Neptune Insurance Holdings Inc. Class A

Good morning. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the NENA Q3 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. I would now like to turn the call over to Mr. Kyle Anderson.

Good morning, and thank you for joining us on NENA's Q3 2021 earnings call. With me today are Julie Chertel, Chief Executive Officer, and Paul DeSantis, Chief Financial Officer. Julie and Paul will discuss recent activities and results, as well as share thoughts on our strategies as we look ahead. We issued a press release covering financial results yesterday afternoon, and hopefully many of you have had a chance to review that information. As always, actual results could differ from forward-looking statements due to risks noted on our website and in our SEC filings. Following our prepared remarks, we'll open the call up for questions. 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. Details of these adjusting items, along with the reconciliation to GAAP amounts, can be found in our press release. With that, I'd like to turn things over to Julie.

Thanks, Kyle. And good morning, everyone. 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 NENA. While encouraged by these results, we remained 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 ETASA acquisition. Additionally, ETASA 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 costs, which continued 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 costs. Lastly, we experienced unforeseen flood damage at our Pennsylvania facility related to Hurricane Ida, impacting results by approximately six cents per share. In the third quarter, the net impact of selling prices and raw material costs reduced operating margins by over 300 basis points and EPS by over 35 cents 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 action. 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 Nina 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 NENA and a key value we bring to our customers. Additionally, we've 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 ensures we 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 action and execution to drive margin improvement into Q4 in 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 NENA. Under Bill's leadership, we have strengthened our corporate governance and increased our board diversity, with 50% of our board identifying as women, or underrepresented minorities. Congratulations, Bill. Well deserved. With that, I'll turn it over to Paul to cover financials. Then I'll wrap up with some comments on our strategy later in the call.