Schweitzer-Mauduit International, Inc.

Welcome to SWM's Earnings Conference call. Hosting the call today from SWM is Dr Geoff Cramer, Chief Executive Officer. He is joined by Andrew Wamser, Chief Financial Officer and Mark Checker, now 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 your questions following the presentation. If you would like to ask a question at the time, please press star 1 on your touch tone phone. If you should require operator assistance, please press star 0. We ask that you please pick up your headset to allow optimal sound quality. It is now my pleasure to turn the floor over to Mr. Chekhanel. Sir, you may begin.

Thank you, Katie. Good morning. I'm Mark Checknow, Director of Investor Relations at SWM. Thank you for joining us to discuss SWM's fourth quarter and full year 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 of 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. I'll now turn the call over to Jeff.

Thank you, Mark, and a good morning to everyone. 2021 was an exciting year from a strategic perspective for SWM, highlighted by our acquisition of SCAPR. While the year was certainly challenging from a supply chain standpoint, we cannot lose sight of how we grew the business and of our strong position exiting the year. We continued our portfolio shift towards growth markets with our largest acquisition to date and are more optimistic than ever about our prospects for sustainable long-term sales and earnings growth. While not all 2021 challenges are behind us, we see positive developments on many fronts, providing support for our 2022 outlook of significantly improved EBITDA, EPS, and free cash flow. Demand is strong. Our prices now reflect the rise in our key raw material costs, and we are actively executing multiple near-term and longer-term innovation initiatives to drive growth, including several Synergy projects within SCAPA. Before moving into our results, I'd like to again thank our global team for all making this possible. Our organization continues to impress every day, proving to our customers that our innovation, expertise, and service are best in class. For two years, our people have persevered through adversity, both personal and professional, and I am extremely proud of the commitment they have demonstrated to our company and to our customers. Many of the themes we'll touch on today are a continuation of those throughout these past several quarters. Simply put, 2021 did not go according to plan. While I am very pleased with our top-line performance, the bottom-line results were not where we had originally projected as we finished the year with 2021 adjusted EPS of $3.10. Inflationary pressures led by raw material cost increases peaked during the third quarter and flowed through our fourth quarter P&L, pressuring our results as we closed out the year. Other cost buckets also continued to move higher. However, while pricing previously lagged these escalating costs, continued price increases in recent months have now positioned us more appropriately, and we are encouraged with where we stand. Before going into our segments, I'd like to revisit the SCAPA acquisition and its long-term strategic benefits. While inflation and supply chain challenges have monopolized the headlines and results this year, I cannot overstate the strategic importance of this acquisition to SWM. First, it brings a significant portfolio of new industrial technologies and capabilities to SWM, which pair well with our existing ones and are the basis of exciting synergy work. Second, we tripled our already important healthcare business, giving us a scaled presence in this attractive end market. We have a great portfolio of specialty products and can go to large healthcare customers with a more compelling suite of solutions than ever before. And third, from a high-level view, SCAPIC tilted our total portfolio more heavily to growth markets with 70% of our company-wide sales in 2021 coming from end markets and applications we believe can deliver long-term growth rates at or above GDP. So the bottom line is we are exiting a challenging year, but with a very positive outlook for 2022 and beyond. To recap AMS's 2021, sales were up over 70%, including the benefit of the SCAPA acquisition, with legacy organic sales increasing a strong 11%. For the year, our largest gains were in filtration, transportation, and construction. For SCAPR, 2021 sales totaled over $300 million for the three quarters since the acquisition and were ahead of plan. Excluding currency fluctuations and GAAP accounting conversions, SCAPR sales were directionally up double digits versus 2020 and were very close to pre-COVID levels. Within healthcare, consumer wellness is growing nicely with successful product launches such as blister and burn care solutions, facial cleansers, and acne treatments. Products used in hospitals, though, especially materials used in medical devices, are still recovering as consumers have not yet resumed elective procedures and discretionary visits to hospitals due to COVID concerns. Scapper's other diversified product lines in construction, transportation, and industrial all higher than last year. Filtration grew approximately 25% for the year, with good growth across water, process, and air. Our water customers continue to benefit from the increasing needs for drinkable water, especially in large coastal cities with the most rapid growth in Asia and the Middle East. Our teams continue to relay bullish outlooks from our customers for new capacity additions all over the world. We are also seeing good demand for RO customers serving the beverage industry as manufacturers are increasingly using filtered liquids and marketing these higher quality product attributes. In addition, A positive developing subplot in the RO industry is increasing energy prices, which tend to make running older and less efficient filters more costly to run, potentially increasing the changeover velocity as water filtration plant operators may choose to replace filtration cartridges more frequently. Process filtration also remains strong with high demand for semiconductor production. And air filtration remains an increasingly attractive segment where we have innovations on the way and which will further expand our offerings. Notably, we believe our filtration sales could have been even higher in 2021 if not for labor shortages in certain manufacturing locations. Transportation was up more than 20% for the year. and as we have indicated recently, was actually constrained by limited access to the specialty TPU resins used in the production of our paint protection films. Some of the raw materials further up the value chain were seeing heavy demand from other products. This shortage has resulted in tens of millions of dollars in high-value sales left on the table in 2021. Demand for the product is tracking well ahead of what we or any of our competitors can supply. It may be late 2022 or early 2023 before sufficient resin capacity comes online to fully meet the demands of the marketplace. As the global market leader, we believe we are as well positioned as possible to supply our customers, but it will require flexibility. Looking beyond the supply constraints, This is an area where we see good long-term demand, and we will continue to invest in capacity and innovation to maintain our leadership position. Further, we see synergy potential with SCAPA as new coatings and adhesive capabilities can potentially add to our offerings in this high-growth area. In construction, we experienced a strong rebound from 2020, driving growth across many product lines. Our ag and erosion control products are benefiting from highway and residential construction activity, and we also continue to penetrate the solar farm construction market. It is also important to emphasize that our strong 11% organic sales growth was off a solid 2020 performance when our resilient portfolio seemed to outperform many other industrials with only 2% organic decline, despite COVID-related demand disruptions. However, we clearly felt the impacts of sharply higher costs, especially for raw materials. Looking back on 2021, our price cost variances were a major issue for our results. And frankly, in hindsight, we should have been quicker and implemented larger price increases to more closely match the unexpected and truly unprecedented rise of input costs. The impact was evident in our margin compression in 2021, and it was most pronounced in the fourth quarter. So, where do we sit now with respect to pricing? We are pleased that after several rounds of price increases, we are starting 2021 with selling prices that are aligned with current resin costs and expect to have improved price versus cost variances in 2022, especially as polypropylene has pulled back in recent months. Raw material costs were not the only challenge of 2021, as labor, freight, and general supply chain disruptions all impacted results. We are entering 2022 in a better position and have adapted to the new normal of inflation with more aggressive approaches to offsetting costs through a combination of operational and pricing actions. Just one quick comment specifically to the fourth quarter's reported organic growth rate of 2% for legacy AMS. Recall that the fourth quarter of 2020 was exceptionally strong for our transportation business. It was up over 70%, driving 20% organic growth for AMS overall. That quarter marked the beginning of the transportation film's rebound following very soft quarters at the onset of COVID. Therefore, our fourth quarter we just closed had an extraordinarily tough transportation comparison, compressing our fourth quarter organic sales for AMS overall. Our transportation business has had significant quarter over quarter fluctuations in both directions since COVID began. But if you excluded from our fourth quarter numbers, AMS organic growth would have gone from 2% to 8% for the quarter, again, demonstrating the broad health of the business. Switching to engineered papers, the year went as expected with the exception of the rapid rise in wood pulp costs and other inflationary and supply chain challenges. Recall, when we issued our original 2021 outlook, our expectation was to return to segment operating profit in the mid to low $120 million range, following the large 2020 benefit of several customers building LIP inventories. While 2021 volumes were down 2% and total sales down 4%, This result was generally expected with the negative mix coming from anticipated decline in LIP papers as customer inventories were rebalanced. However, wood pulp costs began rising at a steady pace at the outset of the year, which was shortly after several of our large contracts had annual price resets, forcing us to absorb the impact of higher pulp costs throughout much of 2021. We did successfully take action with many of our customers later in the year to reflect the unusual supply chain considerations, but were unable to fully cover the variances. We are pleased to say, however, that our contracts have reset and pulp costs, while elevated, have at least been stable in recent months after peaking in the fall. Much like AMS, our selling prices now reflect recent pulp costs, and we look forward to better price versus cost variances in 2022. We also continue to take actions across the business to minimize the impact of higher freight and energy costs, including cost reductions and securing additional profitable volumes. On a positive note, Working with our customers through the various issues facing global manufacturers has actually strengthened those ties. They have recognized even further the value of our global supply chain and our ability to go the extra mile to ensure high-quality products and service levels despite numerous headwinds. further and importantly our innovation pipeline is increasingly important to our customers ability to execute their strategic shifts to lower risk products and increase sustainability as an example heat not burn had a very strong year with product sales nearly doubling These reduced risk products are a great case study in innovation for the industry and how SWM was well positioned with our customers to capitalize on this emerging trend. We have the development capabilities, the technical expertise, and unique manufacturing technologies to capitalize on this demand. What was once an immaterial but rapidly expanding product line is now more than 25 million in annual sales and growing with attractive margins. Furthermore, as we alluded to last quarter, we have made significant progress in our botanicals expansion to develop truly innovative products. We are particularly excited about the recently publicized launch of Botany, our industrial hemp and botanical fiber solutions business aimed at the emerging non-tobacco alternatives marketplace. We are producing wrappers and papers as well as filler products made entirely from hemp with the capability of being infused with active ingredients. Our customers can use these materials to market unique products to a growing customer base seeking innovations in this rapidly evolving space. To illustrate our capabilities, we can produce paper and filler components such that a customer can produce a non-tobacco, non-nicotine-based pre-rolled product that could be infused with CBD, for example. We are very excited about the prospects of these hemp fiber materials as we are again proving our ability to innovate and deliver new materials to an emerging marketplace. Much like Heat Not Burn, sales are expected to be relatively small at the start, but we see significant growth potential and will continue to invest to support this business and our customers. Other innovations underway involve synergies with our SCAPA acquisition around leveraging our paper assets with the specialty tapes business, Second is an effort to develop sustainable specialty packaging solutions with particular focus on fiber-based packaging or other products to displace less environmentally friendly single-use products. And finally, we are working with our tobacco customers to evaluate ways to make filtration more sustainable with the possible use of paper-based materials to replace other materials. We look forward to sharing more on these opportunities as our plans progress. With that, I'll turn the call over to Andy to review the financials in more detail. Thank you, Jeff.