Magnera Corp (MAGN) Q1 2012 Earnings Report, Transcript and Summary

Good morning. My name is Demetris and I will be your conference operator today. At this time, I would like to welcome everyone to the Glatfelter 2012 First Quarter Earnings Conference Call. [Operator Instructions] Thank you. Mr. Jacunski, you may begin your conference.

Thank you, Demetris. Good morning and welcome to Glatfelter’s 2012 first quarter earnings conference call. I’m John Jacunski. I’m the company’s CFO. Before we begin our presentation, I have a few standard reminders. During our call this morning, we’ll be using the term adjusted earnings as well as other non-GAAP financial measures. A reconciliation of these financial measures to our GAAP-based results is included in today’s earnings release and in the investor slides. We will also make forward-looking statements today that are subject to risks and uncertainties. Our 2011 Form 10-K filed with the SEC and available on our website discloses factors that could cause our actual results to differ materially from these forward-looking statements. These forward-looking statements speak only as of today and we undertake no obligation to update them. And finally, we have made available a slide presentation to accompany our comments on this morning’s call. You may access the slides on our website or through this morning’s webcast provider. I will now turn the call over to Dante Parrini, our Chairman and Chief Executive Officer.

Thank you, John. Good morning and thank you for joining our call today. Earlier this morning, we released our earnings for the first quarter as summarized on Slide 3 of today’s presentation. Following a very good 2011, 2012 has gotten off to a strong start. Earnings for the first quarter were $0.43 per share compared to adjusted earnings of $0.34 last year, which represents a 26% increase. Net sales rose 1.4% on a constant currency basis. We experienced strong demand for single-serve coffee products, hygiene and specialty wipes grew by double digits in North America. As expected, Western Europe markets were slow for most of our products and our ongoing commitment to new product development activities continue to produce results, as we generated 54% of revenues from products less than 5 years old. I’m pleased to report that all of our businesses performed well in Q1. Advanced Airlaid Materials profitability improved to 121%, compared to the first quarter of last year. This was driven by improved operating performance and shipments that improved 3.7%, despite weakness in Europe. Specialty Papers operating profit grew 7%, as selling prices rose faster than input costs and our mills turned in solid operating performances, which more than offset $3 million of favorable onetime items in Q1 of last year, as well as weak energy sales. Composite Fibers earned $10.9 million, down 12% from Q1 last year. But this level of performance does represent the second-best quarterly result ever for this business unit. We successfully completed 2 machine upgrades that will increase productivity, improve reliability and add new capabilities. And the costs associated with these investments represented a large part of the year-over-year variance. We also experienced a favorable impact of our debt refinancing and share repurchase program, which together added $0.06 to earnings per share in Q1. All in all, I’m very encouraged by the performance of Glatfelter people in the early part of 2012. And I believe we’re well-positioned to deliver another strong year for our shareholders. Let me now turn the call over to John Jacunski to provide more in-depth comments on Q1 results. John?

Thank you, Dante. For the first quarter, we reported net income of $18.9 million, or $0.43 per share, compared to $16 million, or $0.34 per share, in the first quarter of last year, after adjusting to exclude gains on land sales and integration costs. Slide 4 shows a bridge of adjusted earnings per share from the first quarter of last year to this year. Adjusted earnings per share increased this year from higher operating income in Specialty Papers and Advanced Airlaid Materials, which added $0.02 per share and $0.03 per share, respectively, to earnings. Lower corporate spending added $0.02, and lower interest expense from our debt refinancing in late 2011 and the share repurchase program each contributed $0.03 per share. Composite Fibers' results were $0.02 per share lower in the year-over-year comparison, despite a pretty good quarter. You may recall, Composite Fibers' first quarter last year was exceptionally strong in the quarterly record. And this year’s results were impacted by the cost associated with 2 machine rebuilds and the negative impact of foreign currency exchange rates. Finally, higher pension expense and a higher tax rate each reduced earnings per share by $0.01. Turning to Slide 5. Specialty Papers' operating income increased $1.5 million, or 7%, compared to last year. First quarter 2011 operating income included $2.8 million of onetime benefits from an insurance recovery and the resolution of a tax audit. Excluding these items, operating profit rose 22%. Net sales totaled $224 million for the quarter, up 1.5% from the first quarter of 2011. Selling prices increased in all market segments, totaling $3.7 million for the quarter. Shipments were down 1.5%, which is in line with the broader market. Shipments for our engineered products market segment were up 10% from growth in high-speed inkjets products, as well as a variety of packaging applications. Shipments of carbonless products were down less than 1% due to an expanding customer base and buying ahead of a price increase that was effective at the end of March. Shipments of book and forms products declined, but we continue to use of our flexible assets, superior customer service, and new product and new business development capabilities to offset the impact of a declining [indiscernible] market and we expect to continue to keep our facilities running at or near capacity as was the case in the first quarter. Input costs for this business rose $1.5 million during the first quarter, compared to last year. Pulp prices declined generating a favorable impact of $2.9 million, but nearly all other input costs increased, the most significant of which was wood, which was up $1.7 million consistent with the trends experienced in 2011. Our continuous improvement initiatives remain an important part of our strategy for this business and these initiatives generated a benefit of $1 million during the quarter. This business has announced price increases for envelope, forms and carbonless products of approximately 6%. While we are early in the process of implementing these increases, historically we have realized approximately 1/2 to 2/3 of the announced increases over a 3 to 6-month period, depending on the product, contractual arrangements and market support. Moving to Slide 6. Composite Fibers performed well this quarter, but as I mentioned its results were impacted by downtime associated with 2 machine upgrades, unfavorable foreign currency translation and softening of certain consumer-based market in Western Europe. Net sales declined $3.3 million, or 2.9%, compared to the first quarter of 2011. This was largely due to $3.4 million from the translation of foreign currencies. Selling prices increased modestly, generating $1.1 million of additional revenue. Overall shipments were flat, with food and beverage up 2.3%, driven by significant growth in single-serve coffee, offset somewhat by weaker tea shipments in Western Europe from customer inventory reductions. Shipments of technical specialties and composite laminate products both declined approximately 15%, driven primarily by the weaker market in Western Europe. And shipments of metalized products increased 9%. Input cost for this business rose approximately $500,000 due to energy and a back in synthetic fibers, which was offset in part by lower prices for wood pulp. As we indicated during our fourth quarter earnings call, we completed the upgrades of 2 machines in this business during the quarter. The downtime required for these upgrades, as well as the start-up costs, had a negative impact on operating profit of $700,000 during the quarter. We expect a smaller impact to the second quarter as we complete the commissioning of these machines and ramp them up to full production. The upgrades will improve productivity and reliability, as well as expand the range of products that we can produce. Finally, the changes to currency exchange rates negatively impacted operating profit for this business by $500,000. Moving to Slide 7. Advanced Airlaid Materials generated operating income of $3.8 million in the first quarter, more than doubling the first quarter of last year. This was driven by the success of our continuous improvement initiatives and lower input costs. Net sales increased 3% on a constant currency basis, with shipments increasing 3.7%, led by hygiene and specialty wipes products in North America. And as expected, demand in Western Europe was weaker than a year ago. Selling prices declined slightly during the quarter, but this was more than offset by our continuous improvement initiatives that generated $1.5 million from supply chain efficiencies, improved waste levels and lower spending. We expect to continue to make progress with improving the cost structure of this business, through our continuous improvement program, which we expect will lead to improving margins and profitability. Looking at Slide 8 will provide an update on other financial matters for the quarter. Pension expense increased $700,000 on a year-over-year basis to $3.1 million. For the full-year, we expect pension expense of $12.4 million. I want to remind you that our plans remain overfunded and as a result, we do not expect to have to make cash contributions to our qualified plan in 2012 or for the foreseeable future. Our tax rate on adjusted earnings for the quarter was 30.3%, compared to 29.3% in the first quarter of 2011. The expiration of the research and development credit at the end of 2011 increased the rate, which was partially offset by a change in the jurisdictions in which our income is generated. As we discussed during our fourth quarter call, we completed our $50 million share repurchase program in January. As a result, our diluted shares outstanding declined by 2.9 million shares, or 6.3% this quarter, compared to the year ago quarter, adding $0.03 to our earnings per share. Turning to Slide 9, you’ll see free cash flow was negative $4 million during the first quarter. This reflects normal working capital swings between the fourth quarter and the first quarter each year, as well as increased capital expenditures driven by the $5 million for the Composite Fibers capacity expansion. In 2012, we expect capital spending to be $95 million to $105 million, including a $30 million to $35 million of the $50 million capacity expansion project for Composite Fibers. And finally, Slide 10 summarizes our balance sheet. As we reported during our fourth quarter call, we amended our revolving credit agreement and redeemed $100 million of our 7% and 8% bonds late last year. This generated a $2.2 million decline in interest expense during the first quarter. Our balance sheet remains in very good shape. We finished the quarter with $25 million of cash and $323 million available under revolving credit agreement. Our leverage remains low, at 1.2 times on a net debt basis, so we have ample liquidity to continue to fund our growth initiatives. This concludes my comments. I’ll turn the call back to Dante.

Thanks, John. Before opening the call for questions, I have a few comments on our outlook. As was the case throughout 2011, economic risks persist, sovereign debt issues in Europe are leading the soft economies, and are directly impacting several of our product lines. Unemployment levels in the U.S., although improving, remain high. Growth in China is slowing, and unrest persists in the Middle East. However, over time, Glatfelter had performed well under a variety of circumstances, as witnessed by our performance over the last several years, including the first quarter of 2012. As leaders in our core markets, we will continue to work diligently to provide our customers best-in-class service and products, while emphasizing operational excellence to remain competitive under any economic conditions. On Slide 11, you will find comments on the outlook for the second quarter. Generally, I anticipate market conditions for Glatfelter to be consistent with Q1, with the overall shipping volume to be generally flat, with the exception of Composite Fibers where seasonality in the metalized product line is expected to be the main driver to an overall increase in shipments for this business of about 5%. I expect selling prices for Specialty Papers to rise, as we begin to implement announced selling price increases and we also expect input costs to rise for each of our businesses. Additionally, as we do each year, we will complete maintenance outages at both the Spring Grove, Pennsylvania, and Chillicothe, Ohio, facilities in the second quarter of 2012, which are expected to adversely impact second quarter operating profit by approximately $21 million on a pre-tax basis. And non-shutdown-related maintenance spending is expected to increase by approximately $2 million pre-tax, compared to the first quarter. So to sum it up all, we’re off to a great start in 2012. And I believe we can continue our trend of growing earnings, and generating solid cash flows this year and beyond. Our businesses enjoy leading global share positions in key strategic segments, such as single-serve coffee, tea, and adult hygiene. And we continue to develop attractive growth opportunities. Continuous improvement is making important contributions towards improving cash flows and enhancing our cost structure. As industry-leading specialists, our commitment to innovation is facilitating share growth and margin expansion. And our balance sheet is strong and provides the flexibility to continue making smart investments to deliver superior products and services to customers, and create value for our shareholders. At this time, I’ll open the call for questions.

[Operator Instructions] Your first question comes from the line of James Armstrong with Vertical Research.

My first question is on the pull-forward in Specialty Papers. How much pull-forward do you think there was, and how were volumes looking so far in the quarter? I know you said volumes will be lower in Q2, but can you help us quantify or put a range around this?

Sure, I’ll do my best. I don’t want to really expand much on the guidance that we have provided. I will say that the carbonless price increases, the pull-through was probably on the order of about $0.5 million impact to the quarter. And so that is part of the reason why we would expect or that we provided the guidance we did for second quarter for Specialty Papers. So the advanced buying was about $0.5 million.

Okay. On the -- switching gears, on the second quarter maintenance, could you remind us, are your mills on a 12-month for 18-month maintenance rotation?

It’s 12.

12? Okay. And lastly, your tax rate was little bit lower than I expected during the quarter, should this remain about that level as we go through the year or was there something special that happened in the quarter?

No, there wasn’t anything particular special, it was pretty standard. We would expect that that’s a reasonable rate to use for the balance of the year.

Your next question comes from the line of Steven Chercover with D.A. Davidson.

When you mentioned the benefits of your machine upgrades, can you quantify in terms of additional capacity or perhaps what new products you can make?

Steve, this is Dante. In terms of capacity, it will be incremental because largely the primary benefit of the investments will be in productivity improvements and greater operating efficiencies, so that will translate into things such as lower energy consumption, a little bit better throughput in yields. In terms of capabilities, the -- some of the investments will expand the capability of the assets to produce a wider variety of specialty non-woven materials, that cut across a variety of subsegments. I really don’t want to get into the specific end markets that we’re targeting for strategic regions, which I hope you can appreciate. But we do expect to see an impact on broadening the portfolio of products overtime, as a byproduct to this investment.

We’ll just conclude that it’s all good. Is there any seasonality to the Specialty Papers business beyond the obvious impact of second quarter maintenance?

I would say that in a typical year the only other seasonality we experience from time-to-time is toward the end of the calendar year, when a number of our customers whose fiscal years coincide with the calendar year look to manage working capital and wind down the year.

Okay. One more and I’ll get back in the queue. Are there any start-up costs associated with your inclined wire machine in Germany next year that we should be factoring in?

We haven’t quantified that yet, Steve, but I would expect there will be some start-up impact. We will lose the production of the machine for about a quarter. And there will be some start-up costs. We will quantify that in a future call. But there will be some. I would expect it to be pretty modest, though.

So you’ll lose production for one quarter, but you’ll make it up somehow?

Well, we’ll lose -- that machine is operating today. So that machine produces about 7,500 metric tons of product per year today. We will take that down for about a quarter to do the upgrade and to ramp up the production. So we will lose about one quarter’s worth of production and this machine is currently serving the lower end of the composite laminate market. So we will have some impact to our overall production and there will be some start-up costs as this is a pretty major upgrade. So there will be some shake out of the machine as we start it up. But that’s sort of the best context I think I can give you right now.

[Operator Instructions] Your next question comes from the line of Stuart Benway with S&P Capital.

Despite an increase in pension expense, your SG&A declined close to $2 million. Can you tell us where those savings were achieved?

Sure. If you’re talking about overall SG&A for the company?

Yes.

Part of it is driven by exchange rates, this year versus last year. We also had some integration costs in last year. And we had some higher legal expenses last year that have trailed off somewhat in the early part of this year. I would say those are the major drivers we have. We reported in the fourth quarter that we had some reduction in force in some of our facilities that took some people out that also helped to reduce the overall cost, but those would be the key drivers.

And so what do you expect the trend to be going forward?

I think if you’re looking at Q2, I would say it would be in line with Q1. We don’t expect any significant changes as we go through Q2.

So for the year then, looking to be down, SG&A down, versus the prior year?

Yes.

You made strong progress in operating costs at Airlaid and you said you expect some further gains there. Can you get those margins that business up to the levels of your other businesses?

This is a Dante. So, yes, there’s more upside for the Airlaid business. We’re continuing to leverage the institutionalized approach to continuous improvement within Glatfelter, so this is the application of lean and Six Sigma and other tools and methodologies. And that part of the business is becoming more proficient at applying those tools in a way that generate sustainable value. We continue to focus on growth, so if you think about overarching themes, we’re serving growing global markets and we have leading share positions. And when you combine that with our innovation capabilities, where we want to continue to bring new solutions to the market, where we have strong relationships with market makers, that should bode favorably for better capacity utilization, and we want to capitalize on the recent investment we made in the additional converting capacity in Canada, which is called a festooner, which is also accretive to profitability. So hopefully that helps you get a better picture what’s going on in the Airlaid business.

Okay. And just on the single-serve coffee business, which I think has been pretty strong for you and you have a high share in that business. One of the major coffee retailers in this country has said that they’re going to sell single-serve coffee in grocery stores. Do you see that as an opportunity for you?

Well, today if you walk the aisles in grocery stores, you will find a fair amount of shelf space committed to K-cups, capsules, pads and pods, many of which include filter paper that we produce. So I think these are all complementary channels to the market, and if you think about single-serve coffee in the U.S., compared to perhaps some of the more established Western European markets the penetration rate for single-serve coffee is still in the single digits here and in some of the more established Western European markets they’re in the 30s and 20s. So we think there is a lot of upside over the long-term and we’re very committed to this market, as witnessed by the commitment of $50 million to increased capacity to serve our growing customers.

One last quick one, on interest expense, is probably $17 million good for the year?

Yes. That’s right.

Your next question comes from the line of Lawrence Stavitski with Sidoti & Company.

I just want to see if you could quantify some of the decrease in shipments for the Composite Fibers unit, like how much was that European-related versus North America, or can you guys get into that all?

Well, yes, I would say that most of our product lines were weak in Western Europe. I mentioned composite laminates and technical specialties were both down about 15% for the quarter, versus a year ago. And that was largely driven by weakness in Western Europe. We saw tea volumes were a little bit weak in Western Europe driven by some inventory reduction programs, but we did see growth in Eastern Europe, certainly in North America, Latin America and parts of Asia for our metalized products, we were up 9% and still a little bit weak in Western Europe. We saw growth in Eastern Europe and Latin America. So I’d say most of our product lines tracked the economy for different reasons, some of it was lower consumer demand, others of it was inventory management by some of our customers.

Okay. And also, I noticed that the energy sales were a little bit weaker this quarter. Can you comment on that going forward? How do you look at that?

I think the -- we sell electricity to grid out of our Spring Grove, Pennsylvania, facility, and the deregulation of markets in Pennsylvania has resulted in substantially lower rates. So rates were quite low, compared to a year ago. And so we were in -- for much of the quarter, we were not even producing electricity to sell. So we would dial back our operation and only sell when the prices were advantageous. So we expect that’s probably going to continue. During the summer, the peak season, if weather is warm, there could be and typically there is an increase in the electricity rates, but absent that kind of a summer peak, we expect rates will remain quite low.

Got you. And just going back to the scheduled maintenance outage. Is that going to be simultaneously for both facilities, are they going to be running simultaneously out?

No, we do one facility in May and one facility in June.

Dante, how long is that? Is it the whole month?

No, no, no. It’s a week.

A week each? Okay.

[Operator Instructions] And there are no further questions at this time. I will now like to turn the call back over to Dante.

Okay. Well, thank you again for joining us today. John and I really appreciate your questions and your interest in Glatfelter. And we look forward to talking to you next quarter. Have a good day.

Thank you. That does conclude today’s conference call. You may now disconnect.