Neenah, inc (NP) Q2 2021 Earnings Call Transcript

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Neenah, inc (NP)
Q2 2021 Earnings Call
Aug 5, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to linear Q2 2021 earnings call [Operator Instructions].

I would now like to hand the conference. So where is your speaker today? Kyle Anderson, Vice President of corporate strategy and Investor Relations. Please go ahead.

Kyle Anderson -- Vice President, Corporate Strategy and Investor Relations

Good morning and thank you for joining us on Nina's second quarter 2021 earnings call on the call with me today are Julie Chatel, Chief Executive Officer and Paul De Santis Chief Financial Officer. By way of introduction, my name is Kyle Anderson in Poland, I will be responsible for Investor Relations following the retirement of Bill McCarthy. I've been listening in various roles since 2004, and I look forward to working with you in this new capacity. Julian Paul will discuss recent activity some results, as well as share some thoughts on our strategy. As we look ahead in the year. We issued a press release covering financial results yesterday afternoon, and hopefully many of you have had a chance to review that information. As always, actual results could differ from these forward looking statements to the risks noted on our website and in our SEC filings. Following our prepared remarks, we will open the call for questions. In second quarter, we continued our growth momentum was adjusted earnings of 65 cents per share excluding $2.41 of unusual costs. In second quarter 2020. The adjusted loss per share of eight cents excluded $2.90 of such costs. Details of these adjusting items along with a reconciliation to gap amounts can be found in our press release.

With that, I'd like to turn things over to Julie.

Julie Schertell -- Chief Executive Officer

Thanks, Kyle. And good morning everyone. Second quarter was very active. And we continue to demonstrate some traction, both in terms of operating performance. And in executing our strategy. I want to start by highlighting our safety performance. The health and well being of our employees is our number one value. And I'm proud to say we continue to make solid progress toward zero injury culture. We reached a new safety milestone for recordable incidents during the quarter. And currently more than half of our facilities are over 100 days incident free. Now turning to operating performance, second quarter so continued top line momentum with near record quarterly revenue driven by strong organic growth in all categories, especially in technical products, where we achieved an all time record for the quarter. demand was strong with improving conditions and market share gains and new product placement with key customers. We also successfully completed the Tosca acquisition and initiated both the restarting of an idled asset and the closure of our Appleton facility driving meaningful value in all cases.

As with many companies, we are experiencing near term challenges from supply chain disruptions and rapidly increasing input costs. We're continuing to work through these disruptions, but expect them to continue throughout the third quarter. During this time, we have effectively been able to gain share due to our ability to quickly commercialize alternative solutions for customers. However, the higher costs are impacting our margins in the short term. We've taken pricing actions across our entire portfolio, in some cases multiple times, in order to address the extraordinary level of raw material inflation that we are experiencing. The timing of our pricing actions vary by business. But all business lines have either implemented price increases or communicated to customers and increase that will be effective in early 2022. I'm confident we will offset these raw material cost increases this year through our volume, price and cost initiatives.

And we'll enter 2022 on a good margin trajectory and with additional pricing actions becoming effective. In addition to our operating performance, we're clearly focused on advancing our ESG efforts. from an environmental standpoint, we were recently recognized with a focus on energy award for energy efficiency excellence at our largest North American facility. We also welcome the new members refer to our board of directors. Trudy single sruti has a global leadership experience with Dow Chemical and tangle and is currently the CEO at Chroma teller. We're pleased to welcome sruti and believe he will further strengthen our board. I'm encouraged with our execution during the quarter, as well as the meaningful progress and activating our long term strategy. What's up cover later in this call?

Now I'd like to turn it over to Paul to review financial.

Paul DeSantis -- Chief Financial Officer

Thanks, Julie. And good morning, everyone. The second quarter was extremely busy for Nina as we took actions to drive our strategy, including the successful completion of the Tosca acquisition at the beginning of the quarter, which resulted in $33 million of sales and creative EBIT dot margins in the high teens. synergy realization is on track. From a cash earnings perspective, the business contributed about 15 cents per share for the quarter, we announced the closure of the Appleton facility, which is expected to result in annual savings of seven to $8 million. Beginning in the fourth quarter of this year, we began to see unprecedented raw material cost increases, as expected, and we continue to respond with pricing in some of our businesses, we've announced multiple price increases as we work to offset the rapidly evolving input cost environment. We announced the restart of our production line in Neenah Wisconsin, as a result of the success of our five paper and packaging teams efforts to drive volume.

We committed $13 billion of capital for a new coder to support our recently acquired release liner business. As we continue to see the growth we had expected in a location that was a Greenfield less than three years ago. And we refinanced our debt at favorable terms to support our acquisition and reduced cash cost. Sales reach $269 million, up 108 million from last year's pandemic influence second quarter and up 42 million from the first quarter of this year. This quarter's results includes 33 million from the tasa acquisition. technical product sales were a record 180 million, up 79% from last year, and up 24% sequentially from the first quarter. Signed paper and packaging sales were 90 million for the quarter, up 48% from last year, and up 10% sequentially from the first quarter. We were pleased with the results in a number of our key businesses, including filtration, packaging, industrial solutions, and release liners, all of which performed well during the second quarter. adjusted earnings were $19.3 million compared to 500,000 in last year second quarter. In the first quarter of 2021. We reported adjusted earnings of 26 point 1 million.

The second quarter results reflect the rapid increase of input costs, which, as anticipated, are impacting the business in advance of our pricing initiatives. As our pricing actions, volume increases and other efficiency initiatives begin to take hold. We expect to offset the impact of the cost increases by the end of the year. Technical products adjusted earnings were 14 point 7 million up from 5.8 million in last year second quarter and down from 19 point 5 million in this year's first quarter, reflecting the disproportionate impact of raw material cost increases in this segment. The second quarter results for technical products compares favorably to the almost 13 million delivered during the second quarter of 2019. Reflecting the strength in underlying markets, such as filtration, as well as the impact of the atopica acquisition. Fine paper and packaging adjusted earnings were $10 million for the second quarter, up from last year's loss of $600,000. And down from 12 point 8 million in this year's first quarter.

Again, reflecting the impact of raw material costs and the timing of price increases. We're pleased with the top line performance the prime paper packaging as we're seeing it recovered to 90% of the pre COVID run rate as expected. Turning to the balance sheet and cash flows, liquidity remains strong, while cash flow from operations of $23 million was down from the 44 million recorded for the first six months of last year. The difference was due to working capital Reflecting the rebound in business, trailing 12 months adjusted EBIT da reached $121 million as of June 30. This year, compared to the 100 and 1 million we recorded last calendar year, as we see the benefits of our continued growth and the impact of the natasja acquisition.

As a result of the strong EBITDA growth, and free cash flow, we're on a path to see adjusted net leverage dropped to approximately three times by the end of the year, absent any other actions. Year to date, cap X was 11 million versus 8 million last year. We're expecting setbacks to pick up in the second half of the year, getting us into the low to mid $30 million range as safety, growth and cost reduction initiatives are implemented, including the beginning of the $13 million dollars that we've talked about expansion cafe. Our effective income tax rate was a benefit of 21% in the second quarter of this year, compared to a benefit of 19% in the second quarter of last year. Both periods were significantly impacted by the effects of impairment losses, which will not repeat. And this year's 21% rate includes the effects of the acquisition of E tasa. And the associated acquisition costs. He talks about Terry's a blended tax rate in the mid 20s. So our tax rate is expected to rise slightly from our historical rate, as we will be around 23% for this year.

As we mentioned the q1 earnings call and you can see in our q2 results, we continue to face rapid escalation in input costs, including many fibers reaching all time high pricing levels during the second quarter. global demand resurgence has significantly contributed to widespread shortages in many chemical markets, resulting in a limited number of raw material shortages and stubbornly elevated costs for many materials. The input cost increases significantly impacted our results in q2. Trends in the past month are beginning to indicate that our costs will peak in q3, and generally stabilized in q4. As we mentioned, our teams are continuing to work to offset these input costs. With pricing assets. We expect the impact of the input costs in the third quarter to be $17 million incremental to that of the second quarter of which we expect to offset about half of the additional costs directly with our pricing initiatives as they begin to gain steam. Also, as a reminder, we have most of our annual maintenance down in the third quarter, which adds one to 2 million to quarterly costs. As I said earlier, we expect to fully offset the increases by the end of the year. through a combination of pricing actions, volume increases in efficiency improvement, and we expect to see the gap between raw material costs and pricing begin to narrow in the fourth quarter.

And that note, I'll turn it back to Julie.

Julie Schertell -- Chief Executive Officer

Thanks, Paul. As we wrap up the call, I wanted to provide some additional comments on how we are executing our strategy and positioning Nina for long term value creation. We're focused on building our business into one that rewards shareholders by consistently growing the top line at around 5% annually, achieving mid team operating margin, earning returns above our cost of capital and generating significant cash flow. Our success starts with growth. And we have four targeted platforms to fuel our growth, filtration media, specialty coatings, engineered materials, and imaging and packaging. These platforms provide a framework that creates focus and guides resource allocation, investment decisions, innovation, and m&a effort. Further, this approach offers ways to extend the business while remaining aligned with amena core strengths, including our assets and technical capabilities, and material science know how using these four growth platforms as a backdrop, let me provide a few examples of recent progress and successes, which are good indicators of how we're building for future growth through our strong innovation process, organic investment and m&a activities.

First, our filtration business was up almost 11% from 2019 levels following a record performance in q1 of this year. We continue to focus on innovative high efficiency solutions and extending Beyond transportation filtration. As such, we recently lost our Nina pure air filtration portfolio. Utilizing proprietary technology, we created a premium solution for hv AC, and air purifier elements for both commercial and residential use. Our electrostatically charged media can reach efficiencies of up to 99.9%, the highest level available in the marketplace. With strong macro trends focus on air quality, this is an important new part of our portfolio. Second, we continue to build our specialty coding platform. With our most recent efforts centered on the top the acquisition and growth and release liner. A tosser is performing well, including record revenue and record earnings in the month of June. This is a business that serves multiple end markets, giving a low volatility and multiple avenues for growth. Integration is well underway and on track with expectations.

We are also progressing as expected on our synergies, including new trials with crossover customers and new business with two very large customers in North America. Further, as Paul mentioned, we recently announced a $13 million investment in new coding capacity to support growth in this category and meet ongoing demand for our products. Within engineered materials, we expanded our innovative water dispersible product portfolio, which we branded disperser. This is a label product line that allows for the product along with printed and written graphics to disperse in the presence of water. Nina is the only North American manufacturer of this market leading solution which provides an environmentally friendly alternative for residential and commercial applications. Lastly, within imaging and packaging are backed up school items and newly designed planners, journals and teacher pools have all been very well received at major retailers and continue to outpace the category and rowshare our premium packaging business has rebounded nicely and is accelerating with significant new business and gift cards, boxes and folding board applications.

M&a is also key to how we build out these growth platforms. And as an important part of our strategy. We continue to be active and engaged with a robust pipeline of targets that help extend our capabilities or broaden participation in markets with strong growth dynamics. At the same time, we remain committed to maintaining a strong balance sheet and generating strong cash flow, which we'll use in a prudent manner as we grow and transform our company. Additionally, we continue to make progress on the Neena operating system, which is our approach to applying lean manufacturing methods to systemically drive continuous improvement in our facilities. Today, our niina operating system implementation is delivering results ahead of plan and is expanding beyond the two facilities originally targeted this year. We're seeing benefits in capacity improvements, efficiency gains, and waste production are focused on efficiently managing our assets footprint is also key to delivering growth and margins, as evidenced by our recent announcement to restart an idle asset by investing in additional coding capacity and closing our

Appleton facility. Regarding the closure of Appleton in 2020, we lost a multi faceted project to accelerate and improve the returns on this asset with clear milestones. As the year progressed, we had not achieved target milestones and did not see a long term financially viable option to achieve our expected margin, and we made the decision to close the facility. This closure will result in a benefit of seven to $8 million annually, and we will ramp down and close the facility in the fourth quarter of this year. This by no means lessons are focused on filtration. We remain committed to the broad filtration market as a key growth platform and continue to drive record results in this business. So in summary, we're taking actions to drive continued performance for Nina in alignment with our strategy. We have multiple avenues for growth, both top and bottom line and our trajectory looks promising.

I'd now like to open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of john from CJ s securities. Your line is open.

John -- CJ s securities -- Analyst

Hi, good morning, everyone. Thank you for taking my question. Morning, john morning. wanted to start with the paper segment, it seems to have recovered pretty nicely and I think a little bit ahead of schedule. Any thoughts on the trends from here? I think you have peers to call that 90%. It's kind of a full recovery for that business. Is there more upside now that we're we're a little bit ahead of schedule.

Julie Schertell -- Chief Executive Officer

You know, john, that is a business that when business come it comes not necessarily linearly, but in chunks. And so we saw some nice new business and our packaging, part of that portfolio as well as in consumer products. And commercial printing has recovered pretty much as we expected. I would say in regards to the prior, you know, communications around 90% of pre COVID levels, we're still expecting to recover at that level. But we'll see a little bit of fluctuation, the start-up of the asset that we announced really, is to support that demand path, as well as provide flexibility and surge capacity for us.

John -- CJ s securities -- Analyst

Okay, great, thank you for that color. But also just in terms of things potentially happening earlier than expected, it sounds like you're going to catch up to the cause of inflation by q4, I have previously remembered you saying you would take until next year is that, in fact, the case now, and maybe you were able to pull in all that pricing action, compared to what you might might have thought afford earlier.

Paul DeSantis -- Chief Financial Officer

Let me start with that one, john. And Paul will feel free to add anything that that I may miss pricing has taken pricing with all of our customers, or we've communicated with customers about pricing actions that will be effective, early 2022. So I think from a timing standpoint, what we've talked about, and what Paul mentioned was, we expect about seven to $8 million of incremental inflationary costs in q3 versus q2, and we expect to recover about half of that amount in q3. for the entire year, we're still expecting north of $30 million of inflationary cost increases in our raw materials, including freight, and we expect to recover more than half of that, but not all of it in 2021. As you know, we get quicker recovery in fine paper and packaging. And then we have annual agreement in our filtration business. So those agreements that we've had those conversations, there's plans in place, but they don't become effective until early 2022.

In Johnson had, just to add a little bit to that. So we think that in the third quarter, like we talked about seven days of which we'll be able to offset half so incremental for the second quarter. And I think what we said in the fourth quarter is we expect to start making traction again, and narrowing the gap between the pricing and the raw material inputs. But But like, like Julie said, we expect to offset about half directly with pricing, and then the rest with our other actions for the full year. Got it?

John -- CJ s securities -- Analyst

That's helpful. Okay, and just wondering how much how much the applicants delay contributes until it winds down and gets to that pool, I guess, to 20 to 25 million revenue reduction. And I know still costs but in terms of on the revenue side.

Paul DeSantis -- Chief Financial Officer

It'll be about a quarter of that each quarter. So well. We are ramping down with customer orders throughout q3 and running out with customers and some of the Appleton business we are transitioning to other assets. So it's about you know, in the fourth quarter, I would expect about a quarter of that $25 million that we won't see for Appleton and about a quarter of the benefit as well.

John -- CJ s securities -- Analyst

Okay, great. And then finally, really, you mentioned the MENA operating system improvements to Is there any quantification? How much more you're saving this year? Or is it just Nick deceleration spreading out to different plants and getting there.

Paul DeSantis -- Chief Financial Officer

It's a little of both. I mean, we're celebrating and spreading out to additional plants. But we're also seeing savings come in even higher than we originally estimated. It is a ramp up and we do have third parties in place this year helping us implement so that is offsetting some of the benefits falling directly to the bottom line. And we continue to implement this across our facilities and we have consultants and other folks that are supporting us exit will see even greater improvements in the out years from operating systems and Right.

John -- CJ s securities -- Analyst

Okay, great, thank you. Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Chris McKinney's from, Sidoti and company, your line is open.

Chris McKinney's -- Sidoti and company -- Analyst

Good morning. Thanks for taking my questions and congrats on the results. If we can really start with is the inflationary environment, do you see that at all impacting demand for you at all? Are you know that not that an issue is so publicly out there, I guess, you know,

Paul DeSantis -- Chief Financial Officer

Our demand is very strong across pretty much all of our categories. So it is impacting our costs. And that's where we're really seeing. And that's a timing issue, just like it has been historically, if you think about our margin, they're going to be compressed in the short term, as we catch up on pricing, they'll be more immediately recovering and sandpaper, and that takes us a little bit longer in filtration and some of our technical products categories, but we have historically recovered that pricing over time. And we expect to do that, again, from a demand standpoint, we're seeing really strong demand and signals to see for demand.

Chris McKinney's -- Sidoti and company -- Analyst

Okay, great. I think you mentioned market share gains, and, and TP is on correcting is that if you maybe talk about what's driving that is I've been hearing more of supply chain issues leading to, you know, maybe more North America based companies taking that. I know that TPS a little bit more broken up regionally. But he just talked about those markets or games that you're talking to you mentioned.

Paul DeSantis -- Chief Financial Officer

Sure, I think we're seeing a couple things when we when we're experiencing supply chain disruption, it's really impacting us. From a cost standpoint, we're juggling around the same schedules, we're managing shorter runs on our assets, things like that, from a demand standpoint, is still very strong. And what we've been able to do is provide substitutes or alternatives from our innovation team is really helping us to grow share by providing new formulation for our customers, as we have a supply constraint with a particular chemical, being able to quickly alternate to a different solution for our customers. And quite honestly, this is giving our customers some additional incentive to make some of those some of those changes with us. So that's really driven this fair game.

Chris McKinney's -- Sidoti and company -- Analyst

Right. And just two questions on the past, I guess just one, with the investment you're doing with the 13 million for a new coder. How do you think about that in terms of, you know, is that a, you hit your growth for this year? And how often would you have to add a coder to expand your capacity? You know, how much time is this give you before you have to expand given no seven growth right there?

Julie Schertell -- Chief Executive Officer

Yeah, this is a investment that we knew going into the top two acquisition that we would be making. And so it's really exciting for us to be able to continue to invest in organic growth in the future. And it goes into an existing facility, which I think as Paul mentioned, was a Greenfield facility just a few years ago, that facility is ramping up really strongly. And it's also has had over 8% growth over their history. And record performance, top line and bottom line in June of this year, and really strong demand signals. So all that to say this is to meet the expected growth that we have in release liner. And we'll continue to evaluate that market for continued growth. I view it tossa as a foundational acquisition, that really gives us a strong footprint of build from whether that's organic investment or inorganic investment. So you'll see us continue to grow in this area within our specialty coating platform.

Chris McKinney's -- Sidoti and company -- Analyst

And then you mentioned to large customers in North America, if you just talk a little bit with those new customers, to a Tosca and that's your using your relationship. You just expand a little bit on that sounds like early success.

Julie Schertell -- Chief Executive Officer

Sure, it's a little bit of two things. One of the largest customers was an existing Nina customer and so our ability to work you know, cross pollinate with the toss of business has been very successful there. Another one is one that the pasta team has been working on for some time and landed in North America because of the additional capacity and capabilities that are ramping up in the facility in Mexico.

Chris McKinney's -- Sidoti and company -- Analyst

Thanks for taking my questions. Good luck in q3 and I'll jump back and see for now. Thanks very much.

Operator

Next question from design again from CDs securities, your line is open.

Design -- CDs securities -- Analyst

Just one more for me, guys. I was wondering if you could just give us a lot of color on how trends have gone in July number one. And number two, what your expectations are for August. I know usually the seasonally down quarter people go on vacation, but I'm wondering if there's a different expectation this year, you know, just given the state of inventories across a number of industries and things that are still in high demand.

Kyle Anderson -- Vice President, Corporate Strategy and Investor Relations

Yeah, john does this, Paul, I think what I think what Julie said earlier on the call was really, really important. And that is that, you know, we've seen very strong demand. And so, you know, we, we like the demand that we've seen, and, you know, it's a question of the raw material side of it and the timing on pricing for us. But the top line has been has been pretty robust.

Design -- CDs securities -- Analyst

Okay, thank you,

Operator

Daniel, for your question at this time, Kyle Anderson. Please proceed with your closing remarks.

Kyle Anderson -- Vice President, Corporate Strategy and Investor Relations

Great, and thank you for your time today. To recap, we are aggressively pursuing pricing and other actions to offset near term raw material impacts over time, we continue to focus on our four growth platforms with disproportionate capital investment, innovation, and m&a activity. We're seeing traction on our strategy to achieve 5% top line and double digit bottom line growth consistently over time. So we're looking forward to updating you on our continued progress next quarter. Thanks. Have a nice day.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Kyle Anderson -- Vice President, Corporate Strategy and Investor Relations

Julie Schertell -- Chief Executive Officer

Paul DeSantis -- Chief Financial Officer

John -- CJ s securities -- Analyst

Chris McKinney's -- Sidoti and company -- Analyst

Design -- CDs securities -- Analyst

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