SWM
#Thank you, Frederic.
I'll now review our financial results, starting with segment performance.
In the first quarter, AMS net sales increased 41% to $100 million.
Organic sales grew 3%, and the Conwed acquisition drove the remainder of the growth.
GAAP operating profit was $8.9 million or 8.9% of sales.
Adjusted operating profit was $17.2 million or 17.2% of sales, up 470 basis points.
The margin expansion was largely driven by organic sales growth and favorable mix as mentioned.
Both the strength of surface protection products and exiting low-margin industrial sales provided mixed benefits versus Q1 of last year.
The addition of Conwed's high-margin operations also provided a solid lift to prior year's adjusted segment operating margin of 12.5%.
As did the realization of approximately $0.5 million of early-stage synergies.
The Engineered Papers segment's net sales were down 7%, driven mostly by volumes as well as pricing concessions and decreased royalties.
The adjusted operating margin was 20.6%, down 470 basis points due primarily to the previously discussed impact of lower LIP and RTL volumes and the associated impact on overhead absorption compared to last year as well as the manufacturing inefficiencies.
We expect EP segment adjusted operating margins to improve from the first quarter level and finish the year in the low 20% range.
Corporate unallocated expenses were up slightly to $9 million.
CEO transition expenses resulted in approximately $1 million incremental costs and offset declines in other areas.
On a consolidated basis, net sales increased 9% but decreased 4%, excluding Conwed.
Adjusted operating profits were nearly $36 million, down $1 million from the year-ago quarter.
The adjusted operating margin was 15.3%, down 170 basis points.
Currency movements were not impactful to consolidated sales and operating profits.
Regarding items excluded from adjusted operating profit, AMS segment noncash purchase accounting expenses more than doubled to nearly $8 million.
This increase was due to the added intangible asset amortization and onetime inventory step-up charges related to the Conwed acquisition.
In Engineered Papers, restructuring expenses decreased to $0.5 million from nearly $1 million a year ago.
Shifting to consolidated earnings.
First quarter 2017 GAAP EPS was $0.45, down from $0.69 in the prior year.
Adjusted EPS was $0.66, down from $0.80 in the prior and excludes restructuring and impairment charges and purchase accounting expenses.
As mentioned, a notable year-over-year comparison factor was a $0.04 gain in Q1 of 2016 from the sale of water rights, whereas, we had no comparable items this year.
In addition, we experienced an increase in our quarterly effective tax rate to 34.3%, driven by a higher proportion of earnings generated in the U.S., lower foreign tax credits, an increase in tax rates in certain geographies, and some discrete items.
As disclosed last quarter, the previously low tax rate for our LIP printing facility in Poland increased significantly due to a change in tax regulations.
After the discrete items, the first quarter 2017 effective tax rate would have been 32%.
The impact of currency translation was negative $0.01 to both GAAP and adjusted EPS in the first quarter.
While first quarter earnings were lower versus last year, we note that first quarter adjusted EPS of $0.66 was basically in line with our expectations.
In the context of our full year adjusted EPS guidance of $3.15, this would imply the combined EPS for the remaining 3 quarters would be stable compared with last year's result.
Over the course of the year, we expect continued organic sales growth and margin expansion in AMS, continued Conwed integration and synergy realization, LIP comparisons to become more favorable, continued RTL declines, and a pickup in paper segment margins compared to the first quarter.
First quarter 2017 free cash flow was essentially neutral.
Historically, first quarter is a seasonally low cash-flow period.
Compounding the seasonal factors was anticipated higher investments in growth-related CapEx.
We called out we began upgrading the paper line in 2016 to produce new specialty filtration paper, and we're pleased to report the project is now largely complete.
This project contributed to total capital spending of about $12 million this quarter versus only $5 million last year.
We expect stronger free cash flow through the remainder of the year.
From a leverage perspective, per the terms of our credit facility, we were at 3.2x net debt to adjusted EBITDA at the end of the first quarter, up from 2x at the year-end 2016, driven by the increase in debt with the closing of the Conwed acquisition in January.
As communicated at the time we announced the Conwed acquisition, we expect to return to the mid-2x range by the end of 2018.
Now back to <UNK>.
Thank you, <UNK>.
Joining SWM at this juncture is such a unique opportunity with exciting developments across both of our businesses.
This is also an ideal time for transition giving the clear execution plan for the next 12 to 18 months.
With our operating priorities in place, I look forward to spending the next several months assessing our global capabilities, meeting our employees and learning more about our customers, products and operations across both segments.
Despite the significant changes at SWM with the creation of the AMS growth platform, the story is far from complete.
Integration and execution on the tangible opportunities within reach today is clearly the immediate focus.
However, our sights remain on continued evolution of the business to drive sustainable long-term growth.
Yes, Dan.
What we mentioned previously is that we see ourselves in a position to exit 2018 in the mid-2x net EBITDA range, and so we very much see ourselves tracking to that early days.
By end of 2018.
No, I'd be happy to.
And first of all, thank you for the kind words.
I look forward to working closely with you as well.
I'll try to give you a brief background.
So I'm an engineer by training, and I've had numerous technical and business leadership roles throughout my career.
I've led global businesses that have manufactured products for use in paper manufacturing, nonwoven manufacturing, polyurethanes, and so I've had previous experience in those markets as well as experience in the oil and gas industries.
I've also spent about half my career living overseas both in Europe and Asia.
So I have on-the-ground experience growing businesses in international geographies, which will represent good growth opportunities for us.
And then finally, I've had executive positions involving leadership in both strategy development, mergers and acquisitions, and I've led successful acquisitions and integration activities all around the world.
So when I step back, I think my background will greatly complement the already-strong leadership we have here at SWM.
And I'm really looking forward to the opportunity to make a contribution to work with the team to grow the company going forward.
