Q4 2020 Earnings Call Transcript

Published: 19 Feb 2021

[Operator:]

Welcome to SWM's Fourth Quarter and Full Year 2020 Earnings Conference Call. Hosting the call today from SWM is Dr. Jeff Kramer, Chief Executive Officer. He is joined by Andrew Wamser, Chief Financial Officer; and Mark Chekanow, Director of Investor Relations. Today's call is being recorded and will be available for replay later this afternoon. At this time, all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to Mr. Chekanow. Sir, you may begin.

[Mark Chekanow:]

Thank you, Janica. Good morning. I am Mark Chekanow, Director of Investor Relations at SWM. And thank you for joining us to discuss SWM's fourth quarter and full year 2020 earnings results.

[Jeff Kramer:]

Thank you Mark, and good morning everyone. As you may have already seen in our financial results pre-released last week, SWM delivered a strong 2020 despite many challenges and uncertainties demonstrating the strength and resilience of our global portfolio. We are equally encouraged by the positive momentum we are carrying into 2021. Before we get into details, I'd like to again express the heartfelt appreciation of the SWM executives and the entire Board of Directors for the incredible efforts our global teams continue to put forth. Our results and achievements this year would not be possible without their remarkable commitment to each other's safety and outstanding service to our customers. Fourth quarter results capped off a very good year for SWM with respect to our financial results and overall health of the business. We do not use the term resilient lightly when we describe our results and believe our diversified and balanced portfolio served us well this year. Our EP business had an exceptional year, with demand unaffected by the pandemic and its related economic uncertainties. While AMS bounced back quickly for mid-year softness in some areas delivering outstanding organic sales growth of 21% in the fourth quarter. Bottom line for the year, both AMS and EP grew adjusted operating profits. We grew adjusted EPS 4% to $3.68 and free cash flow increased to $128 million all while we continue to delever the balance sheet.

[Andrew Wamser:]

Thank you, Jeff. Consistent with Jeff's comments, I'll focus mostly on the full year results and trends and also highlight key fourth quarter takeaways. Beginning with our segments. AMS sales increased 14% for the year and were down only 2% excluding the Tekra acquisition. Tekra contributed $77 million of sales for the year; and recall, we closed the transaction late in the first quarter. The 2% organic sales decline was largely driven by the decrease in aftermarket transportation films, while the remainder of the portfolio actually increased 1%. As Jeff referenced, AMS organic sales for the fourth quarter was a very strong and increased 21% with transportation sales increasing over 70% from the prior year quarter driving the growth. However, even excluding that strong increase in transportation films, our other markets' organic sales growth would have been a combined 7%. AMS adjusted operating profit grew 6% for the year. We benefited from the incremental profits from Tekra, as well as lower input costs, which more than offset the modest organic sales decline.

[Jeff Kramer:]

Thanks, Andy. So to conclude, I'd like to reiterate some key highlights about 2020 and share some positive perspective albeit with some limitations on our outlook and strategy. We are definitely proud of the results we achieved in 2020 and the people who work together to make that happen. The year was not without challenges ranging from finding solutions to keeping our employees safe while still providing great service to our customers, to flexing our operations in order to meet high demand for certain product lines. Our resilience was truly tested in 2020 and I firmly believe we have delivered. And hopefully, our results of this year demonstrate we are capable of solid financial performance even in a difficult and volatile operating environment. Our paper business exceeded our expectations delivering meaningful profit growth and once again generated robust free cash flow. AMS had its first $500 million year and despite the mid-year headwinds, rebounded sharply in the fourth quarter and is poised for strong organic growth in 2021. And when we consider our overall portfolio, we believe our diverse end markets provide a good balance of stability, plus growth opportunities that should serve us well as we continue to expand. Speaking of expansion, I'd also like to reiterate some themes from our investor call, when we announced the pending acquisition of Scapa. First, Scapa advances our successful value-added solutions strategy, as it expands our core competencies, adds new capabilities and enables us to bring our customers, a more comprehensive suite of solutions. Broadening offerings and technologies to help solve our customers' challenges is our long-term strategic direction. And this acquisition would mark another significant step forward in our value-added capabilities to support our customers. Second, Scapa will give us immediate critical mass in the growing medical materials space, with approximately $250 million in annualized sales between us. Their focus on innovative, skin-friendly technologies and their end-to-end offerings range from adhesive formulations and product design through converting and packaging finished products and extends to compliance and regulatory approvals. Third, we would also add an industrial division, with highly complementary capabilities and overlaps with several end markets we already serve such as transportation and construction. And most importantly, both groups come with significant people talent. Last, but certainly not least, the addition of Scapa is expected to push SWM sales towards $1.5 billion and AMS towards $1 billion of annualized sales. So, nearly 65% of the combined company sales were generated -- would be generated in growing segments such as medical, filtration, transportation, infrastructure and construction and industrial. Bottom line, we expect this transaction will enhance SWM's long-term growth profile. While we cannot yet comment on our 2020 outlook, other than directional items, Andy referenced, we are excited about the many strategic efforts to grow our base business and we look forward to closing the transaction and sharing details on our financial outlook at that point. That concludes our remarks. Janica, please open the line for questions.

[Operator:]

Our first question comes from the line of Chris McGinnis of Sidoti & Company.

[Chris McGinnis:]

Good morning. Thanks for taking my question and nice quarter. Maybe, if you could just start within AMS and just that strength you're seeing in transportation you talked about near-term, can you maybe -- how much of that is pent-up demand that was waiting? And I know that's obviously a big part of it, but maybe just the organic growth of that in the sense of a more normalized trend. Do you think, you get to that in the back half of the year? Just trying to get a little bit of a feel around that growth. I mean, it was very, very strong in the quarter obviously.

[Jeff Kramer:]

Yes sure, Chris. I'll be happy to try to give you some color like -- and as you said, it's hard to give you the exact interpretation. Certainly, with the incredible strength we had in the fourth quarter, part of that was back-up demand. So, many of our suppliers as we had indicated lowered their supply chains earlier in the year as some of the consumption was reduced. And then, I think everybody was a bit surprised about how rapidly the marketplace returned to normal. If you recall, quite a bit of that marketplace is growing fast in China and that market recovered earlier. And so we saw a rapid increase in people trying to fill supply chains. Now with that said, we have always said this is one of our fastest-growing markets overall, and I don't think those trend lines have changed at all. So I think you're seeing a little bit of combination of both a little bit of restocking supply chains to normal levels and then we continue to see strong long-term growth opportunities for this marketplace.

[Chris McGinnis:]

Great. Very helpful. Thanks for that. And I guess, just in thinking about cost pressures when you look out at 2021, anything to highlight on the cost side for raw materials?

[Jeff Kramer:]

Yeah. I think, of course, the first thing that's on everybody's mind is the rapid increase of the polypropylene pricing. We're seeing those same headwinds that everybody else I'm sure is reporting throughout the industries. But we have a number of activities in place to help mitigate some of those effects. So that's everything from contractual price increases to other types of price increases. We're also doing things on the operations side around scrap reduction efficiency et cetera. So we have numerous programs to offset that, but it's certainly not the way you wanted to start the beginning of the year, because I think globally most people would say this is – the amount of rise of polypropylene has been unexpected. I think the other point though to continue to emphasize is that the majority of our resin costs are for our thermoplastic polyurethane films, the transportation industry, and we're not seeing those types of cost pressures on those resins.

[Chris McGinnis:]

Okay. Thanks for that. And I guess just in terms of impact, it sounds manageable at least. Is that more forward-loaded in the year or more back half? And I guess, can you think about that for demand trends? How you – you talk about growth for the year, I know you can't say much because of the pending acquisition, but as you think about the year just given 2020 was so different what's the expectation for growth as you go out? And is there any cadence or anything as you think about the year playing out that should be highlighted?

[Andrew Wamser:]

Sure. So, I'll take the first stab at that. The first thing, I would highlight and just we kind of always reemphasize is that, this is a portfolio and it's a portfolio effect. So Jeff was just mentioning what happened in the fourth quarter specifically. And for the year, let's say even like a market like medical that was up all year, I would say, pretty significantly. It still was up in the fourth quarter. And then filtration it sort of puts and takes. We had really high-growth in air. Water would have been a little bit weaker last year and now we look at in the fourth quarter and water sort of roared back and now we're really bullish in that outlook. So I'm giving you a long-winded answer of really saying, it's really a portfolio effect. And so when we look at the growth lines for 2021, I would say transportation we're exceptionally bullish on. I mentioned that, it was up 70% in the fourth quarter. Now that's not sustainable, but we still expect really strong growth in that segment. Air will have a tough comparison. We still expect it to grow, but water filtration should be really strong next year. So we kind of – we talk about our sort of key end markets that are really the growth drivers for us. We're really optimistic about transportation films. We're really optimistic still about filtration. We're optimistic about medical. And I know you would love to hear something about, a specific sort of percentage range of growth. But, because of some limitations because of the UK takeover panel, we'll be able to get into more color, hopefully at our Q1 call or certainly when we close Scapa we'll provide more color and outlook for the year.

[Chris McGinnis:]

I appreciate the color and understand the regulations, I guess you're up against, and just turning to EP, a little change there. Can you just walk through maybe the thought process for maybe price and mix obviously a different set of portfolio for you, in -- versus technical. But our AMS, just how do you think that playing out for the year? I know you talked to margin side, the profit side, but just demand trend in the outlook given 2020?

[Andrew Wamser:]

Yeah. I mean, we continue -- and it's been a conscious effort probably over the last even two years, where we've been much more focused on profit growth versus the top line number. And that's why you've seen our margin continue to creep up here, over the past couple of years. I don't think that's really going to change. I think the one thing to note, from 2020 is that you did see the attrition rate moderate, fairly significantly from where we were tracking from 2017 through 2019. So that is tempered. Remains to be seen how that rate really changes in 2021. But at the end of the day, we still continue to focus on a lot of the high-value products whether it's our LIP papers, the wrapper and binder products, Recon, Heat-not-Burn, all those are really the high-value products. And we continue to expect to have a good solid stable business there.

[Chris McGinnis:]

Great. And I appreciate the color, best of luck for, working Q1.

[Andrew Wamser:]

Great. Thanks, Chris.

[Operator:]

And at this time, there are no further questions in queue. And I'll now turn the call back over to Jeff, for closing remarks.

[Jeff Kramer:]

Okay. Thank you, Janica. Well again, everyone, thank you for tuning in and listening to share our story. I want to close again with positive comments about, just the contributions of our people. We say many times that people make the difference. I think this year you saw absolute proof of that. Without our global teams, it is impossible for us to have achieved these results. I'm really proud of the results. But I'm even more proud of our global team. So I want to thank them again. And thank everyone. And look forward to sharing more information in Q1. Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.