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Text: So hopefully many of you have had a chance to review that information.
On the call today you'll be hearing from Julie Schertell, our Chief Executive Officer and Paul DeSantis, our Chief Financial Officer.
Julie and Paul will discuss recent activities and financial results and comment on our outlook as we look ahead in 2021.
We'll finish up with a recap of key strategies and initiatives under way to drive long-term value.
Adjusted earnings of $0.87 per share in the fourth quarter equaled that of prior year.
In 2020, GAAP earnings were adjusted to exclude $6 million of expense or $0.28 per share and included a non-cash impairment of a small overseas investment.
2019 fourth quarter adjusted results excluded a net gain of $1.2 million or $0.05 per share, mostly related to a post retirement plan settlement.
Actual results could differ from these statements due to the risks outlined on our website and in our SEC filings.
With that, I'll turn things over to Julie.
The fourth quarter marked the end to an unprecedented and challenging year for everyone.
While there was no escaping the impact of the pandemic, I'm pleased with the actions we took to prioritize the health and safety of our employees, maintain substantial liquidity, aggressively reduce cost and drive demand recovery.
This was evidenced in our strong performance as we exited the year with both segments, again, delivering sequential improvement in quarterly revenues, operating income and margins.
In the fourth quarter, adjusted operating income of $21 million and corresponding earnings per share of $0.87 both equaled the prior year.
Performance was led by our Technical Products segment.
With the combination of a strong market demand, new product launches and efficient manufacturing, technical product sales increased an impressive 11% versus 2019 and adjusted operating income of $18 million reached the highest quarterly level in recent history.
Market demand in Fine Paper & Packaging, as expected, has a more extended recovery curve and we remain on track for this business to recover 90% of its pre-COVID quarterly run rate of $90 million this year.
Before we talk about 2021 later in the call, I'd be remiss if I didn't note some of the key accomplishments our teams achieved in 2020.
Most importantly, with new health and safety protocols put in place, we were able to protect our employees and avoid disruptions to our operations and to our customers.
We began to implement a Neenah operating system at our two largest facilities.
Utilizing Lean Principles, this system will improve safety, quality, customer delivery, and will reduce our cost structure with improved productivity and unlocked capacity.
We aggressively reduced costs and working capital, resulting in free cash flow of $75 million, one of our highest years ever.
We quickly developed and commercialized high performance media for face mask to support COVID relief efforts and meet our customer's needs.
We published a corporate sustainability report, highlighting the meaningful progress made over the past five years in reducing our carbon footprint, building a more diverse and inclusive workplace, and maintaining sound governance practices.
We successfully refinanced the senior notes that were due this year and replaced them with a more flexible term loan B, due in 2027.
We reinvigorated our innovation efforts and launched number of new products that will generate incremental revenue for years to come.
We maintained a disciplined and active M&A pipeline.
We strengthened our executive leadership team combining new leaders that bring fresh perspectives with existing personnel who have deep experience and know how.
And lastly, we updated our vision and strategy providing a clear direction and focus for our organization on key drivers that will add significant value and support expansion into our four targeted growth platforms.
With increased capabilities of our team and strategies and catalysts now in place, we're clearly entering 2021 with momentum and positioning ourselves well for future profitable growth.
I'll talk more about this later in the call, but will now turn things over to Paul to discuss fourth quarter financial results in more detail.
As you heard, both business segments delivered another sequential quarter of improved sales, profits and margins.
Versus the third quarter sales increased 8%; adjusted operating income was up by more than 30%; and adjusted earnings per share jumped almost 60%.
These results were led by our Technical Products segment, which now makes up almost 65% of our total revenue.
So let me start there.
Sales of $137 million in the quarter were up from quarter three, and more impressively, grew 11% versus last year.
The increase was driven primarily by volume growth and helped by currency translation as the stronger euro increased the top line by about $5 million.
These favorable results were partially offset by lower pricing in a few categories such as backings that have price adjusters tied to raw material input costs.
Our filtration business has continued to perform extremely well and fourth quarter revenues were up almost 30% to a record $66 million.
Transportation, filtration media sales grew strongly in Europe and the U.S. and sales of industrial filters increased by more than 20%.
Industrial filtration growth was led by gains in products used for evaporative cooling and other similar applications.
Quarterly revenues also included about $4 million for face mask media, which we began selling in 2020.
Outside of filtration, our Industrial Solutions business also performed well with almost 20% growth in backings, primarily due to increased tape revenue with new products introduced at some of our most strategic customers earlier in the year.
Segment adjusted operating income of $18 million was up from $10 million in the fourth quarter of 2019 and operating margins also increased from 8% to 13% of sales.
Higher income in 2020 resulted from increased sales and production volumes, lower input costs net of selling prices, reduced SG&A spending, and favorable currency translation.
Turning to Fine Paper & Packaging, net sales of $70 million increase from the prior quarter and, as expected, due to COVID, were below sales in the fourth quarter of 2019.
Volume was the largest reason for the shortfall with commercial print accounting for most of this due to reduced demand for print marketing and advertising.
Consumer revenues fell impacted by timing of back-to-school sales while premium packaging revenues increased, led by growth in labels and folding board.
Segment adjusted operating profit was just under $8 million, up 15% from the third quarter, but below prior year due to lower sales and production volumes and a less favorable mix.
These impacts were partially offset by reduced SG&A spending and modest benefits from lower input costs, net of selling prices.
As a reminder, we have a history of successfully managing costs and our asset footprint to generate attractive returns and good steady cash flows that we can invest in growth categories.
The commercial print market, while in secular decline, makes up less than half of the segment sales and our consumer and premium packaging businesses with their stronger growth characteristics efficiently utilized the same asset base.
With actions and plans under way, I am confident we're on the path to recover volume and restore a historical mid-teen operating margins.
Next, I'll cover a few corporate items.
Consolidated SG&A was $21.5 million, down almost $2 million from last year.
In 2020, we carefully managed spending, and expenses like travel were severely curtailed.
In 2021, with the resumption of more normalized spending, we expect quarterly SG&A of approximately $25 million with unallocated corporate costs of $5.5 million.
Interest expense was $3.1 million in the quarter, up from $2.8 million in 2019.
The increase was largely due to higher non-cash amortization expense related to refinancing our bonds, plus interest rate differentials on cash and debt as we build up a large cash balance in 2020.
Our income tax rate in the fourth quarter was 15% compared to 19% in the prior year.
This 2020 rate included the benefit from a provision of the CARES Act, which allowed us to increase the value of certain net operating losses and will generate a cash benefit in 2021.
On an ongoing annual basis, we expect our tax rate to be approximately 22%.
With $37 million of cash on hand and no borrowings against our revolver, year-end liquidity was over $175 million and remains in excellent shape.
Cash generated from operations in the fourth quarter was $13 million, and while down from the fourth quarter of 2019, it decreased for the right reasons.
In 2019, cash flows benefited from a drop in receivables as year-end sales tapered off due to typical seasonality.
This was not the case in the fourth quarter of 2020 as customer demand was still rebounding from the impacts of COVID earlier in the year.
In addition, as noted in our last call, we accelerated $6 million of retirement plan cash contributions into 2020.
In 2021, we expect to return to a more traditional level of cash flow with increased working capital as we grow sales while maintaining our efficiencies.
Fourth quarter capital spending was $7 million.
This included a project to increase coating capabilities at one of our plants to support growth in release liners.
For the full year, capital spending was only $19 million as we cut or deferred non-critical items.
In 2021, we expect to resume more normal spending to around $35 million.
I'll end with a few additional comments on our near-term outlook.
Demand for both business segments should continue to recover with general economic activity.
While we won't be back to Q1 2020 pre-COVID levels by the first quarter due to the slower recovery in Fine Paper and less of a seasonal bounce back in Technical Products, we expect to continue delivering modest sequential quarterly gains.
The second half of the year should reflect more normal seasonal patterns and will include costs for our annual maintenance downs in the third and fourth quarters.
With the weaker U.S. dollar, recovering global economies and short-term volatility in supply and demand factors, input prices for fibers, chemicals, and transportation costs have all begun to rise off of Q4 lows.
Since many of our fiber contracts have a one quarter lag to market, we'd expect to see the majority of the impact from fiber increases starting in the second quarter.
Our teams are aggressively working to mitigate these higher input costs with pricing and other actions.
We're confident that over time our pricing will successfully offset cost headwinds, though sometimes this may not happen in the same calendar year.
Input costs in 2021 could be more than $20 million higher than in 2020.
However, for the full year, we currently expect volume growth and benefits from our cost and pricing actions to offset this.
One positive outcome of the weaker U.S. dollar is translation of our European operating results.
With the euro currently over $1.20, it's more than $0.05 above the 2020 average.
Each $0.05 is worth about $10 million to annually of sales and a little less than $2 million of operating income or $0.10 per share.
Finally, I'd note that in 2021, our publishing business will be managed as part of Fine Paper & Packaging.
The change enables us to realize SG&A efficiencies since Fine Paper & Packaging has a similar path to market and customer overlap.
Publishing is a relatively small category with sales of less than $30 million and mid-single digit operating margins.
So, if you're building 2021 models, this business should be reclassed from Technical Products into Fine Paper & Packaging.
I'll wrap up as I've started, by saying our businesses delivered another quarter of improving revenues, profits and margins led by Technical Products and outstanding filtration performance.
While the economic environment still has its challenges, demand is recovering in both segments, and Neenah remains on a strong financial footing.
And as always, we remain committed to the financial principles we've been known for; maintaining a prudent balance sheet, disciplined capital deployment, and returning cash to shareholders through an attractive dividend.
Our recent results are demonstrating the success of our strategies and ultimately will make Neenah a faster growing, more profitable company.
Each of our businesses is on track or ahead of the top line recovery expectations we've communicated.
Technical Products exceeded pre-COVID levels in the most recent quarter, and Fine Paper & Packaging is tracking with its targeted pace of recovery.
Going forward, we'll drive profitable organic growth as we build on three core competencies; manufacturing excellence, customer intimacy, and a robust innovation process.
The Neenah operating system will deliver meaningful value and help us further excel, operationally, to support employees and customers with improved safety, quality, delivery and cost, and unlock latent capacity.
Customer intimacy has always been an ingredient of our success.
In Technical Products, our R&D teams work closely with customers to meet their demanding performance and qualification requirements.
In Fine Paper & Packaging, our design team collaborates with customers to develop premium products and sustainable solutions that support their brand equity and image.
Our work with customers often includes joint development efforts that draw on our innovation abilities and technical expertise.
I mentioned earlier how we continue to strengthen our teams and capabilities.
This includes the recent hire of an experienced Global Head of our innovation process reporting directly to me.
With this change, we've realigned our R&D teams to leverage their knowledge and skills across Neenah.
This will allow us to unlock even greater value with existing and new customers and expand into new markets.
While excited about the future, I'm also pleased with what our teams have done over the past year.
In Technical Products, in addition to successfully commercializing high performance face mask media, we've launched a high efficiency filter media for heavy duty trucks, created new filtration offerings for growing needs like evaporative cooling, provided a unique dissolving label, and extended our digital transfer technology to new end-use applications.
In Fine Paper & Packaging, we've launched new planners, journals, and teacher tools for the retail channel and initiated a number of new products that provide a sustainable and desirable alternative to plastic.
As I've mentioned, our focus is on expanding in our four growth platforms; filtration, specialty coatings, custom engineered materials and premium packaging.
Each of these platforms are growing, profitable and defensible and align with our manufacturing technologies, our paths to market and material science know how.
In addition, they benefit from macro trends like a desire for cleaner air, personal health, and environmentally friendly solutions.
These platform significantly increase our addressable market and will allow us to unlock synergies as we gain scale.
We plan to grow in these platforms organically and through M&A.
Our M&A pipeline has remained active and focused on a robust set of targets that are a strategic fit and meet our required returns.
As a result of our strong balance sheet, we're in great shape to act on attractive opportunities that arise.
Let me talk next about our initiatives under way to increase margins.
Our businesses have returned to double-digit margins in both segments and technical products ended the year with some of their best margins in recent history.
Further improvement will occur as we grow in our targeted markets supported by innovation efforts that result in higher value and margin accretive new products and offerings.
The Neenah Operating System will also be an important contributor with incremental value creation of over $20 million annually when fully implemented.
In our two pilot facilities, employees have embrace this new process, identifying projects and enthusiastically tackling opportunities.
I could not be more encouraged by the level of engagement, pride, and results we're achieving.
Neenah has always had a strong culture of continuous cost improvement and I believe that momentum we're seeing is contagious.
And our initiatives and success will accelerate as we implement the system in other facilities.
Through the combination of these efforts, we will increase our organic growth rate with both business segments delivering mid-teen operating margins.
However, this wouldn't be possible without the right people doing the right things the right way.
I'm fond of saying "Culture eats strategy for breakfast".
And we're fortunate at Neenah to have a culture that always makes safety the top priority, is results oriented with a strong bias for speed, and is collaborative and inclusive.
We've emerged from a challenging year with a strong financial position, clear roadmap to accelerate top line growth and specific catalyst to increase margins.
You're seeing the results of our strategies and actions and I'm excited about our future.

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qtrly adjusted e.p.s. of $0.87.

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