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Text: Julie, and Paul will discuss recent activities and results as well as share thoughts on our strategy as we look ahead.
In the third quarter, we continued our top-line growth momentum with net sales up 40% over last year.
Adjusted earnings were $0.38 per share excluding $0.19 of unusual costs.
In Q3 2020, the adjusted earnings per share were $0.55 and excluded $0.09 of unusual costs.
With that, I'd like to turn things over to Julie.
Before we begin to discuss third quarter results, let me start with employee safety.
We continue to make solid progress on this core value of our business.
At the end of the third quarter, we had reduced our injury rate by 40% since the start of the year, an all-time record for Neenah.
While encouraged by these results, we remain vigilant in our efforts to achieve our target of zero incidents.
Turning to business performance.
Third quarter results were broadly in line with our expectations.
Starting with the top-line, demand for our products was extremely strong and we delivered record sales of almost $270 million, up 40% from last year and up 22% excluding the Itasa acquisition.
Additionally, Itasa continues to deliver strong performance with September being their third record revenue month since the acquisition.
From a bottom line perspective, margins were challenged by a number of factors.
First, as expected and mentioned in our last call, the primary factor was rapidly escalating input cost, which continue to increase throughout the quarter to a greater degree than originally anticipated.
Compounding these cost increases were supply chain disruptions and shortages of certain chemicals, leading to operational disruptions and an unfavorable sales mix.
Operating labor availability in the United States also impacted our business, driving manufacturing inefficiencies and higher cost.
Lastly, we experienced unforeseen flood damage at our Pennsylvania facility related to Hurricane Ida, impacting results by approximately $0.06 per share.
In the third quarter, the net impact of selling prices and raw material cost reduced operating margin by over 300 basis points and earnings per share by over $0.35 per share versus the prior year.
To this point, input costs have continued to increase at a rate faster than the resulting benefits of our pricing actions.
However, we expect to see further improvement and recovery in Q4 and 2022.
We are clearly on a path to recover these input costs as Neenah has historically done.
To address these challenges, we are taking a number of actions.
First, multiple price increases have been implemented in all businesses as well as incremental energy and fuel surcharges.
To address the impact of chemical availability, our R&D team has worked closely with customers to qualify alternate products to meet market needs.
Over the last few months, we have reformulated over $200 million of annual sales, demonstrating the agility and material science know-how we have at Neenah and a key value we bring to our customers.
Additionally, we streamlined our product portfolio to simplify operations and improve our cost position, including over a 30% reduction of grades in our Fine Paper and Packaging business.
This unlocks capacity, improves our cost structure, and I'm sure will provide a premium level of service our customers expect from Neenah.
We are also working to improve our operating labor challenges by implementing a broad range of initiatives to attract and retain top talent, including referral fees and additional incentives.
So while it's clearly a challenging environment, I'm encouraged with our swift actions and execution to drive margin improvement into Q4 and 2022, while at the same time, working closely with our customers to meet their needs.
Before we move on to financials, I want to take a moment to recognize Bill Cook, the Chair of our Board of Directors, who recently received the NACD Public Company Director of the Year award.
This is quite an honor, and we are grateful to Bill for his guidance and service to Neenah.
Under Bill's leadership, we have strengthened our corporate governance and increased our board diversity with 50% of our board identifying as women or under represented minorities.
Let's dive right into our discussion of price and input costs for the third quarter.
Our actions have resulted in price increases each month of the quarter as our initiatives take hold.
The overall impact of that pricing acceleration for the third quarter was $8 million over 2020.
We expect these pricing actions will gain momentum in the fourth quarter and into next year.
In terms of input cost increases, during the third quarter, we saw input costs rise even higher than our expectations to about $17 million over the prior year, of which we were able to offset about half directly with our pricing initiatives.
For the fourth quarter, we're expecting an input cost increase of over $20 million versus 2020.
We expect to recover about two-thirds in the fourth quarter through our accelerated pricing initiatives.
We're now expecting an over $40 million increase of input costs for the full year of 2021 versus last year.
As we've said, we expect to fully offset the raw material cost increases through 2022 with our pricing actions.
Julie mentioned the unfavorable mix.
Overall, the mix effect for the quarter was an unfavorable $4.5 million.
Contributing to the unfavorable mix were the supply constraints.
Let me share some thoughts about what we're seeing in today's input markets.
Fiber prices have peaked globally, and in some regions, have started to give back some of the gains, though Europe has yet to fall from the peak.
And while the rate of decline in North America has slowed, it remains well above highs from previous cycles.
Chemical input prices rose in the third quarter on strong demand.
Supply is beginning to recover from natural disasters and unplanned outages, while pricing of some basic chemicals is starting to show signs of leveling off as we start the fourth quarter.
A number of materials remain in tight supply, causing availability issues, and historically high prices have yet to curb demand.
We expect this market turbulence will continue into 2022.
Energy has risen dramatically through the third quarter and remains very volatile globally with the most significant impacts to our business being seen in Europe.
And lastly, the challenging global shipping market continues as congestion at many ports adds cost pressures.
U.S. transportation market remains tight with national spot rates recently reaching the highest level of the year.
Diesel prices have been climbing, hitting their highest levels at the end of the third quarter.
It looks like those transportation cost pressures and availability issues will also left into 2022.
In regards to Appleton, the facility was closed at the end of the quarter.
Recall, we expect this action to save us approximately $78 million a year beginning in the fourth quarter of 2021.
Here's a quick review of the third quarter financial statements.
Consolidated sales reached $268 million, up $77 million from last year's comparable quarter.
Itasa accounted for $36 million of sales in the quarter.
We saw very strong growth in a number of areas, including filtration, packaging and industrials.
Adjusted earnings were $12.7 million compared to $15.9 million in last year's third quarter.
The primary driver of the variance was the favorable pricing of $8 million, offset by input cost increases of $17 million, netting an unfavorable $9 million, whereas Julie mentioned, a 300 basis point impact on margins or about $0.35 a share.
We were able to offset most of that gap through favorable volume and fixed cost absorption as well as the impact of the Itasa acquisition.
Consistent with our discussion last quarter, we expect to see margins begin to improve from here as those pricing actions, robust volume and other efficiency initiatives begin to offset the input cost increases and availability issues.
Technical product sales were $173 million, up 46% from 2020 and up 15% excluding Itasa.
Adjusted earnings were $10.8 million, down from $13.3 million last year, reflecting the impact of raw material cost increases along with labor and raw material availability.
Technical Products is bearing the brunt of the input cost increases and is most impacted by timing with filtration annual pricing taking effect January 1.
Fine Paper and Packaging sales were $95 million, up 32% from last year's level and above our original expectations of recovery, reflecting the strength of the packaging and consumer business.
Adjusted earnings were $6.6 million from the quarter, up from last year's $6 million with pricing offsetting about 75% of the input cost increases.
We expect to fully offset the input increase with pricing initiatives during the fourth quarter in this segment.
Turning to the balance sheet and cash flows.
While year-to-date cash flow from operations of $40 million was down from the $80 million recorded for the first nine months of last year, the difference was primarily due to working capital, reflecting the strong top-line.
Trailing 12-month adjusted EBITDA reached $122 million as of September 30 compared to the $101 million we recorded last calendar year as we see the benefits of our continued growth and the impact of the Itasa acquisition.
As a result of the strong EBITDA growth and free cash flow, adjusted net leverage was 3.4 times at quarter end and is expected to drop a bit by year end, absent any other actions.
Working capital from higher input costs will continue to moderate through the end of the year and availability issues will pressure mix and efficiencies.
Year-to-date, capex was $19 million versus $12 million last year.
We're expecting capex to end up in the low-to-mid $30 million range as safety, growth and cost reduction initiatives are implemented in Q4.
In addition to returning cash to shareholders through our strong dividend, during the quarter, we bought back 71,000 for $3.4 million at an average price of $47.85 per share.
Additionally, the board has authorized a $0.02 annual increase to the dividend beginning in the fourth quarter.
Our dividend remains critically important and we're pleased to have raised the dividend every year for the last 11 years.
SG&A was $26.1 million versus $19.1 million last year.
Itasa accounted for about $4 million of the increase.
The remainder was the result of cost reduction initiatives executed in 2020.
While we typically expect our full year normalized tax rate to come in around the low-to-mid 20s as a percentage of pre-tax income, the 2021 full year rate is expected to be near 20% when considering the magnified benefit of research credits in the current year.
Our effective income tax rate was 48% of pre-tax book income in the third quarter 2021 as compared to 23% in the third quarter of last year.
This increase resulted primarily from the effects of non-recurring items relating to the closure of the Appleton facility.
Looking forward, we had expected cost to stabilize in Q4.
However, recent increases in energy, particularly in Europe, and stubbornly high chemical costs globally are now expected to continue through the fourth quarter with volatility and availability issues lingering into next year.
As Julie mentioned, our teams are working to offset these input costs with additional pricing initiatives, surcharges and cost reduction actions.
So for the fourth quarter, our seasonally weakest quarter, we now expect the impact of input cost to be over $20 million above last year, of which we expect to offset about two-thirds directly with our pricing initiatives.
In spite of these pressures, because of the increased pricing recovery, we expect the third quarter margin to be the most challenged to the year and expect to see improvement in the fourth quarter.
That being said, this is a very volatile year and things are changing quickly and unpredictably.
No matter what, we'll continue with our actions to offset the cost and availability issues as we have done historically.
To sum it all up, as the year stands now, we expect input costs for the full year to be up over $40 million, of which we'll have offset about half directly with pricing.
We expect to offset the other half in 2022 as our pricing initiatives, particularly in filtration, take effect.
In addition to addressing our actions driving the business today, I want to discuss how we are also focused on executing for the future.
Core to our strategy is growth.
And we continue to leverage our assets and technical capabilities, unique material science know-how and unmatched customer relationships to extend our presence in large growing markets.
Our four growth platforms; filtration, specialty coatings, engineered materials and imaging & packaging, provide a strategic framework which guides our investment decisions, organizational focus and resource allocation, all are positively influenced by large macro trends such as increased emphasis on health and wellness and a growing preference for sustainable alternatives.
Our products are used in a variety of categories with diverse end use applications, giving us multiple pathways to create value.
As evidenced by our strong top-line, we are confidently are focused where Neenah has a right to win.
As a reminder, we have set all-time records in filtration, packaging and release liners this year, three of our four targeted growth platforms.
I'd like to highlight a few areas of momentum aligned with these growth platform.
First, demand for our filtration products is very strong with top-line up year-to-date over 25% from 2020 and 20% from 2019 levels, continuing a trend of record-breaking performance.
We are seeing strong demand across all end markets, especially in life science and industrial applications where sales are close to double pre-pandemic levels.
As we continue to extend our high performance media for air, liquid, acoustic and thermal applications, we've introduced two new platforms; NeenahGuard and NeenahPure, which provide the highest level of filtration efficacy available in the market.
Leveraging these platforms, we expect to continue to grow and diversify in attractive categories such as building HVAC, gas turbines, gaskets, process fluids and medical testing.
Turning to our specialty coatings platform.
We are focused on driving record growth in release liners.
We are pleased with Itasa's performance and a strong Q3 in line with our investment thesis.
Integration is progressing according to plan and synergy delivery is on track.
Progress continues on our recently announced capital expansion for a new state of the art coater in our Mexico facility, expected to start-up in 2023.
This investment will support our growth expectations for the business, which historically has been around 8% annually.
Lastly, Itasa was awarded the EcoVadis 2021 Gold Medal for Sustainability, an achievement demonstrating our leadership commitment to sustainable manufacturing practices.
In Engineered Materials, we continued our cadence of innovative product introductions, launching two new products this quarter that provide sustainable alternative.
First, we recently launched a new recyclable paid product made with sustainable fibers.
Unlike plastic-based tape, this product breaks down along with the box during the recycling process, making the product 100% recyclable and unique to the market.
We also expanded our DISPERSA product line of sustainable labels, tags and pouches that disperse in water and are used in applications such as food rotation labels and reusable plastic containers.
This product extension continues our approach to combine superior functionality and sustainability.
Last but not least, we celebrated a record quarter in our packaging business, up almost 20% over pre-pandemic levels.
Demanding customers appreciate the unique sustainable packaging solutions Neenah provides, including plastic replacement alternative for applications and our targeted verticals of beauty and cosmetics, alcohol, high end retail and electronics.
Evidenced in these examples is solid progress in both M&A and innovation, two key enablers of our strategy.
With M&A, we maintain a robust pipeline of targets.
We also remain committed to maintaining a healthy balance sheet and strong cash flows.
Innovation is a key part of our strategy.
Taking a market back approach, we are leveraging the ideas and insight of our customers, employees and independent research to inform our efforts.
We are encouraged by the depth of our pipeline and expect our pace of development to continue to increase over time.
Lastly, the Neenah operating system is a consistent framework of principles, practices and tools, through which we will continue to drive meaningful and sustainable margin improvement.
As a reminder, this global manufacturing initiative is based on lean principles and methodologies.
Improvement will be gradual as we execute many specific measurable projects facility-by-facility.
We are pleased with our progress and are on track with our plans.
As these initiatives take hold, we expect to see both top and bottom line benefits and the merits of a more diversified mix of specialty products.
In summary, we have focused efforts to drive significant value as we close out this year and launch into 2022, including net pricing actions, which we expect will offset the 2021 recovery shortfall of approximately $20 million; a full year of our Itasa acquisition valued at an additional $5 million of EBITDA in 2022; closure of our Appleton facility, which will generate over $6 million of incremental EBITDA next year; and focused organic investment, innovation and M&A efforts in our targeted growth platforms.
And while we don't expect input costs to decrease dramatically in the near-term, we do expect them to begin to stabilize at current levels, and in some cases, retreat throughout 2022.
Our goal is to grow the top-line by 5% and earnings by 10%, driving EBITDA margins in excess of 15%, while generating investment returns above our cost of capital.
Despite the near-term input costs and supply chain pressures, our teams are leaning in to drive the business forward.
I'm encouraged by our progress toward these goals and confident we have the right strategy and initiatives in place to deliver.

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q3 sales rose 40 percent to $267.9 million.
q3 adjusted earnings per share $0.38.
q3 gaap earnings per share $0.19.

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