Magnera Corp (MAGN) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Brandy and I’ll be your conference operator for today. At this time, I would like to welcome everyone to the Glatfelter’s 2016 Q1 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to John Jacunski. Sir, please go ahead.

Thank you, Brandy. Good morning and welcome to Glatfelter’s 2016 first quarter earnings conference call. This is John Jacunski; I’m the company’s CFO and President of the Special Papers business unit. Before we begin our presentation, I have a few standard reminders. During our call this morning, we will use 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 2015 Form 10-K filed with the SEC and today’s release, both of which are available on our website, disclose 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, Glatfelter’s Chairman and Chief Executive Officer.

Thank you, John. Good morning and thank you for joining us to discuss our 2016 first quarter results. Our results reflect a solid start to the year. As shown on slide three, we generated adjusted earnings per share of $0.37, an increase of 23% over the prior year quarter. Revenue for the quarter was $402 million, down 2.4% on a constant currency basis compared to the same quarter last year and shipments were up 2.5%. Composite Fibers had a challenging start to 2016 where shipments down 3% compared to last year and operating profit declining 24%. Following strong volumes growth in 2015, demand in the food and beverage market segment was impacted by inventory reduction efforts by some of our larger customers, resulting in a 6% decline in shipments. We expect demand for these products to return to more normal market growth patterns in the second half of the year. In a wallcover market, Russia and Ukrainian seems to have stabilized and we're seeing some indications that shipments will improve in the near term. In the Advanced Airlaid Materials, we had a solid quarter with continued growth in shipments of personal care products. Shipments of hygiene products grew 3% and specialty wipes were up 5%. Continuous improvement in operating performance of both facilities and the benefits from a weak Canadian dollar increased operating profit by 25%. We also made progress with our capacity expansion plans for the business, which I’ll update you on during my closing remarks. For Specialty Papers, shipments in the quarter were a record for Q1 and up 4% compared to last year, again, outperforming the broader uncoated free-sheet market. Pricing in commodity grades were below year ago levels, but we expect improvements as we implement the recently announced price increases. Significantly lower input costs and improved operations more than offset the effects of lower prices, driving operating profit up 58%. This concludes my opening remarks; John will now provide a more in-depth review of our first quarter results, and offer some closing comments before taking your questions. John?

Thank you, Dante. For the first, we reported net income of $16.2 million or $0.37 per share. After excluding non-core business items, we reported net income of $16.3 million or $0.37 per share compared to $0.30 in 2015. Slide four shows a bridge of adjusted earnings per share from the first quarter of last year to this year. Composite Fibers had a challenging quarter, with results reducing earnings per share by $0.06, including a negative $0.02 impact from foreign currency translation. Advanced Airlaid Materials results increased earnings per share by $0.02 per share, due impart to a positive impact from the weak Canadian dollar. Specialty Papers is also increased earnings per share by $0.09. Higher corporate costs driven by the Fox River legal matter reduced earnings per share by $0.02 and lower pension expense increased earnings per share by $0.03. Slide five shows a summary of the first quarter results for Composite Fibers business. Total revenue for this business was $124 million, a decrease of 5% on a constant currency basis compared to last year with overall shipping volumes down 3%. As a result of price declines in 2015, selling prices negatively impacted operating profit by $3 million compared to the first quarter of last year. Selling prices were flat on a sequential quarter basis. The lower selling prices were partially offset by lower prices for energy and certain raw materials. Due to tightness and the availability of our back to fiber market prices are increasing for this critical raw material for our tea and coffee products. Demand for tea in single-serve coffee products was soft with shipping volume down 6% compared to the year ago quarter. After strong shipments last year this reduction reflects a few key customers reducing inventory levels, which we expect to continue in the second quarter. We remain the global market leader for beverage filtration papers and we expect demand for these products to return to more normal growth patterns in the second half of the year. Shipment of Wallcover products were down 3% this quarter compared to a 20% reduction throughout 2015 and we are seeing indications that demand may improve in this market in the near term. And finally we continue to see growth in our composite laminate products with shipments up 5% compared to last year. We have another solid quarter from an operations perspective, which was in line with the year ago quarter and our performance throughout 2015. We expect a solid operational performance to continue and to at least offset the impact of general cost inflation. Overall, operating profit decreased for the quarter to $11.2 million compared to $14.7 million a year ago, including a negative $1.1 million impact from foreign currency. For the second quarter when compared to the first quarter, we expect shipping volume to be approximately 10% higher. We expect selling prices and raw material and energy prices all to be in line with our first quarter. During the first quarter, we announced a 5% price increase on our tea and coffee products driven by the higher cost of Abaca and other natural specialty long fibers. We expect to begin to realize these price increases in the second half of the year as customer pricing arrangements and contracts renew. Advanced Airlaid Materials results are summarized on slide six. This business performed well during the quarter with improved demand and operating margins compared to same quarter year ago. Revenue during the quarter was $60.8 million, down 1.3% on a constant currency basis compared to last year with shipments up 2% in comparison. The decline in revenue was driven by lower selling prices from customer contract provisions that recorded the pass-through of raw material cost movements. Shipments of hygiene products were up 3% and specialty wipes were up 5% compared to the year ago quarter. We see continued growth opportunities in these segments as the market grows and the Airlaid technology gain share. On the operating side, the teams in the both facilities performed very well in the first quarter, again, achieving higher production output to serve the growing customer demand and offset the impact of general inflation. As a result, operating income for this business increased to $6.6 million compared to $5.3 million last year, including a $900,000 benefit from foreign currency. For the second quarter, we expect shipping volumes to be in line with the first quarter, but well ahead of the second quarter last year. In addition, we expect average selling prices and raw material prices to be in line with the first quarter. Slide seven provides a summary of the Specialty Papers business. Shipments for Specialty Papers increased 3.6% when compared to the first quarter of last year. Growth in book publishing drove the increase in shipments which was partially offset by declines in other market segments. Selling prices in the first quarter were below the first quarter of last year, resulting in a $4.2 million impact to operating profit. Including a negative FX impact of $600,000 from sales denominated in the Canadian dollar. Lower raw material and energy cost more than offset the impact of lower pricing. As a result of the shutdown of industry capacity for uncoated free sheet, this quarter, the industry including Glatfelter announced a price increase of $60 per ton on non-carbonless forms, book and envelope products effective April 1st. This price increase applies to about 500,000 tons of annual business for specially papers. As is typical the price increase will be phased in over several months based on customer agreements competitive dynamics. We expect to begin to see some impact of the price increase in the second quarter. The ultimate success to increase will be depended on the supply demand balance and a discipline with which it is implemented across the industry. From an operation perspective, pulp production increased 19.5% in the quarter and overall reliability improved. Despite some challenges from weather in January, operations delivered a $4.8 million improvement to earnings in the year-over-year comparison. Lower market pricing for electricity reduced the sale of access generation in spring rolls negatively impacting results by $1.4 million. The net result was $5.5 million improvement to operating profit compared to the year ago quarter. For this business in the second quarter we expect shipping volumes to be approximately 5% lower than the first quarter, reflecting a normal impact of our annual maintenance outages. Selling prices are expected increase slightly, as we previously mentioned price increases begin to be realized. We expect input cost to remain in line with the first quarter. We will also complete our annual maintenance outages during the second quarter with an expected impact to operating profits of approximately $25 million to $27 million compared $33.4 million last year. Slide eight shows corporate costs and other financial items. During the first quarter, corporate costs were $5.4 million compared to $4.2 million in 2015. The increase was driven by higher legal costs for the Fox River matter as we prepare for trial schedule for March of 2017. And as previously reported, we expect our pension cost to be lower in 2016, primarily due to higher discount rates. Slide nine shows our free cash flow. During the first quarter, our adjusted free cash flow was use of $1.8 million compared to use of $18.4 million in the first quarter of last year. The improvement was primarily due to lower cash utilization for working capital and improved earnings from our businesses. Capital expenditures have increased due to Airlaid capacity expansion project and Specialty papers, Boiler environmental compliance projects. We continue to expect total capital expenditures of $150 million to $170 million in 2016. Additional details on CapEx are provided on slide 14. Our first quarter spending on Fox River remediation totaled $700,000 reflecting the final payments for work performed in 2015. We have submitted our plans for remediation work in 2016 and we have begun to perform against these plans. We expect our spending in 2016 to be less than $10 million. Slide 10 shows some balance sheet and liquidity metrics. Our net debt on March 31 totaled $294 million, up $38 million from the end of 2015. We finished the quarter with $70 million of cash and $252 million available under our revolving credit facility. Our balance sheet remains in good shape with leverage on a net debt basis of 1.8 times. We believe this provides sufficient liquidity to meet our near term investment needs and to continue to execute our growth strategies. This concludes my comments. I will turn the call back to Dante.

Thanks, John. The year is gotten off to a solid start and we believe we can continue to build on our overall progress. Our Composite Fibers business is core our growth strategy and remains the global market leader and attractive consumer product categories with healthy long-term growth potential. We're seeing some indications of improvement in the wallcover market and we expect more normal growth patterns in the food and beverage market in the second half of 2016. Our Advanced Airlaid Materials business continues to build on its leadership positions in the feminine hygiene, adult incontinence and specialty wipes markets. We expect these markets to grow about 5% per year, which led us to pursue a capacity expansion project for the North American market. In March, we announced the selection of Fort Smith, Arkansas for the new Airlaid facility. We've closed on the purchase of an existing manufacturing building and its currently being modified for the Airlaid production process. We've also finalized the contract for the specialty Airlaid equipment needed at the facility. We're progressing as planned and expect the facility to be operational in the fourth quarter of 2017, with commercial shipments beginning in the first quarter of 2018. This facility will add 22,000 tons of capacity to serve our growing markets. And in specialty papers, we continue to deliver our new business and new product development initiatives which led to record key one shipment. We also expect to benefit from those price increases that we began to implement and we continue to make good progress on our environmental compliance projects as John mentioned in both facilities expecting completion on time and on budget. In addition, we will continue our discipline approach to daily execution, controlling cost, providing superior customer service and developing new products and new business relationships, all while, remaining focused on executing our long-term growth strategy. I believe this approach will continue to serve our business well and position Glatfelter for future success. Before I open the call for your questions, I’d like to address two key management changes that were made during the quarter. In March, Sam Hillard joined us as Vice President of Corporate Development and Strategy. Sam brings to Glatfelter deep experience in M&A and strategy development, both in industry and investment banking. He filled the position that was vacant over the last year due to the promotion of Chris Astley, to President of the Advanced Airlaid Materials business. Also during the quarter, Brian Janki resigned as President of the Specialty Papers business to pursue another opportunity. I asked John Jacunski to take on this role in addition to retaining his responsibility as CFO. John is a well-respected and experienced senior leader at Glatfelter who has a demonstrated track record of success. John provides the strategic thought leadership and drive for results required to guide Specialty Papers toward realizing its full potential. Over the last several years, John has built a high performing finance organization, which when combined with the veteran industry talent that makes up our Specialty Papers leadership team and the addition of Sam Hillard gives me confidence that we have the right team in place to execute our strategy and deliver value to our shareholders. I'll now open the call for your questions.

Thank you. [Operator Instructions] And your first question comes from Anuja Shah with BMO Capital.

Hi, good morning.

Good morning.

My question is about the food and beverage weakness that you saw in composite fibers, I believe you said it was down 6% and part of it was due to your customers drawing down inventory. Can you give any more color on that, like was it all inventory drawdowns, was there anything else going on, or things that you can tell us about it?

Yes, happy to do so. The entire 6% delta is due to inventory reductions. So from our point of view, we have no material changes to our markets and haven’t lost any market share.

Okay, great. But you do expect that some more of that in 2Q, but then turning in 3Q?

Yes, I said from the food and beverage point of view, we think volumes will be flattish from Q1 to Q2 on a sequential quarter basis and then in the second half of the year we’ll start to - we’ll see our more normalized industry growth levels.

Okay. Great. And then just switching over to your non-woven wallcoverings, you made a comment that demand may improve in the near-term. Can you give a little more detail on that, why you are confident about that? And also you said you have a new product, a new lower price product for either, Russia and Eastern European market, maybe an update on sales trends there? Thank you.

So as you know the Russian and Ukrainian markets have been very challenging and quite volatile over the last several quarters. We have very strong customer relationships. We have a lot of feet on the ground, and the discussions that we’ve been having with our customers indicate that we expect to see some volume growth this year, starting next quarter. And with currency levels, with a euro at about - the ruble is about 76 to the euro right now. So that’s a pretty stable level according to our customers where they can manage. So again, it’s a bit volatile and the crystal ball isn’t quite as clear in a long-term perspective. But based on the data that we’ve collected and the customer behaviors that we’re observing, we have an expectation to see overall wallcover shipments increasing, which is a positive thing for us. I think the other part of your question talking about other products is - we talked about several quarters ago, the fact that we expanded our portfolio to introduce some lower basis way products that could provide some solutions to our customers that were challenged with regard to currency volatility.

All right. Great. Thank you.

Yeah.

[Operator Instructions] Your next question comes from Dan Jacome with Sidoti & Company.

Hey, good morning. How are you?

Good morning.

Good morning, Dan.

Appreciate your time. Three quick questions, can you just give us a little flavor of what progress you are making over at Fort Smith facility for the Airlaid segment? And then - that's the first question.

Sure. We're tracking according to plan. So, as I said we purchased a building. We are in the process of making modifications to accommodate the early production process. We've solidified contracts for the equipment that we're going to put in the facility. We've been very warmly received by the broader community in Fort Smith and across the state of Arkansas which is wonderful. We're excited and looking forward to establishing our operations there and the game plan is for us to have the facility complete by the end of 2017 and producing and shipping product in Q1, 2018.

Okay. And that's good. Can you just remind us why that location was chosen just proximity to end customers I imagine?

Yes. So we did the analytics and the demand was continuing to grow in North America and as we looked at customer concentrations, supply chain and logistics opportunities and a few other considerations in terms of the broader economic consideration that Glatfelter would be afforded in these various locations, we determine that Arkansas was the best location for us and we are very fortunate to find a great facility that we were able to purchase.

Okay. Got it. That’s helpful. Second question is just on SG&A, can you just give us some incremental high level of thoughts on what sort of leverage you might be able to get this year. I know the second half of last year there were some labor force reduction, but this quarter we didn’t really see net, net much of a benefit. How should we think about that?

It’s Dante. So, unrestricted [ph] SG&A, particularly on the corporate side, we expect our cost to increase in the second quarter, the guidance we provided in the slides and this is summarized on slide 12 in the Investor packet, is that we'll expect our corporate SG&A cost to be up about $2 million in the second quarter compared to the first quarter. This has been driven by some of the Fox River legal cost which have ticked up as we are preparing for trial in 2017 and then also some corporate initiatives that we have. When I think about the broader context of your question of labor, we had a program last year to reduce cost by about $30 million and that included a headcount reduction program. We reduced global headcount by about 3%. We don’t have a similar type targets for this year. Although, we expect that in our Specialty Papers business, given the competitive dynamics in that business that we will continue to see some headcount reductions, as primarily through attrition, as we look to continue to improve efficiencies.

Okay. Were those $30 million - is there anything left or is that already - my impression was that some of that was going to flow into '16 or is that a completely 2015 event?

That was a 2015 event.

Okay. Got you. And then my last question, I have to ask is with the way the stock is today, how much left on your buyback program?

How much is left?

Yes.

Our buyback program, we have around $35 million on the buyback program, although it does expire here in a few weeks with the capital commitments we have around the Airlaid facility and the environmental compliance projects for Specialty Papers and the high level of CapEx this year and next year. We do not currently anticipate to put a new authorization in place right now. But we will continue to look at our cash flows and address that as we move forward.

Okay. So it sounds like buyback are off the table through 2017?

I’d say at least in the near term, given the capital that we’re spending on some of our growth initiatives and the Specialty Papers compliance project.

Understandable. Thanks a lot.

Your next question comes from Alec Cummings with Deutsche Bank.

Hi, good morning.

Good morning.

I was wondering, could you give a little more color on the pricing environment in composite fibers and given that prices were flat sequentially, would you expect the year-over-year impact to subside as we progresses in the remainder of 2016?

Yes. And you know, that we did announce a price increase for our food and beverage products and the nature of our contracts in this part of the business is a little bit different than perhaps Specialty Papers. So we would expect to see some of the benefits of these price increases to grow through the P&L over the next couple of three quarters.

Okay. And then I was also wondered to get your thoughts on yesterday’s fluff pulp transaction and is some divestments need to be made for regulatory reasons, would any of those assets potentially be of interest?

So the observation is that this is a process that’s been very public, so there were a lot of speculation as to who might be the larger goal and final orders of the asset. So not very surprise with the outcome. As it pertains to fluff pulp, we're big buyers of fluff pulp. There is also more capacity coming online, whether it’s in Brazil or they are Chinese that are also going to be building a facility and so Arkansas which I believe is scheduled to open in 2019. So, reminded at about 90% of the Airlaid business has a cost pass through on pulp. So I think we're very confident with these overall supply chain and our relationships with the existing players and potentially new players we're very opened to learning more about those opportunities. Yes, it pertains to Glatfelter buying pulp mills, that’s something I envision doing it. We don’t really have practice of commenting on particular targets or speculating about M&A activities. Alec? Brandy?

Alec, please continue.

Okay.

So I was finished.

Okay.

I think I lost you for a second.

Yes, no worries.

Brandy, do we have any further questions?

No sir, not at this time. [Operator Instructions]

Okay. Well, I just want to thank everyone for joining our call today. And we look forward to speaking with you next quarter. Have a good day.