Paper. It may not be the sexiest business on the planet, but right about now, I'm betting investors in Motley Fool Hidden Gems recommendation Neenah Paper
Headlining the results were sales that rose 70% year over year, helped by the acquisitions of Neenah Germany and Fox River Paper Co. Combined with continued improving margins that we examined in last week's Foolish Forecast, the firm achieved 176% growth in operating profit and a quadrupling of net income to $1.01 per share. It also improved its operating margin to 12.3% -- far superior to the quarterly performance of either International Paper
As promised by management, this segment continues to gain strength. Just removing the drag that it placed on last year's results, when pulp lost money for the firm, would have been an improvement. What Neenah actually managed to do was much better, however -- this unit produced the firm's second-best margins -- 15.4%.
The firm combined sales from Neenah Germany with improved domestic operations to achieve sales of $100.7 million, building scale and adding 400 basis points to its operating margin to reach 10.1% in this, its largest business by sales.
Thanks to its acquisition of Fox River, Neenah now bills itself as "the leader in the premium fine paper market." According to management, the Fox River purchase accounted for the bulk of the 24% sales growth in the fine paper division. (That's not necessarily a good thing, however. Operating margin in this, Neenah's most profitable business, dropped 960 basis points to 17.2%.)
Eyes on the prize
It's easy to get distracted by all the good GAAP news, but let's not forget what's most important in our investments: the ability to manage working capital to generate real cash profits for shareholders. Here -- perhaps distracted by all the mergers and acquisitions activity going on -- Neenah slipped a bit in the first quarter. Against sales growth of 70%, it managed to keep inventories well in hand at just a 48% increase. However, bill collection stumbled and the firm allowed accounts receivable to rise 102% year over year. As one might expect, this hurt free cash flow generation, as last year's $12.9 million in greenback production evaporated, to be replaced by cash outflows of $5.8 million in Q1 2007.
In future quarters, as the new businesses get integrated into the whole of Neenah, we'll want to see improvement in how the company manages this kind of paper in particular.
For more on Neenah Paper, read:
- Neenah Paper's Fine Results: Fool by Numbers
- Neenah Paper Presses On: Fool by Numbers
- Neenah Paper Reshuffles Its Deck
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Fool contributor Rich Smith does not own shares of any company named above.