Neptune Insurance Holdings Inc (NP) 2015 Q1 法說會逐字稿

Good morning. My name is Callia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Neenah Paper first-quarter 2015 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 7, 2015. Thank you. I will now turn the call over to Mr. Bill McCarthy, Vice President Financial Analyst and Investor Relations. Please go ahead, Mr. McCarthy.

Good morning, everyone and thank you for your interest in Neenah. Our press release covering first-quarter earnings went out yesterday afternoon, so hopefully you've had a chance to read through it.

In our call today, John O'Donnell, our Chief Executive Officer, and Bonnie Lind, our Chief Financial Officer, will discuss activities and financial results for the quarter in more detail, and, as usual, following our prepared remarks we'll open up the call for questions.

I'll first provide a few high-level comments before turning things over to John and Bonnie. Consolidated sales for the first quarter were $228 million up 1% from a year ago, although on a constant currency basis sales increased 8%.

As we indicated in our February call, translation impacts due to the rapid strengthening of the dollar versus the euro would materially impact our top line, but through careful cost control and benefits of lower input costs, we would mitigate any bottom-line impacts. These efforts were successful and we, in fact, delivered our best ever quarter with EBIDA of $29 million and EPS of $0.95 per share.

At times, we use adjusted figures to aid in comparability between periods and these non-GAAP measures are reconciled to corresponding GAAP figures in our press release. In 2015 there are no adjusting items, but the first quarter of last year included an adjustment to exclude restructuring costs of approximately $300,000, or $.01 per share, in our technical products business.

Also let me remind everyone that our comments today may include forward-looking statements. Actual results could differ from these statements, and risks and uncertainties that could cause these differences are outlined in SEC filings and in the safe harbor disclaimer on our website. With that, I will turn things over to John.

Our businesses performed very well in the first quarter with both segments delivering strong bottom-line growth, improving margins and operational efficiencies. Historically, the first quarter tends to be our strongest, though still with plenty of challenges that our teams were clearly able to overcome. This consistent business performance reflects the success of our strategies to grow in defensible profitable niches as we continue to evolve into a larger, more diversified specialty materials company.

Let me start, as usual, with a recap of some of our key strategies and initiatives. First, we'll continue to expand our leading positions in premium niche categories that are core to Neenah. These categories include transportation filtration, performance backings, and premium fine papers. I'll talk about each of these briefly, starting with transportation filtration.

This business continues to demonstrate impressive growth. In the first quarter, local currency sales rose 6%. While still highly concentrated in Europe, we sell globally and have been growing exports at a double-digit pace.

We expect to consume available capacity in Germany within the next two years and, as announced in February, we're adding manufacturing and advanced saturating capabilities in the United States to meet this growing global demand. As a reminder, we'll do this in a capital efficient manner by repurposing one of our fine paper machines in Wisconsin.

Following our February announcement, our sales team met with a number of US customers and the response has been very positive. The US markets evolve into more demanding engine platforms that require the type of high-performance innovative filter media for which Neenah is known. These customers, many of whom are global and with whom we've built successful long-term relationships, also confirm the opportunity we see to increase our presence in the Americas in a disciplined and responsible manner.

From a technical standpoint, the project remains on track for a start up in early 2017 and initial phases of permitting are well underway. Our past investments in capabilities and fine paper, along with significant increases in productivity, as we've achieved over the past two years, will allow us to support future fine paper and packaging growth with one less machine. Work is already underway on optimizing and rebalancing operations to ensure a seamless transition for our customers.

So to summarize, our filtration international growth plans are on track and have been met with excitement by both customers and employees. I will turn next to backings, which are a key component of specialty tape and abrasives end products where we add value through saturating and coding expertise.

Backings is a global business today with customers served out of our mills in the United States and Germany. These markets are growing in line with global GDP, and sales and constant currency for the first quarter were up approximately 3%.

We're looking at ways to take further advantage of our footprint as it's more global than a number of competitors. Our products are focused on meeting specialized needs, such as high temperature resistance, fine paint lines, and UV protection. We continue to look for opportunities to expand in adjacent markets that will further grow the business and enhance profitability.

The last core category is premium fine paper, a business that continues to deliver outstanding financial returns. In the first quarter, sales of approximately $100 million were in line with last year. We benefited from new distribution at a major retail customer, and sales were also boosted by shelf resets of other retailers in the first quarter of this year that occurred in the second quarter of last year.

These positives were offsetted in part by reduced sales of non-branded business. With the climbing pulp prices, we expect more aggressive competitive pricing for lower value business to continue, and while this could reduce our top line, it should have a minimal effect on our bottom-line. Overall, fine paper continues to deliver steady results despite challenging market conditions.

The strength of this business remains in our leading brands. We're leveraging our brand awareness and expertise as we expand in premium packaging. And for all of our high-end fine paper packaging products, we continue to outperform the broader market as customers look for the distinctive solutions that can convey a premium image. If you want to check out our latest packaging progress, you can visit our recently launched website at neenahpackaging.com.

A second strategic priority is to increase our size, growth rate and portfolio diversification by expanding our presence in profitable and defensible segments of growing markets that value our capabilities. As we've mentioned before, we're looking to expand in categories like filtration media, premium packaging, and performance oriented technical products. We've allocated internal resources to support growing markets like premium packaging and filtration, and remain very excited about the business we acquired last year and the new technologies now available to us to drive future organic growth.

At the same time, our acquisition process remains very active as we pursue companies that fit or complement our capabilities and can deliver meaningful value for our shareholders. Filtration continues to be a target market. We're also open to opportunities in other defensible markets that are strong fit and improve our growth profile.

With our disciplined process you can be assured we are not simply looking to buy growth, and that any acquisition will provide the necessary financial returns. I'm very pleased with the attractive acquisitions we've been able to deliver in each of the past three years, and expect that M&A will continue to support our future growth aspirations as well.

Finally, our priority is to continue to deliver attractive returns to shareholders, including a meaningful cash component. We believe that combining our strong execution culture with our commitment to delivering attractive return on capital as we grow our company will reward our shareholders with an increasing stock price.

In addition, the strong cash flows our businesses generate allow us to supplement these good returns with an attractive dividend. In March, we paid our first dividend of this year at a new quarterly rate of $0.30 per share, representing the fifth double-digit increase over the past 10 quarters.

Before turning things over to Bonnie, I will reiterate how pleased I am with how our teams are executing our strategies and how these results translate into good financial performance and returns for our shareholders. Bonnie?

Let me begin with technical products. First-quarter sales were $120 million, up from $117 million last year. As expected, with more than half of our technical product sales in Europe, the translation impact of a stronger dollar had a large impact on our top line, reducing sales by $14 million or 7%.

The average exchange rate in the quarter declined by almost $0.25 from 1.37% to 1.13%. As we mentioned in our last call, every $0.10 change reduces sales by about $25 million annually, or over $6 million per quarter, with a corresponding impact equal to around 10% of that amount on the bottom line.

On a constant currency basis, our businesses did really well, growing 4% organically and increasing 8%, including sales from last year's acquisition. In addition to volume growth, net sales benefited from a higher value mix and higher selling prices.

Operating income was a record $16 million. That is 17% compared to income of $14 million last year. In addition to higher volumes and improvement selling prices, profits also benefited from lower input costs. In total, these items more than offset the currency translation impact on the bottom line.

Turning to fine paper and packaging, sales in the quarter were $101 million, and in line with the prior year. As John mentioned, we had an unusually strong quarter in the retail channel, primarily due to the shelf resets that occurred in the second quarter of last year. Sales of core premium brands also did well, growing 2%.

These results were partly offset by timing of premium packaging orders and volume declines in the non-branded business. Overall, benefits from our higher value mix and increased selling prices were able to offset at 3% volume decline in volume.

Fine paper and packaging operating income of $17 million increased from $13 million last year. The majority of the increase is due to lower energy costs, which had spiked in the first quarter of 2014 due to high winter demand. Profits also increased in 2015 as a result of benefits from the improved mix and pricing.

Unallocated corporate costs of $4.8 million compared with $3.8 million last year. These costs generally averaged around $4 million per quarter, but were higher in the first quarter of this year primarily due to the timing of certain expenses.

Consolidated SG&A was $21.9 million, up from $19.9 million in 2014. About half of the increase was due to timing of unallocated corporate expense, and the other half reflected SG&A associated with our 2014 acquisition. Going forward, we expect SG&A to continue to average around $21 million to $22 million per quarter.

Net interest expense of $3 million increased from $2.8 million last year as a result of a year-end borrowing in Germany on our new global lending facility. These funds were used to repatriate cash to the United States in a tax efficient manner. In the first quarter we began paying down this added debt in Germany with local cash flows.

Our effective tax rate in quarter was 37%, equal to the guidance we provided in February, but higher than the rate of 35% last year, due to changes in the mix of income between our tax jurisdictions. As a reminder, if Congress renews R&D tax credits for 2015, as it has in the past years, this would lower our overall full-year rate to about 35%. However, we can't record this until the law has passed, which was in December of last year.

Our cash tax position remains favorable. While we no longer have in the US federal net operating losses, we now have almost $30 million of R&D credits. Even with these credits, we are subject to minimum US tax payments of approximately $10 million in 2015, and expect our consolidated cash tax rate to be about 20%.

As a result of the actions we've taken to fund our US pensions, we're able to reduce pension contributions significantly this year, as planned, and offset the impact of the higher cash taxes. In addition, our actions and the good returns on our investments will keep pensions OPEB expense similar to last year, despite changes in mortality tables and lower actuarial discount rates in 2015.

Let me finish up with a few comments on cash flow and deployment. In the first quarter, cash from operations was $5 million, down from $15 million last year. The first quarter is always seasonally low as sales increase and we rebuild accounts receivable from low year-end levels.

The comparison with last year also reflects a favorable one-time benefit in the first quarter of 2014, resulting from changes in accounts payable terms. While the first quarter was seasonally low due to timing of working capital, our cash generating capabilities remain strong.

Capital spending of $6 million was up from $4 million last year. As we've stated, full-year spending will be in the upper end of our targeted range of 3% to 5% of sales, or around $45 million to $50 million. This includes $25 million for the North American filtration expansion.

Our balance sheet is strong with low leverage. We deploy cash in a disciplined and balanced matter in line with our priorities of attractive organic investments, value-adding M&A, increasing dividends, and share repurchases.

Our actions and cash deployment strategies have delivered attractive returns on capital and returns for shareholders. This remains a priority in the future.

With that, I'll turn it back to you, John, to provide summary comments.

As usual, I'll start with a few comments on external influences that may impact us in the quarters ahead. As we stated in February, currency translation due to a stronger dollar was expected to materially impact our top line, but we would work to find ways to mitigate bottom-line impacts.

In 2014, the euro remained above 130 for most of the year. Therefore, if the euro stays around the current levels of 113, translation impacts will continue to reduce quarterly sales by around $15 million or so before easing a bit in the fourth quarter. But the euro has traded between 105 and 115 so far this year, so don't hold me to any predictions, please.

In addition to translation, a weaker euro could enhance the competitiveness of the lower-priced imports into the United States. However, the majority of our businesses are in defensible niche markets where performance, brands and other factors count more than just landed costs.

On a positive note, many economies in Europe appear to be gaining momentum, although projected growth is still not robust. Fortunately for us, Germany continues to be among the best-performing countries, and transportation filtration is one of our more resilient categories.

Turning next to input costs, as in the past, commodity prices like oil and pulp have moved inversely with the US dollar, although hardwood pulp prices appear to have strengthened more recently. While prices for many of our inputs don't move as quickly, due to their specialized nature and we also have selling price adjusters on some products, overall, we still expect lower input costs to be a benefit and help offset impacts from currency.

With that, I'll wrap up. First quarter results were very good. As I said earlier, this historically has been our strongest quarter, particularly for technical products. Looking forward, our businesses are well-positioned competitively in defensible niche markets, and our teams are executing on their initiatives.

Key efforts include support of growth in global transportation and specialty filtration markets with capital efficient investments in North America, allocation of resources towards premium packaging to expand our share, development of new products that combine our global capabilities, pursuit of acquisition targets that deliver attractive returns, and return of cash directly to shareholders through an attractive dividend.

Given the quality and the depth of our teams, I'm confident in our ability to execute these initiatives and create value as we build a leading global specialty materials company. Thank you for your attention. At this point, I'd be happy to open up the call for any questions.

(Operator Instructions) Jonathan Tanwanteng; CJS Securities.

Good morning, guys, very nice quarter. Can you go into a little more detail on the strength on the retail in the quarter? What's the relative size of that new customer opportunity there? Is that still ramping? And for next quarter, do you expect some decline given the change in the timing of that re-shelving you mentioned?

Yes, we're always looking for new distribution in retail, and their shelf sets are typically an annual event from that standpoint. The impact of that overall new distribution may be a couple of million dollars, if I tried to size it from that piece. I would expect that to be a continual annual event we have.

What I wanted to make sure I called out in the call was that last year we saw a big part of those shelf resets and distribution activity happening in the second quarter. So really happening in the first quarter. I expect that to be a regular annual event. Just as a reminder, too, our retail business represents about a quarter of our fine paper business.

Okay. Can you quantify the size of that shelf reset at all?

Shelf resets, it's an annual process with many of the major retailers, so we're looking at Office Depot, OfficeMax, Staples, and then new distributions with customers. So when you're doing a shelf reset you may gain SKUs, you may lose SKUs. In this first quarter, we saw a $3 million to $5 million opportunity, if you will, gaining incremental shelf space with our retailers.

Got it. That's helpful. Then on the export side, you mentioned [FX] helping you a little bit, selling to the US from Germany. I'm just wondering what percent of your revenues that might be?

In reality, I did say that the US, from a transportation filtration had improved, I didn't connect it to FX. Our success in the United States, we've been growing at double-digit pace in the United States from transportation filtration, as we've been moving into this market. In fact, I think I mentioned that [NAFTA] was up 15% in that overall quarter. Of all of the categories, transportation filtration has a long qualification cycle. So timing of currency isn't going to affect dramatic changes in new distribution.

I would say that our backings items, the ones that are more global GDP-ish and might have higher opportunity for switching, would be the categories that would potentially be exposed with changes in currencies. Good news for us, we have a facility in Germany as well as one in the United States.

Okay, thanks. Finally, just an update in what you're saying in the M&A space, valuations or potential targets, how active exactly are you there?

We have been very busy. As we said in the past, we've got dedicated resources and it's a key part of continuing to reshape the growth profile of our business and continuing the diversification for a specialty materials company.

While I can't really communicate on any specific event, I will communicate it when they happen. I hope that our track record at least speaks for that, A, we are active and, B, we are not out just to acquire revenue, but we are really very disciplined in the investments we're going to make. But I do expect it to be a part of the change in our growth trajectory.

Okay, thank you very much.

Daniel Jacome; Sidoti & Company.

Just back to the shelf reset, can you talk a little bit more about that? Was that incremental? Was that the customer displacing someone else or adding all into their paper offering?

Think about shelf resets as an annual event, refreshing. Retailers are actually, they are selling space and they are constantly looking each and every year to make sure they have the best opportunity and best put up and mix of products there. They're going to look at your brand awareness, if you will, as well as your put up and the meaningfulness for the consumers.

We have the two strongest brands in retail. Our expectation is that we will continue to gain market shelf space as we've gone forward. The big piece of it was a Walmart. We picked up an incremental SKUs in Walmart as well as the shelf sets at Office Depot and Staples.

This is an annual event. I would hate for you to think that it is a huge change. It's really a timing first quarter, second quarter, and probably the first time I've talked about shelf resets, although I could understand why the questions, if you will. But I think it's more of a timing, and new distribution and Walmart are probably going to be the biggest drivers.

Okay. Walmart's a nice customer to have.

They're great customers, by the way. In case anybody is on from Walmart, I didn't just call them nice, I called them great.

Okay, I'll make a note of that. It sounds like you took space from someone else. All right, great. Then was that kind of like the Astrobrights type of papers?

Yes, it really was.

Okay.

Specifically, they had a private label in there and we compared our brand and the lift of our brands versus the private-label performance, and the team did a fabulous job ensuring they had the right put ups, the right mix and right assortment. And net-net, at the end of that, our products drew greater lift and greater revenue for Walmart. That is why they made the change.

Okay, great. Then on the premium packaging side -- and nice job on the website, by the way, I had a chance to look at that yesterday.

Perfect.

Yes, it's nice. What I was wondering -- I've asked this before but I'm just curious because there's not a lot of information out there -- who will you guys be taking share from? I get this question a lot.

Yes. If you think you get it a lot, guess how often I get it?

Okay.

This is premium packaging. First of all, packaging is such a large market, $42 billion. We've sized $300 million of addressable market. As you could margin, there is no single customer out there that has done a phenomenal job in capturing the biggest share of that. There are some other players out there, especially in high-end spirits, like I believe FiberMark is in that business. But we're focused in spirits, cosmetic, retail --

Electronics.

Electronics. Yes, thank you, Bonnie, and electronics. So those core categories where you have expensive things in small boxes, is where we believe we have the greatest opportunity. Any time a customer is looking to enhance an image through the packaging, not just protect the product, that is where we believe we have the greatest chance for success. So there isn't a set player out there. A number of players are doing it more of a hobby.

Okay. Is this niche, is this still growing like 20%, I think you said in the past?

Yes, double-digits is a good thing for you to have in your mind. I'm excited when it is 20%, but it is definitely a growing market for us. As we garner share and focus in those key markets, our expectations will continue to demonstrate meaningful growth going forward. The market is growing as well, so I sized it at $300 million but, as a reminder, it's high-end image luxury goods are continuing to grow and that's the place that we want to be in.

Okay. Hate to hammer you on this, but is this high double-digit or low double digit? Where are you closer to?

Yes, we both agreed on double digits, so I'm going to split the difference and call it mid.

Okay.

How about that?

I would take that.

All right.

Steven Chercover; D.A. Davidson & Co.

I got on a wee bit late so forgive me if I missed something. Both segments did really well and I'm just wondering, is the margin in technical products, do you think, sustainable? Because it certainly seems a little bit better than we've seen previously.

Our aspiration has always been for both of our businesses to be in that double-digit margins. Tech products has made tremendous progress over the last four years. As we continue to look (inaudible) and with our filtration acquisition, as we look at those higher-end mix opportunities, they're going to continue to drive that up. We had good cost performance, especially in some of our US technical businesses as well, but our view is that it's not a one-off margin opportunity.

Okay. Then to continue along that line of thinking, John, you said that Q1 tends to be the strongest.

Yes.

I'm just wondering, is that a statement that's related to -- That doesn't seem to be the case, at least as far as earnings go in the last three years, so was that a comment on fine papers due to the shelf situation or earnings as a whole?

Right. That is a great question. You've talked with me before, so you know sometimes I can confuse people. I would say, when I talk about the strongest, I'm really talking about top line. So technical products business, the largest quarter is the first, then the second, then the third, then the fourth, historically where we are at.

As a reminder, a majority of our maintenance downs and outages are in the third quarter, so that quarter is up and pressured on overall margins. Since our first quarter typically is the highest revenue opportunity and it follows our weakest fourth quarter, that's why Bonnie was talking about the cash piece. Good shape on that. But it looks like it lulls a little at the beginning because we had strong sales. But we're in great shape from a collection standpoint.

The business that's the most predictable is the fine paper business, I would say. It's typically 50%, 50% top line and almost bottom line to that end, so pretty stable between the two.

I think our technical business has been 52% in the first half and 48% in the second half. I don't want to suggest they're dramatic swings, but I was talking about the top-line piece of our business and from a bottom line, remember, third-quarter outages will definitely impact the bottom-line performance.

And fourth quarter in the technical products businesses, especially in Germany with a lot of --

We have a lot of customers who manage their inventories towards the year end then restock them at the beginning in January, hence, the seasonality impact that we talked about. I hope that clears that up.

I'll just leave it there. Thanks a lot.

There are no further questions, thank you.

Okay. Everyone, thank you for joining us. On behalf of the team here at Neenah, we appreciate your time and interest and look forward to updating you on our progress next August.

Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.