Schweitzer-Mauduit International, Inc.

Good day and thank you for standing by. Welcome to the SWM's third quarter 2021 earnings conference call. Hosting the call today from SWM is Dr. Jeff Kramer, Chief Executive Officer. He is joined by Andrew Ramser, Chief Financial Officer, and Mark Checkenow, Director of Investor Relations. Today's call is being recorded and will be available for replay later this afternoon. At this time, all participants has been placed in a listen-only mode. and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your attached phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. If you should require operator assistance, please press star 0. We ask that you please pick up your handset to allow the optimal sound quality. It is now my pleasure to turn the floor over to Mr. Chakanel. Sir, you may begin.

Thank you, Peter. Good morning. I'm Mark Chekhanow, Director of Investor Relations at SWM. Thank you for joining us to discuss our third quarter 2021 earnings results. Before we begin, I'd like to remind you that the comments included in today's conference call include forward-looking statements. Actual results may differ materially from the results suggested by these comments for a number of reasons, which are discussed in more detail in our Securities and Exchange Commission filings, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. In particular, the extent to which the COVID-19 pandemic continues to impact our business is uncertain and depends on numerous evolving factors which are difficult to predict, including the duration and scope of the pandemic and actions taken in response to it. Some financial measures discussed during this call are non-GAAP financial measures. Reconciliations of these measures to the closest GAAP measures are included in the appendix of this presentation and the earnings release. Unless stated otherwise, financial and operational metric comparisons are to the prior year period and relate to continuing operations. This presentation and the earnings release are available on the investor relations section of our website, www.swmintl.com. I'll now turn the call over to Jeff.

Thank you, Mark, and good morning, everyone. These continue to be interesting times around the world. As seen in news reports, COVID is moderating somewhat, but also not retreating as fully as everyone had hoped. At the same time, dramatic demand increases have caused widespread supply disruptions with rapid and sometimes unprecedented price increases on many input costs, coupled with shortages of key raw materials. In mid-2020, while many companies dealt with weak sales results and lengthy production outages from COVID-related stay-at-home orders, SWBM's performance was quite strong. with several AMS markets proving resilient to COVID pressures and our paper business exceeding expectations. SWM's global teams were agile and our portfolio robust with good demand across many end markets, resulting in outstanding 2020 third quarter earnings. We were expecting a similar story this year by building on an already strong portfolio, combined with the additional capabilities offered by our acquisition of SCAPR in April. we have high conviction that the fundamental story remains positive, as demonstrated by the strong top-line growth continuing in AMS. However, 2021 has seen global supply chains in disarray and rapid inflation, and challenges accelerated throughout the third quarter, with higher input costs compounded by limited availability of some key raw materials and global shipping bottlenecks. These headwinds are clearly impacting our bottom line results. While we've continued to successfully implement price increases, with the latest round becoming effective October 1st, we have still been lagging in many cases, pressuring margins and resulting in us delivering adjusted EPS of 82 cents for the third quarter. Though we do see some early signs of moderation, we expect these conditions to continue at least through the fourth quarter before our actions deliver better margin recovery. Given our results to date in near-term view, we expect that our full year 2021 adjusted EPS will be below our original guidance for the full year, but do expect sequential improvements throughout 2022. As you will see in the following commentary, our overall portfolio remains strong with very good demand, and we are confident that the actions we have and will continue to take will return us to the levels of profitability expected from our company. As demonstrated by our Agile teams last year, we are well positioned to continue to execute against our long-term strategic plans despite these shorter-term disruptions. In AMS, overall sales nearly doubled, including the benefit of SCAPA acquisition. with underlying organic sales increasing a strong 10 percent in the quarter. Demand remains positive in several of our most strategic product lines, particularly in transportation and filtration end markets. Transportation was up approximately 25 percent. Fundamentals remain very strong, and consumers are driving rapid growth for our high-value paint protection films. As we noted in last quarter's call, that despite being the world's largest supplier of these base films, our sales could have been even higher if not for raw material scarcity. Year to date, we have missed tens of millions of dollars in sales due to this midterm constraint. To address this, we have expanded our supplier network and qualified additional suppliers' resins with our customers and secured additional supply for 2022. Though still constrained, access to more raw materials should support our ability to deliver even greater than 10% growth next year on top of what will be already rapid growth in 2021. We further expect our recent acquisitions to allow us to continue to innovate by expanding our offerings in this key product area, thereby executing against our stated strategy of offering our customers greater solutions to their needs. We also continue to invest in capacity worldwide to capitalize on increasing consumer awareness and adoption of paint protection films and continued middle-class growth in many countries. Filtration also grew approximately 25 percent in the quarter as the need for cleaner and purer continues to drive positive trends. Water and processed materials led the way. Again, Echoing comments from the second quarter call, our water customers continue to relay bullish outlooks to our commercial teams as they restock from depleted inventory levels, see increased activity at processing sites, and convey positive outlooks for additional capacity coming online in emerging markets. Process filtration also remains strong, albeit somewhat constrained by the semiconductor shortage. but we see continued momentum as chip makers work to fulfill unmet demands. On the air filtration side, sales nearly matched third quarter of last year when our sales grew more than 60% on widespread COVID-driven HVAC system upgrades, and we are encouraged that this business is maintaining such a high level of activity. Notably, though, our overall filtration sales have been impacted by labor challenges that constrained our growth. We estimate the total impact to be in the range of $4 million to $5 million per quarter in lost sales, implying our total filtration business could have been up nearly 40% in the third quarter compared to last year. Though there is limited visibility on when labor markets will reach equilibrium, We are taking multiple actions at various plants to address the issues in the meantime and are seeing increased interest in open positions. These actions are a combination of increasing wages where needed to assure we are competitive, increasing our focus on supporting those currently in roles, and investing in automation to reduce our reliance on labor and improve efficiencies. AMS's legacy healthcare business faced a tough year-in-year comparison, as last year we benefited from the unprecedented demand in face mask materials. Outside of that, we saw good gains in both consumer and higher-margin specialty wound care categories. Regarding SCAPR's performance, we are pleased that it is in line with our sales expectations. Excluding currency fluctuations and gap accounting conversions, the overall business rebounded strongly versus 2020 and is nearing pre-COVID levels on the top line. On the healthcare side, we are seeing good growth in consumer wellness products, whereas products more reliant on hospital foot traffic remain below pre-COVID levels. In industrial, we again saw strong growth versus 2020. Though sales are performing well, SCAPA is experiencing similar inflationary and supply chain pressures as the rest of our businesses. Although we are disappointed that inflationary pressures, material sourcing challenges, and labor availability negatively impacted the bottom line, top line performance for AMS has been strong. Though we have successfully increased prices multiple times, These actions, quite simply, were not sufficient to keep pace with rapidly increasing raw material prices. Customers are generally accepting these increases, and we will continue these actions as needed. On a positive note, we do see early signs of resin pricing easing during the fourth quarter, and if that trend continues, should put us in an improved price-cost position in 2022. It is also important to note that while we have been addressing the above challenges, we have continued to drive our innovation process and invest in capacity and efficiency improvements across many of our segments. These efforts will allow us to continue to position ourselves for continued growth. Switching to engineered papers, quarterly top and bottom line results were softer than last year. Though this was to be expected, as last year's third quarter was the highest quarterly segment of operating profits we have achieved over the past five years. While we were very happy with this performance last year, as many businesses were suffering from weak demand, we knew that the inventory builds our customers took to handle the pandemic would reverse in time. As you may recall, when we outlined our 2021 annual guidance, our expectation was to return to a more historical EP segment profit level, giving the large 2020 benefit of several large customers building LIP inventory to de-risk their supply chains. Unfortunately, while the decline in sales of 12% on a 10% volume decrease was generally anticipated, EP was not an exception to the inflationary pressures seen across global manufacturing. Higher input costs for wood pulp, freight, and most recently escalating energy and natural gas prices have far exceeded our expectations to date. But just as with AMS, we have been actively raising prices to recoup higher wood pulp costs. Due to the more standard contractual obligations, these increases lag the pace of inflation, although we expect to catch up in the coming quarters. We have also been able to negotiate additional volumes as a further offset to pricing constraints. Just as with resin, we do believe we have seen peak pull prices and expect modest near-term relief. Importantly, we are not slowing our investments in innovation and finding ways to improve our cost structure. Heat-not-burn sales demonstrated continued momentum as our customers invest heavily in reduced-risk products. Our hemp products are also going commercial, and we are in the process of finalizing our first meaningful commercial contract for hemp filler products to be used in non-tobacco, non-nicotine-based alternative smoking products. This customer alone could become a multimillion-dollar customer within two years. Our investments in hemp processing technologies and botanicals are beginning to bear fruit. And like all new innovations, these product lines deliver an attractive margin profile. I reiterate that despite grappling with the current supply chain headwinds and inflation, it is critical for our long-term outlook to continue to drive innovation and partner with current and potential new customers to drive growth in new product categories. Regarding our cost structure, we have announced that we will be closing our Winkler site in Manitoba, Canada at the end of the year. This site primarily processed materials for our recently closed Spotswood, New Jersey site. Though always a difficult decision to close facilities, we believe it was the prudent decision given the Spotswood shutdown. With that, I'll turn the call over to Andy to review the financials in more detail.