Neptune Insurance Holdings Inc (NP) 2015 Q4 法說會逐字稿

Good morning, my name is Josephine and I will be your conference operator today. At this time I would like to welcome everyone to the Neenah Paper fourth quarter and full year 2015 earnings conference call.

All lines have been placed on mute to prevent any backgrounds noise. After the speaker's prepared remark there will be a question and answer period. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, February 17, 2016.

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 good morning, everyone. We released earnings yesterday afternoon and in our call today, John O'Donnell, our Chief Executive Officer and Bonnie Lind, our Chief Financial Officer, will discuss business activities and results in detail.

As usual, following our prepared remarks, we'll open up the call for questions. I'll start off with a few comments before turning things over to John and Bonnie.

We completed a number of strategic activities in 2015, including the acquisition of FiberMark on August 1, 2015 and the divestiture of our wall covering mill in Lahnstein, Germany at the end of the of October. Financial results reflect launch time as discontinued operations in all periods and include FiberMark starting in August.

FiberMark's products are included in each of our business segments, and as we integrate and realize efficiencies from our combined operations, we will not be recording these separately as we go forward into 2016. Also, a notable event in the fourth quarter was that the U.S. Congress acted to approve renewal of various tax credits, including credits for investments in R&D.

Consequently, we recognized benefits for credits earned for the full year in the fourth quarter of both 2014 and 2015. In addition, we were able to recognize credits for previously unclaimed work-related to prior periods but have excluded these from adjusted earnings. These excluded prior period credits were $1 million or $0.07 per share in 2015 and almost $17 million or $1.00 per share in 2014.

As a reminder, adjusted figures are a non-GAAP measure that we use to improve comparability between periods and these numbers are reconciled to corresponding GAAP figures in our press release. In addition, our comments today include forward-looking statements. Risks and uncertainties that could cause actual results to differ from these statements are outlined in our SEC filings and in the Safe Harbor disclaimer on our website.

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

Thank you, Bill. And good morning.

The fourth quarter capped another year of good results for Neenah and our shareholders. Full year sales increased 6% and earnings grew 15%. These results are consistent with our growth rate the past five years, as we've executed strategies to drive organic growth, supplemented by value-added acquisitions.

In addition, margins increased by more than 100 basis points in each of our business segments and we maintained our very attractive return on capital as we invested in growth. Cash from operations increased by $17 million, and we returned more than $25 million of cash directly to shareholders through our higher dividend and opportunistic share buybacks.

We delivered these results despite an external environment that had its challenges. Global GDP growth was modest in developed markets like the United States and western Europe, where the majority of our sales are, and growth in emerging markets also slowed. In addition, the U.S. dollar strengthened, significantly, impacting translation of our results for non-U.S. operations.

The strong dollar, coupled with moderate global demand and a drop in oil prices contributed to lower inputs costs. Our teams, however, remained focused on what they could control, growing share, reducing costs, and improving efficiencies, while enhancing selling prices with a higher value mix of products sold. These efforts all contributed to the improved results in 2015.

Turning to our business segments, growth in 2015 was led by Technical Products, where sales increased 6% and adjusted operating income grew 17%, with EBIT margins now touching 13%. Filtration continues to be a principle driver of Technical Products performance and transportation filtration sales were up 8% in constant currency.

We're well positioned in this growing market and continuing to gain share, especially with our more advanced (inaudible) products as engine requirements become more and more demanding. We're also successfully growing share outside of Europe, and in 2015 our sales to the United States increased 15%. To ensure we're prepared to support future growth our investment to add capacity in the United States is well underway and should start up as planned in the first quarter of 2017.

Sales of other filtration products grew at double-digit pace due to increasing global demand for water filtration and other synthetic media needs. We acquired most of this business from Crane in July of 2014, and results are tracking well ahead of our expectations.

Our global R&D teams are working closely together, enhancing our product development efforts and enabling the organization to combine know how and technologies as we pursue new markets for growth. In addition to filtration, Technical Products include saturated and coated performance materials used for backings and other specialty end uses. Backings is a growing market and one of our most global.

In 2015, however, sales fell due to currency and changes at a large Asian customer that resulting in their in sourcing some lower value tape grade. Nonetheless, our competitive capabilities and position remained strong and were bolstered with FiberMark.

We reorganized mid-year to optimize the utilization of our global footprint, which will in turn provide efficiencies and redundant sourcing capabilities for our global customers. While this change was relatively recent, we're encouraged by the progress already made.

The balance of our Technical Products representing just over 15% of sales, grew revenues 10% last year. This was largely due to higher sales of label products where our unique formulations have allowed us to introduce new products and boost our share position a number of key label customers.

Turning to Fine Paper and Packaging, sales grew 2% while adjusted profits increased 13%. This business continues to deliver strong cash flows with mid-teen EBIT margins. Revenue growth was driven by the acquisition as organic sales declined with reduced levels of lower margin, special order business.

These special make opportunities are large in size and they help to optimize our assets, but they tend to be the most price competitive, so while impacting our top line, they have a much lower effect on our bottom line. Our core branded business, where we're the clear market leader, remains healthy. We sell primarily in the U.S., with demand driven by a needs for high quality print packaging.

Our team has worked to offset market pressures with new products, distribution channels and revenue streams. Two areas of focus are expanding in the retail channel and increasing share in premium packaging. Our retail sales team did a tremendous job in 2015, growing distribution and increasing branded offerings with major retailers such as Amazon, Wal-Mart, Staples, Office Depot and others.

Retail sales make up about 20% of fine paper revenues and they were up 10% this year. Our premium packaging business continued to grow by double digits in 2015. The FiberMark acquisition unlocked future growth opportunities by dramatically expanding our capabilities and presence in this category, especially in end markets like spirits and beauty products.

With FiberMark, premium packaging is now around 15% of segment sales, and we expect it to become an even larger percentage in the future. 2015 was not only a good year for financial return, it was also a year in which we executed a number of strategic initiatives that will help shape our product portfolio and future.

I mentioned our investment to expand transportation filtration capacity. This will support capital efficient growth in this profitable business for the next five years and helps us to establish an important foothold in North America.

In our last call we also discussed the sale of our non-woven wall covered Mill in Lahnstein, Germany. This business was not a good strategic fit due to its relatively small position in a more comoditized market with excess capacity. The divestiture helped further focus our portfolio in profitable growing markets where we can hold the leading market share position.

Finally, the acquisition of FiberMark was important, bringing us new capabilities in end markets as well as overlap with existing products. We've moved quickly to execute our integration plan, implementing a new right sized organization, negotiating supply chain and procurement savings and working to optimize our expanded manufacturing footprint.

In addition, we're leveraging new R&D and prototyping capabilities to activate growth strategies in packaging, security papers and other areas. Following the planned closure of a mill in Pittsburgh, Massachusetts at year end, annual sales for FiberMark are expected to be in the range of $100 million to $135 million, spread across our various segments. Related costs for the acquisition and integration were $5 million in 2015, in line with what we previously communicated.

We expect to spend up to $2 million more over the next two years as we finish optimizing operations and implement an ERP system. We're realizing synergies ahead of plan and expect to generate $4 million in 2016 versus the $2 million to $3 million we had originally communicated. This keeps us on pace to deliver at or above the end of curve synergies we projected by the close of 2017.

Looking back, while the acquired top line was not as robust as originally anticipated, we're ecstatic with the opportunity that this has brought us to drive future growth with the higher level of synergies we are realizing and remain very confident this investment will provide the attractive returns we promised to our shareholders.

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

Thanks, John.

I'll start with segment results which, as we've mentioned, include a portion of the acquired FiberMark business. I'll also cover quarterly results in 2016 expectations for corporate items.

So beginning with Technical Products, quarterly sales of $108 million were up 11%. This resulted from 3% growth in our base business, supplemented by a 14% boost from acquired sales, partly offset by currency translation, which reduced sales 6%. Organic growth was driven by increased volumes for filtration and labels, partly offset by lower backing sales.

Operating income, after excluding integration and restructuring costs, was $13 million, up 21% from last year. Increased income resulted from timing differences for our annual filtration maintenance down in Germany, higher sales volume, improved operational efficiencies, and lower input costs, which, combined, more than offset negative effects from currency translations and added SG&A from the acquisition.

Turning to Fine Paper and Packaging, sales were $112 million, up 6% from last year. While FiberMark added around 10% to the total, it was partly offset by a 4% decline in organic sales. As John mentioned, this was due to reduced shipments of lower margin special order business, and also likely reflected the slower U.S. economic growth reported for the fourth quarter. Excluding one time acquisition and integration costs, adjusted operating income was $15.8 million, up 4% from 2014.

Profits increased as a result of lower input costs, higher net selling prices, and lower SG&A spending. Consolidated selling, general and administrative expense was $24.9 million, compared with $21.6 million last year. The increase was primarily due to the acquisition. Going forward, quarterly SG&A is expected to average around $24 million.

Unallocated corporate costs, which are part of SG&A, were $4.8 million and included $300,000 for integration and restructuring. Excluding this, costs of $4.5 million were slightly above last year's adjusted amount and in line with our expected run rate. In addition, we expect to incur $3 million of costs related to transitioning the Wisconsin fine paper machines to produce filtration media.

Sales in our other segment, which include acquired date and diary products, were $10 million. Sales in 2015 also included products made at the Pittsburgh mill, which was closed as planned on December 31, 2015. Sales were elevated in the quarter, as customers stocked up in advance of the shutdown. Going forward, we expect quarterly sales for this segment around $6 million.

Adjusted operating income in the quarter was $200,000 after excluding one time cost of $2 million that were related to the mill closure and other integration activities. Net interest expense of $2.8 million was just slightly above $2.7 million last year, as of year end, debt was $229 million, down $12 million from September, and we maintained cash on hand of around $5 million.

Our debt to EBITDA ratio remains low, at below two times, and we have well over $100 million of available borrowing capacity on our existing credit facilities. Our adjusted effective tax rate was 26% in the fourth quarter and 34% for the full year. These numbers reflect R&D credits earned for 2015 activities, but exclude credits related to prior periods.

In December Congress approved a loan allowing these credits not only retro actively for 2015 but also for future years. Therefore, starting in the first quarter of this year our effective tax rate will reflect projected annual credits and we expect the 2016 rate to remain at around 34%. Our cash tax rate is expected to remain around 20% due to over $25 million in benefits for prior years' credits that we expect to consume over the next two to three years.

Our defined benefit pension plans remain in really good shape, however, pension and other post retirement obligation expense is expected to increase by almost $2 million in 2016 due to lower asset returns in 2015. Cash contributions will also increase to $14 million in 2016, about $2 million higher than our projected expense. Cash from Opps $32 million in the quarter, up significantly from $22 million last year, due to the higher earnings and pension contributions.

Full year cash from operations of $111 million grew $17 million for similar reasons. Quarterly capital spending of $22 million compared with $13 million last year and full year spending increased from $28 million to $48 million. Spending increased, as planned, as a result of North American transportation filtration investment and for the full year was at the upper end of our targeted 3% to 5% of sales range.

In 2016, we expect total spending of around $65 million as we complete the filtration project, and, following start-up of commercial operations in the first quarter of 2017, we expect capital spending to fall back to the mid or lower end of our range.

I'll now turn it back to you, John, to wrap up with some of your personal thoughts on 2016 and then your concluding comments.

Thank you, Bonnie.

We're currently expecting market growth for all categories, in line with 2015. Filtration market growth should outpace global GDP growth while most other technical product markets should grow with global GDP.

Fine Paper and Packaging should benefit from accelerated sales of premium packaging, but will continue to face challenges as much of this business still participates in a market subject to secular decline. However, in all of our categories, our teams continue to look for ways to outperform the market.

Like other multinational companies, we're facing currency headwinds that are expected to continue from a strong U.S. dollar. While the Euro current trades around $1.11, if it weakens, as most forecasts expect, this would have the largest impact on our Technical Products segment.

The $0.05 change in tax sales by around $10 million and has a corresponding $2.5 million impact on earnings due to translation and some transactional exposure. While we don't expect a windfall from the drop in oil prices, we do expect prices for raw materials and energy to be somewhat lower in 2016, helping to offset negative currency impacts.

So let me wrap up by stating our commitment to continue executing the strategies that have guided our actions and have supported our consistently improving results. These include focusing on growing and profitable niche markets where we can earn a leading market position, investing in product innovation and in our brands, knowing these organic investments deliver the highest returns. And utilizing our expanded manufacturing capabilities to accelerate top line growth and deliver synergies.

Growth through acquisitions will continue to be part of our playbook, helping to change the growth trajectory of our portfolio while creating added value. We'll remain disciplined as we deploy capital, with a focus on optimizing return on capital and returning cash to shareholders through an attractive dividend. Our team successfully executed a number of important strategic initiatives in 2015, making Neenah a larger and more profitable company.

We've increased our presence in targeted categories, and we are well positioned to compete effectively in the years to come. Our strong cash flows allowed us to make important organic capital investments, increase dividends, and complete value adding M&A, all while maintaining a strong balance sheet that protects our flexibility to act on future opportunities that can drive additional value for Neenah and our shareholders.

We expect 2016 to be another busy and productive year and look forward to updating you on our success. Thank you for your interest and at this point I'd like to open up the call to any questions you may have.

(Operator Instructions). Your first question comes from Dan Jacome with Sidoti.

Good morning, how are you?

Good, Dan. Good morning.

Thanks for taking these questions. Just the first one, I was just wondering about the cash tax benefit you're going to see this year. Just wondering more about kind of the timing. Is it going to be spread out this year or is it skew more to the fourth quarter again?

Okay so Dan are you talking about the R&D credit?

Yes.

Yes. So that's, we expect that to be a little under $2 million, and as you pointed out, we've been booking it in the fourth quarter the last two years. Now that Congress made the credit permanent, we will spread that out over the four quarters.

Okay. Got you. Thanks. And then, John, you mentioned you're taking label share from a competitor. I was just wondering, if you could share it, if it was a U.S. or maybe an Europe based competitor?

I don't know that I'd mention taking share from a label. What I did mention is we introduced three new label products, at least three, I'm probably underestimating the progress of my organization, but we really had a very strong label performance in our Technical Products business this year. And that's really what I was referencing. A big part of that growth that came in the category, we call the other Specialty Materials Products, came from strong label growth and we anticipate that to continue.

Okay. Great. And then staying on that topic, I think you mentioned you had a customer based out of Asia that, can you talk a little bit more about like that? Is that kind of like a one off situation.

Sure. Yes, it's pretty much a one off situation. So, in the tape business virtually every tape customer we deal with has the ability to sell saturate. We typically play in the very high end technical saturating capability. So it's more commodity oriented, and in that case, this was a customer who had plans to add a saturator and do their own saturation and we've seen that coming for multiple years so it's not something that happens as a surprise around every moment.

Right now we see the tape market as about $700 million market and the part that we play in is about 20% of that, and we have a very nice position in that higher end segment.

Okay. I really appreciate the color. And then lastly, I just was wondering, on the buyback program, wondering if the Board, you know, you see the stock more attractively valued now, down 8% year-to-date, I know it's been kind of a tough environment for small paper and packaging. Any thoughts there?

Well, we do have a $30 million approval for share repurchases. Bonnie's corrected me $25 million. Excuse me, from that piece of it. And you're exactly right, when we see that the value of the share price is much lower than the intrinsic value, that's what I mean when I say we have opportunistic share repurchases and we'll continue to take advantage of that. Our primary use of cash, and especially in returning cash to shareholders, would be through our attractive dividend. But both are important tools in our toolbox.

Okay. I appreciate it. Thanks a lot.

(Operator Instructions). Your next question comes from Steve Chercover with Davidson.

Good morning, everyone.

Good morning.

Good morning.

So just a couple quickies.

Sure.

First of all, the import duties that were recently placed on cut size, uncoated free sheet, did that have any benefit for you? I mean, I know that you're not a commodity producer, but maybe on the ASTROBRIGHTS or some other trickle down effect?

Just a minimal, if it has any impact. Trickle down gave me the minimal part. But I would say you're exactly right, we're not a commodity producer. We weren't negatively impacted by imports, especially at the high end branded portion of our businesses, so I don't see it as a detriment, but I don't see it as a real benefit, either.

I mean, do you raise prices for your ASTROBRIGHTS or other kind of, I don't want to call it commodity but for papers that could be run through a copier, nonetheless?

Sure.

Independent of what the big boys are doing or do you wait for pricing signals?

Yes, that's an easy one. We make all of our pricing decisions independent from everyone else out there in that regards. Whether it's printed on an offset or digitally, is really not the real benefit that our products, we try to make our products so it's agnostic as to what technology we use to make it, but it's really the color, the texture and the high end weight, both cotton materials, recycled and so on, that makes our products unique from that standpoint.

So you're right in the sense that there are other players who have colored papers that are more commodity oriented, but that's why we believe ASTROBRIGHTS has done so well, especially in this past year, because there is a pointed difference between the quality of our products and the strength of that brand.

Great. And then, you know, this is my interpretation of your body language, but it still seems that you've got firepower to do deals, you know, maybe the size of FiberMark or better, so I just want to make sure I'm not misinterpreting it. I think you have the desire to continue growing via acquisition.

Yes, I couldn't be more proud of the organization, to get through a year where we acquired FiberMark and still be in the same strength on the balance sheet where we were at the beginning of the year. There's no doubt that both the financial capability but also the organization's ability to do a deal, if you will, and that finding the right alignment for our strategic needs going forward.

We do keep an active radar. We have dedicated resources towards that. And acquisitions, M&A are going to be an important part going forward. I always say that the three most difficult uses of cash are M&A, M&A, and M&A, all right? So I don't underestimate how difficult they are from that standpoint but clearly it is going to be a meaningful part of our future, like it has been in the past.

But there's no reason to believe then that 2016 is a year devoted to digestion.

If I don't find the right company, you know, or the right value, we won't overpay for a company, it's hard to recover from that standpoint, so you should expect that we're going to go into 2016 like we went into 2015, managing the businesses we have, driving the mix that we have, improving the margin cost positions that we have and then given the right opportunities, making sure we are in the position to take advantage of those.

And by the same token, I'm sorry, go ahead, Bonnie.

I was just going to say, you're right, though, we do have the available firepower, so we have over $100 million of availability, ready availability on our revolvers, and then with a debt to EBITDA of 1.6 times, you know, we're comfortable in that, we say two to three but that's our real comfort zone but we'd even be willing to lever up above that.

And it's fair to say that given your statements on the intrinsic value of the equity, you would not be using equity to finance an acquisition.

This is really big.

It depends on the event, but your assumption is very logical.

Very good. Thanks for taking my questions.

You bet. Thank you.

There are no further questions. I would now like to turn the floor back over to Bill McCarthy for closing remarks. I'm sorry you do have a question from Garo Norian with Palisade Capital.

Great.

Hi. I was wondering if you could help put some parameters around the exposure you have on the transportation side to autos, particularly, you know, it seems like there's increasing concern in the marketplace that kind of the recovery in the auto cycle may be peaking out here, so any kind of comfort you can give as you add capacity it's going to be utilized in the manner that you expect it to be?

Sure, that's a great question. Two things that we need to consider. First, in the transportation filtration media market, there's really three global players. So it's a fairly consolidated market. Two of which participate in the United States. So with different technologies.

So I think there's plenty of room from another supplier for that. If you look at our transportation filtration sales, they have been about 8% a year for the last 11 years, and only one year, 2009, when we didn't have that growth rate, which was the great recession when everybody parked their car. So our business is really tied around miles, and the way you think about miles.

So if you're not buying a new car, which would be consuming filters, you're going to be taking care of your existing car and right now we sell about 30% in the OEM and about 70% in the after market.

Okay. Great.

So, I'm sorry. In conclusion, it's a very steady market from that piece of it. It's not tied heavily to OEM.

Okay. And then just to have the right mindset around the capacity, you said it's kind of a, I guess the assumptions you're making, kind of five years of growth and kind of coming on kind of (inaudible).

Yes, there's two things driving that. I've been part of the paper industry for many, many years and you can try to bring up capacity in and shove it into the market but that is not how we're bringing this asset up. For a couple reasons. It takes about a year or two years to qualify with customers that your products meet and can be utilized for the projects, so it's a long qualification. And that's a nice barrier to entry.

So for us, what's really important is that we can support the global growth of our key customers over the next five years. So we've got a fairly conservative runway. If the enthusiasm by our customers is greater than we had anticipated, I'd love to make that a little steeper acceleration, but today, we've got a conservative approach to how we're bringing it to market and feel very good about our plans going forward.

Great. Thanks very much.

You're very welcome.

Your next question comes from Jon Tanwanteng with CJS Securities.

Hi, John.

Hi, guys, thanks for taking my questions. Can you talk a little bit about trends heading into Q1, markets and confidences have obviously been volatile. Are you experiencing any incremental or sequential to demand headwinds that your customers, over what you saw in Q4?

Yes, I would say that, you know, in Q4 we didn't, from a U.S. standpoint, we didn't have a strong fine paper business and I don't see that changing dramatically as we roll into the beginning of 2016. What we talked about was, our technical business, transportation, filtration, typically running at global GDP plus the rest of our technical business about global GDP. And those are in the markets where we compete. So we're heavy western European, so not real robust from an economic conditions and then also in the U.S.

Our Fine Paper business is predominantly in the U.S. and the big challenge with our Fine Paper business is that it's heavily branded, that's the good news, but it's a short lead time business, so as business slows down, we see it immediately from that standpoint.

Another reminder, too, is that the business isn't very seasonal, so while Fine Paper is more first half, second half fairly equal, our technical business typically has a stronger first quarter than second quarter, then third and the weakest in the fourth. So I think it's important to keep that in mind as well as you're thinking about revenue in those quarters.

Okay. Great. And, John, I think you said you expect market growth in line with 2014 or 2015. Is that off adjusted base, excluding Lahnstein and inclusive of what you see in foreign exchange?

Yes.

Okay. And then finally, just on the CapEx plans for this year, I think you're a little bit above the 3% to 5% of sales range. Are you accelerating plans in Wisconsin or adding anything else in there or is that just the, you're exceeding temporarily to get that up and running?

Both. Obviously if we can bring that asset up, as early as we can bring it up is as early we can begin filling it and selling it. So while we have, and thank you for reminding me that 3% to 5% cadence of our overall capital spend, it's been a guideline to really ensure the market.

We're not going to go have a crazy paper company moment of overspending to that end. But at the same time, it's not a barrier to prevent us from making good decisions and from a timing. The group is right on track with our project there, and, you know, I'm very pleased at their ability to get all of that done in this year.

Okay. Thank you. And just one quick one. The $3 million in additional expenses that are non-capital expenses, that are tied to the project, is that a one-time items and when do you expect to incur that?

Yes those are one-time items we expect to incur them throughout 2016, and they're things like for, you know, we have to insure the assets, we have environmental studies we have to do. We have grade transitions as we move the fine paper grades off of that paper machine and into the rest of our footprint. It's just stuff like that. So I think, we don't expect to see a lot of them in the first quarter but they'll ramp up in the second, third and fourth.

Got you. Thank you very much, guys.

You're welcome.

You're welcome.

There are no further questions. At this time I would now like to turn the floor back over to Bill McCarthy for closing remarks.

Okay. Well, this time that really concludes our call this morning. So thank you for your time and we look forward to updating you on the next call.

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