cause clarity. We're looking for where the high-value niche mix is and where we can bring unique capabilities from that standpoint.

So predominantly, I would think transportation filtration from a competitive position and then opportunistic mix enhancement in those other categories.

Okay. And maybe moving to paper, the $5 million in the first quarter, is there a way that we could think about how much of that should be recovered maybe sequentially? I know you said $5 million higher input costs across the remainder of the year. But shouldn't you see the majority of that come back in the next quarter relative to the first?

So the big spike in natural gas, we're going to see that mitigate. So $3 million of the $5 million was natural gas. So from that standpoint, we still expect that to be elevated all year. We've had -- and we'll have to overcome that with the pricing activity that was announced early on in the year. Pricing activity -- really, we see pulp and can act on pulp despite from natural gas. We couldn't influence the pricing activity that we had already taken by that.

What our expectation is, that all the businesses have been in the marketplace with price increases will carry those through as we move through the year. Pulp -- our expectation is not in the first half, because we're still going to see elevated costs in the first half, but in the back half. We do believe that it'll be mitigated, so that more sticky pricing in our paper side, we should see our margins recover.

So I would expect margins to recover significantly in the second quarter just as a result of the nonspike in natural gas, but full year before we're able to overcome the input costs that we talked about.

All right, thanks for that. Just a couple more here. I tried to follow your maintenance commentary. I think in the paper, you usually take maintenance in Q3. Is that still the case, and do you have an estimate for us for that you can share?

First of all, Evan, no need to apologize. People have a hard time following me all the time in that regard. I would say, yes, the majority of our maintenance happens historically in the third quarter, and that's still going to be the case this year. And it typically is a $2 million to $3 million impact for the downtime in that third quarter.

What we see different this year is that we have a significant capacity-adding capital project, and the best opportunity for us is to move that into the fourth quarter. So rather than have a maintenance down and then come to take another down later, we've combined the two to be more efficient.

So really what I was trying to suggest is that fourth quarter will have $1 million of incremental costs to achieve that, and you should see $1 million of our historical $2 million to $3 million move from the third quarter to the fourth quarter. That's really it. And I'm sure that in future years, you'll see more of a third-quarter maintenance activity for us. It seems to be the best time.

Okay. And then just a final one for me. Just maybe an update in general terms on your acquisition pipeline and sort of what you're seeing out there in the markets I think would be helpful.

Sure. I've mentioned it in the past, and I'll -- it may sound redundant, but learning comes from repetition. We have a very disciplined process, and we have dedicated resources to that and continue to be very, very active. Our bias is towards asset in the United States, but open to all opportunities in that regards. And our bias is towards performance-oriented technical products, but would love to continue to grow our filtration portfolio, as that's where we believe we add the most unique value from that standpoint.

And then finally, I mentioned in the call around packaging -- it's a large market. We're early in it, and those will be opportunities that we would want to continue to see what capabilities make sense for us to continue to invest behind it, so active process. I'm not discouraged in that regards. I think it's really important to balance why is it right that Neenah owns this company and what's the long-term value with our desire to utilize some of the cash that we've built on the balance sheet. And that's kind of the tension I live in every day.

Okay. Well, thank you for that. Given all the Oscar commentary in the script, I think I'll hop off before I get played off.

Jon Tanwanteng, CJS Securities.

You had a very nice job on the Technical Products. My question is has the momentum in that segment carried into Q2, or should we view that Q1 as the seasonal high-water mark for both revenues and margins this year?

Yes, I did mention that Q1 is typically a strong quarter for technical products. And there is some seasonality that happens as customers replenish inventories that they might have pulled down. Aut I was hoping you could hear it in the tenor of my voice -- I'm excited about the Technical Products opportunities. And I don't view it as a one-off. I believe that's an area where we're going to continue to invest and have a meaningful point of difference. So, our expectation is that is a great opportunity and a great area for us to continue to see growth.

Okay, great. And then aside from increased energy costs, was there any other impact from the poor weather in Q1, just from a demand side?

Great question. And we turned over everything we could to try to really look hard to say -- what could I quantify as it resulted to the weather? This is a time I've got to have a shout out for my team. I'm incredibly impressed with what they were able to overcome. For us, I would say, no, I can't suggest any revenue was lost as a result of cold weather.

Remember, we're in businesses that oftentimes have either longer lead times, and so while there was cold weather and it caused interruptions in timing, in the quarter, our team was able to act and react in a way that ensured that we protected all the revenue opportunities that we had in the quarter. So I'm very pleased with their performance.

Okay, that's helpful. And then you mentioned 30% year-over-year growth in the premium packaging. Can you update us as to what percent of the Fine Paper segment that is, and do you envision an inflection point where the growth there could kind of accelerate the overall segment growth?

That segment is pressured, as we talked about, with the secular decline, so the group has done a fabulous job over the last four years of offsetting any pressures in top line. As a reminder, we've grown that business the last four years. The premium packaging, we said that it represents about a $300 million addressable market in the segments we're in. Today, it represents about 10% of the Fine Paper business, is probably where I would look.

As far as what kind of step change, today what we've done is we continue to point resources to it to learn more about it and to make sure that we're meeting the needs of the customers. Likely step changes will come with capacity additions or capability additions, and we'll talk about those more as we go forward. It won't be a linear improvement from that standpoint, but today, with where we're at, we see lots of nice upside in that regard.

Okay, thank you very much.

At this time, there are no further questions. I would like to turn the call over to John O'Donnell for closing remarks.

Thank you. I'd like to thank everyone for your participation and interest in Neenah today. We look forward to updating you on our progress and results in the future. Thank you again.

Thank you. This concludes today's conference. You may now disconnect.