Earnings Labs

Neptune Insurance Holdings Inc. (NP)

Q1 2018 Earnings Call· Sun, May 13, 2018

$26.31

-0.77%

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Transcript

Operator

Operator

Good morning, everyone, and welcome to the Neenah First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Bill McCarthy. Please go ahead.

William McCarthy

Analyst

Good morning. On the call with me today are John O'Donnell, our Chief Executive Officer; and Bonnie Lind, our Chief Financial Officer. After our prepared remarks covering progress against key strategic initiatives and quarterly financial results, we'll open the call up for questions. We released earnings yesterday afternoon, reporting record revenues of $267 million. This reflected continued strong organic growth in our Technical Products business augmented by the November 1 Coldenhove acquisition, increased selling prices and a higher value mix in both segments, and tailwinds from currency translation. While operating income in the quarter also benefited from these items, this was offset by higher cost for pulp and distribution. GAAP earnings per share were $0.95 and adjusted earnings per share were $1.04, up from $1.03 last year. Adjusted earnings in 2018 excluded $0.05 to true-up previously estimated taxes on foreign earnings following clarification of the new U.S. tax law and $0.04 per share for a SERP settlement charge. We report adjusted earnings when it can improve understanding of results and comparability between periods and a reconciliation of these non-GAAP measures is included in our press release. Finally, our comments today may include forward-looking statements. Actual results could differ from these statements due to the uncertainties and risks that we've outlined on our website and in our SEC filings. With that, I'll now turn things over to John.

John O'Donnell

Analyst

Thank you, and good morning, everyone. Our quarterly results demonstrated the solid progress our teams are making as we execute our strategy to increase our growth rate while becoming a leading global specialty materials company. Sales in our Technical Products segment grew by more than 20%, with similar increases in both filtration and performance materials. In Fine Paper & Packaging, sales of premium packaging increased by over 20%, yet the overall segment revenues fell 2%, with the majority of the decline in targeted, low-value commercial print grades. As we begin our call this morning, I like to cover three of our key growth catalysts before turning things over to Bonnie to review first quarter financial results. Starting with Technical Products. The ramp-up of our transportation filtration capacity in North America remains on track with previously communicated plans. This added capacity is allowing us to balance global production and increase overall throughput as we move volumes to the U.S. to support growth in Europe. Transportation filtration sales were up more than 10% on a constant currency basis, and we continue to qualify new grades of customers. More than 70% of projected 2018 sales of $15 million to $20 million have now been qualified, up from 60% when we spoke in February. Even more exciting is that the Appleton facility is now a fully certified global production facility for our largest transportation filtration customer, and major U.S. customers are now considering Neenah as a potential partner for their global needs in addition to their U.S. requirements. Our best-in-class capacity addition comes at a good time. Global market demand continues to grow and customers are seeking out suppliers who can invest in that growth with them. And this investment provides us with a clear runway for continued high single-digit and profitable growth over…

Bonnie Lind

Analyst

Thanks, John, and good morning. I'll start with Technical Products, where we had another great quarter. Sales were a record $149 million, up 22% versus the prior year, driven by both strong organic growth and acquired sales. The first quarter is seasonally the strongest of the year, and we got off to an impressive start. Filtration sales increased 24%. About half of this gain resulted from the combined benefits of double-digit growth in transportation filtration as we ramp up Appleton capacity, benefits of a higher value mix due to strong demand for our more advanced grades, and increased sales of water filtration. The remaining part of the increase resulted from currency gains with a stronger euro. Performance materials revenues also grew by more than 20%. While predominantly from the acquisition, sales of our specialty grades also performed well, growing 8%. This was led by digital heat transfer and by security papers, where we are the global leader in passport covers. Growth in these areas helped offset lower sales in labels mostly due to timing. Technical Products operating income of $17.5 million was up an impressive $5 million from the prior year. In addition to acquired profits, the increase resulted from higher volumes and net selling prices, currency benefits, and the absence of a plant down in Germany that occurred in 2017. Combined, these items were worth $7 million and offset more than $2 million of higher input and freight costs. Moving next to Fine Paper & Packaging. Revenues of $112 million were below 2017 sales of $114 million. The largest contributor was a reduction in lower value non-branded business that we manage opportunistically when input costs are low. Partly offsetting this was our strong growth in premium packaging as well as increased selling prices and a higher price mix. Operating…

John O'Donnell

Analyst

Thank you, Bonnie. I'll finish off with some comments on the external environment and key activities we have under way. With stronger global economies, market demand for our products has been solid this year, and our competitive positions remain very strong. Currency translation due to a stronger euro has also been a benefit. And in the first quarter, the euro was about $0.17 ahead of where it was in 2017. While the dollar has strengthened recently, currency in the second quarter should still be favorable, albeit about half of the amount in the first quarter. As a reminder, each $0.05 different translates to about $2.5 million in sales and $0.5 million of EBIT per quarter. As I'm sure you already heard from every other company, input and freight costs are up significantly this year. Fine Paper & Packaging is by far our hardest hit business as pulp is the single largest input cost and since the market include shipping cost and selling price for most customer orders. In addition to rising rates, the financial impact from freight has been magnified by customer-friendly order quantities and policies that have contributed to our outstanding customer service and delivery times. The combination of pulp and freight is expected to impact Fine Paper & Packaging most in the first half of the year, as evidenced in the first quarter, where else were up $5 million out of potential full-year estimated impact of over $16 million. As you should expect, our Fine Paper & Packaging team has been taking aggressive actions to address these challenges. Price increases implemented during the first quarter and additional pricing activities in the second quarter are expected to deliver the revenue improvement required to offset anticipated higher pulp costs this year of $10 million. Staying with cost pressures in Fine…

Operator

Operator

Thank you, sir. [Operator Instructions] And our first question comes from Jon Tanwanteng with CJS Securities.

Jonathan Tanwanteng

Analyst

Good morning, guys. Thank you for taking my questions and a really nice job on the Technical Products business.

John O'Donnell

Analyst

Thank you.

Jonathan Tanwanteng

Analyst

And just regarding the strength there, how sustainable do you think that momentum is on a sequential basis as you head into Q2 and as you're head into seasonally weaker quarters in Q3 and Q4?

John O'Donnell

Analyst

Yes. Thanks for reminding everyone too on the seasonality of that business. When we look at - overall, we look at filtration at 2x global GDP and we look at our performance materials segment, really more of global GDP plus. There is no question that we had significant improvement in the first quarter. Helped a bit by exchange rates as well, but good organic growth rate. So again, you're right, Jon. First quarter is going to be the best as we work through the year. We won't lap that Coldenhove acquisition until November. So we'll continue to see benefits from that acquisition last year, all year. And again, as we continue to make progress with our Appleton facility, we should see improvement there as well. So I don't think I'm going to hold them to the 20% a quarter.

Jonathan Tanwanteng

Analyst

Okay. And just to be clear, do you think this is going to be the best quarter of the year for that business?

John O'Donnell

Analyst

Typically the first quarter usually is the best quarter of the year. I would love for the groups to prove me wrong in that regards. But yes - just because what we do know, and you see that in our cash. A large portion of the use of working capital is receivables as customers replenish their inventories after pulling those down at the end of the year. So that is typical for these businesses.

Jonathan Tanwanteng

Analyst

Okay. Great and then, Bonnie, is it possible to break out how much Coldenhove contributed in the quarter and how much you exceeded your expectations by?

Bonnie Lind

Analyst

Yes. So we had originally indicated for Coldenhove that we expected annual sales of about $45 million. And then EBIT about six - or EBITDA rather, of about $6 million. And we also said that we had expected synergies to be realized of about $1 million over the first two years. And so we're happy to say that we're seeing revenue at about 10% higher than what we expected. And we feel that we can comfortably say that we will achieve those synergies in year one rather than waiting till year two.

Jonathan Tanwanteng

Analyst

Great. That's helpful and good for you guys. Finally, between your efforts to improve price and efficiencies, when do you actually see Fine Paper margins returning to the mid-teen operating margins? Is it possible in Q2 or is that more of a second half story?

John O'Donnell

Analyst

The first half is - we're going to continue to feel that pressure of input cost and that's why I've been communicating first two quarters we're really hit. You will see improvement, I think in - as we move through the year; I imagine the second quarter will be better than the first. But getting back to what we say 14% margins when input costs are high and 16% margin when inputs cost are low, they've got good plans, so they should be able to achieve that by the end of the year. If they can get there earlier than that, that would be great.

Jonathan Tanwanteng

Analyst

And one more, if I could any sense of timing on the sale of the mill and the ballpark cash proceeds you might see?

John O'Donnell

Analyst

Yes. We've just started that process and what little toe in the water that we have, we're very encouraged that we'll able to successfully transact there. In regards to the selling price, I think the range of $30 million to $40 million impairment is - there will be no surprises for you from that standpoint. We will be in that realm.

Jonathan Tanwanteng

Analyst

Okay. What's the book value of the mill then?

John O'Donnell

Analyst

Bonnie, what's the...

Bonnie Lind

Analyst

The book value of the mill is most of that $30 million to $40 million range. And the largest part of the book value, of course, is fixed asset. When we acquired FiberMark, the most asset-intensive part of the acquisition was Brattleboro. And you know, Jon, in purchase accounting U.S. GAAP ascribed value to all of the different assets. And so that one was pretty asset-intensive and so we ascribed a lot of value to it. Overall, when we look at the FiberMark acquisition, it's returning well above our cost of capital and we're happy with it. So the coating capabilities are better than we expected, and then Brattleboro is not as good as what we expected. But in total, the whole thing still works, and we just kind of ascribe too much value to Brattleboro, and that's why we have the write-off.

Jonathan Tanwanteng

Analyst

Gotcha. Understood. Thank you very much for the color.

John O'Donnell

Analyst

You bet. Thanks Jon.

Operator

Operator

Our next question comes from Steve Chercover with D.A. Davidson. Please go ahead.

Steven Chercover

Analyst · D.A. Davidson. Please go ahead.

Thanks. Good morning, everyone.

John O'Donnell

Analyst · D.A. Davidson. Please go ahead.

Good morning, Steve.

Steven Chercover

Analyst · D.A. Davidson. Please go ahead.

Bonnie kind of anticipated what I was going to say.

John O'Donnell

Analyst · D.A. Davidson. Please go ahead.

She does that.

Steven Chercover

Analyst · D.A. Davidson. Please go ahead.

Yes, she is uncanny. The $30 million to $40 million is basically a third of what you paid for FiberMark, if I'm not mistaken. So, you've also given us a couple other little nuggets here. So if - I think you said it's going to be accretive by about $5 million, is that correct?

Bonnie Lind

Analyst · D.A. Davidson. Please go ahead.

After we sell it and it no longer is part of Neenah? Yes. That - well, Steven that is part of some of the other activities that we're doing here...

John O'Donnell

Analyst · D.A. Davidson. Please go ahead.

That's the majority of it.

Bonnie Lind

Analyst · D.A. Davidson. Please go ahead.

Yes.

John O'Donnell

Analyst · D.A. Davidson. Please go ahead.

That is the majority of it.

Steven Chercover

Analyst · D.A. Davidson. Please go ahead.

Okay. But - so it's fair to say that it is not generating the mid-teens margins on $30 million worth of sales that your other assets are? But is it EBITDA positive?

Bonnie Lind

Analyst · D.A. Davidson. Please go ahead.

Well, yes. But it is - in the first quarter, it was - we had a loss in EBIT and, of course, it's below our return on invested capital target. So anytime we get a business that's below our return on invested capital, we have to take a hard look at it.

John O'Donnell

Analyst · D.A. Davidson. Please go ahead.

But we don't typically manage our P&Ls by facility. What we - we do look at the strategic market categories. Office products hasn't been a category. Just to remind you, when we acquired FiberMark and the value really, it was activating our Fine Paper & Packaging premium packaging strategy. And really it's the coating that we acquired in that company for. And that's doing really well. As Bonnie said, we're getting the returns, but we didn't - our purchase accounting didn't ascribe the book value...

Bonnie Lind

Analyst · D.A. Davidson. Please go ahead.

In the right place.

John O'Donnell

Analyst · D.A. Davidson. Please go ahead.

In the right places. So, net-net, at the end of the day, that's why that write-off look so big.

Bonnie Lind

Analyst · D.A. Davidson. Please go ahead.

Yes. So I'll give you an example, Steve. I mean, in purchase accounting, you look at kind of cash flows, we took the book value of the Brattleboro assets and stepped them up three times. And then a lot of the other assets we put below their historical book value. So it's just like - this was just something that happened in purchase accounting. If we had it do it over, we'd put more value on all the other assets.

Steven Chercover

Analyst · D.A. Davidson. Please go ahead.

Sure. Now, office folders, I understand why that wouldn't be part of the mix going forward. Are there other products that are manufactured there that you want to retain a presence in the market and then you've got capacity elsewhere that you can maintain your exposure?

John O'Donnell

Analyst · D.A. Davidson. Please go ahead.

There might be some minor products that are there. The predominance is office products. So we'd be misleading if we didn't suggest the facility was predominantly focused on that category. But there are - we've worked over the last two to three years trying to take advantage of what the facility's capabilities are and supporting the other businesses. So we worked through that integration activity. But, unfortunately, this is going to be a non-cash impairment, and we can't run from it.

Steven Chercover

Analyst · D.A. Davidson. Please go ahead.

Understood. Okay. And then infiltration, I believe, 30% was the threshold where the new machine in Wisconsin starts to become profitable. Will we hit that operating rate this year?

John O'Donnell

Analyst · D.A. Davidson. Please go ahead.

Yes. I will tell you that I did say 30%, it was probably a year ago. I love your memory. On the last call, I had a mea culpa moment and said that it's really going to be closer to 50%. And we will achieve that as we roll into 2019. So that's - when I say we're on our plans, that's what I'm saying. We'll come into 2019 at a breakeven status and we're on track to do just that.

Bonnie Lind

Analyst · D.A. Davidson. Please go ahead.

It wasn't that our end of curve expectations changed. It's that we had costs that were incurred sooner, that caused the breakeven to shift from 30% to 50%.

John O'Donnell

Analyst · D.A. Davidson. Please go ahead.

Right also staffing up of the labor.

Bonnie Lind

Analyst · D.A. Davidson. Please go ahead.

Exactly.

John O'Donnell

Analyst · D.A. Davidson. Please go ahead.

It's a shade of it.

Steven Chercover

Analyst · D.A. Davidson. Please go ahead.

Yes, but overall, it's a very good project for you and no regrets, right?

John O'Donnell

Analyst · D.A. Davidson. Please go ahead.

No regrets. It's the gift that'll keep on giving for years to come. Just a reminder, it will support 7% to 8% growth rate in our transportation filtration for four to five years. And I think that's really key, because that's been our growth engine, so we're very pleased with that.

Steven Chercover

Analyst · D.A. Davidson. Please go ahead.

Okay. I'll get back in the queue. Thank you.

John O'Donnell

Analyst · D.A. Davidson. Please go ahead.

Thanks Steve.

Operator

Operator

Our next question comes from Dan Jacome with Sidoti & Company. Please go ahead.

Daniel Jacome

Analyst · Sidoti & Company. Please go ahead.

Good morning. How are you?

John O'Donnell

Analyst · Sidoti & Company. Please go ahead.

Hey, Dan.

Bonnie Lind

Analyst · Sidoti & Company. Please go ahead.

Hi, Dan.

Daniel Jacome

Analyst · Sidoti & Company. Please go ahead.

Couple of quick questions. So just to go back to the Vermont mill, sorry to beat a dead horse here. But what - so it was EBITDA positive. But I'm assuming it was EBIT negative and it was all just DNA flowing through, given that you're saying is going to improve EBIT by $5 million once sold?

Bonnie Lind

Analyst · Sidoti & Company. Please go ahead.

Yes. It was a EBIT negative in the quarter.

Daniel Jacome

Analyst · Sidoti & Company. Please go ahead.

Yes, it has to be, just the way the math works. Okay. A little surprised.

John O'Donnell

Analyst · Sidoti & Company. Please go ahead.

Thanks for making us do that.

Daniel Jacome

Analyst · Sidoti & Company. Please go ahead.

A little surprising, but understandable. Okay. And then I wanted to ask you, I think you said in the commentary on Appleton that some of your conversations with U.S. customers that might be kind of new customers might be picking up some momentum. Did I - did you say that?

John O'Donnell

Analyst · Sidoti & Company. Please go ahead.

Yes, that's the flavor I was giving. So as a reminder, we had strong global relationships with a number of customers, especially in Europe, given our European facilities. And as we build our facility in the U.S., we - it gave us the opportunity for us to begin relationships with U.S. builder manufacturers who are then considering our capabilities as they look at their global footprints now that we're a - have a facility in Europe and one in the U.S. So that's very encouraging. We - our initial perspective was supplying them in the U.S. But we're encouraged by their broader discussions for long-term planning.

Daniel Jacome

Analyst · Sidoti & Company. Please go ahead.

Okay. All right. So that's good. But I mean, but I think in the past you have said that once up and running you'd be - incremental revenue would be, I think you said, $90 million? Sorry if I missed it.

John O'Donnell

Analyst · Sidoti & Company. Please go ahead.

I said $80 million.

Daniel Jacome

Analyst · Sidoti & Company. Please go ahead.

$80 million? Sorry, okay $80 million. So you did that. When you put out that $80 million, not to trip you up here, but when you put out that $80 million, did it include some of these benefits or maybe better conversations you're seeing now with customers? Or was the assumption internally just we're going to serve...

John O'Donnell

Analyst · Sidoti & Company. Please go ahead.

Yes, Dan, it's the capacity of the asset. So regardless of who I sell it, if I sell it to old customers or new customers, I won't be able to do more than $80 million with that. We'll have that - right? If it does anything, if I'm broadening my reach and importance in the transportation filtration category, it might suggest that the opportunity for further additions would make sense. But today, I would say we built a facility, it's got $80 million worth of revenue over four years to five years and we're broadening the number of people who could participate in that sales growth.

Daniel Jacome

Analyst · Sidoti & Company. Please go ahead.

No, that's good. All right. And then on water filtration I think you said something positive about water filtration. I haven't heard that term used too much recently. So any color there?

John O'Donnell

Analyst · Sidoti & Company. Please go ahead.

Just so - I mean, our reverse osmosis category was - did very, very well. It made - over the past year, it made some real step change in the quality of the product itself, which has opened up our options with some Chinese companies and others. So it was a - I think they're up 40% in the quarter, which is - it's not a huge category, as we've talked about before, and it's typically driven by investments. But they got a shout-out, you are right, they got a shout-out of this quarter.

Daniel Jacome

Analyst · Sidoti & Company. Please go ahead.

Yes, a shout-out. Because I know that area has not been very strong, not just across the industry because the replacement cycle people have been waiting for and has been taking a little bit longer, but then it appears then and one of your peers, I think, like last week said that finally it looks like that is picking up. So maybe you guys are seeing that or will see that.

John O'Donnell

Analyst · Sidoti & Company. Please go ahead.

And I'm sure that's - they're also a component of the filter. So we're one part of the seven layers of the filter. They are probably as well seeing similar things as we are.

Daniel Jacome

Analyst · Sidoti & Company. Please go ahead.

Okay. Thanks a lot.

John O'Donnell

Analyst · Sidoti & Company. Please go ahead.

Thanks Dan.

Operator

Operator

[Operator Instructions] And our next question comes from Mike Weinsaw with Buckingham Research. Please go ahead.

John O'Donnell

Analyst · Buckingham Research. Please go ahead.

Hi, Mark.

Mark Weintraub

Analyst · Buckingham Research. Please go ahead.

Hi, good mooring. On Brattleboro, just, I assume that now it's going to be accounted as a discontinued operation, is that correct?

Bonnie Lind

Analyst · Buckingham Research. Please go ahead.

Not quite, Mark. It will be held-for-sale. So we will have it in two lines, assets held-for-sale and liabilities held-for-sale. It doesn't meet the criteria for disc ops.

Mark Weintraub

Analyst · Buckingham Research. Please go ahead.

Okay. So it will be part of your ongoing results until it is sold?

Bonnie Lind

Analyst · Buckingham Research. Please go ahead.

Yes.

Mark Weintraub

Analyst · Buckingham Research. Please go ahead.

Okay. And then that $5 million of improvement accretion, is - about half of that would be just reduce DD&A and the balance would be improved cash performance, is that a reasonable way to look at it?

John O'Donnell

Analyst · Buckingham Research. Please go ahead.

Yes.

Bonnie Lind

Analyst · Buckingham Research. Please go ahead.

I'd say, yes. I guess I would have thought maybe a little more improved cash performance. But it's $5 million of improved EBIT. Because it's just not - right, it's not just Brattleboro...

Mark Weintraub

Analyst · Buckingham Research. Please go ahead.

I guess, I just said - first, just trying to understand how much was the annual DD&A on Brattleboro?

Bonnie Lind

Analyst · Buckingham Research. Please go ahead.

Yes, I can't tell you right now what that would be.

Mark Weintraub

Analyst · Buckingham Research. Please go ahead.

Okay. And then so...

Bonnie Lind

Analyst · Buckingham Research. Please go ahead.

Probably $1 million or $2 million.

John O'Donnell

Analyst · Buckingham Research. Please go ahead.

Yes.

Mark Weintraub

Analyst · Buckingham Research. Please go ahead.

Okay. And then so you're just - you're saying, I believe the question had come up before. I think - I thought the reference was that the majority of the $5 million was related to Brattleboro. Is that right because - or you're just suggesting there are other drivers too? Okay. Very good, thank so much.

John O'Donnell

Analyst · Buckingham Research. Please go ahead.

Thanks Mark.

Operator

Operator

I'm showing no further questions. This concludes our question-and-answer session. I'd like to turn the conference back over to Bill McCarthy for closing remarks.

William McCarthy

Analyst

Okay. I would just like to thank everyone for your time and interest today. Please feel free to reach out to me if you have further questions. Thank you.

Operator

Operator

The conference has now concluded. Ladies and gentlemen, thank you for attending today's presentation. You may now disconnect.