Magnera Corp (MAGN) Q2 2016 Earnings Report, Transcript and Summary

Good morning. My name is Brandy and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Glatfelter’s Second Quarter 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. Mr. John Jacunski, you may begin your conference.

Thank you, Brandy. And good morning and welcome to Glatfelter’s 2016 second 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 second quarter results. As noted on Slide 3 of the presentation, for the quarter, we’ve reported adjusted earnings per share of $0.06, up $0.02 over the prior year quarter and in line with our expectations. We continue to operate in a slow growth global environment that resulted in revenue for the quarter of $406 which was down approximately 1% in constant currency. Each of our businesses saw improved demand in the quarter resulting in shipments increasing 2.5%. And for the year, selling prices have been generally flat to improving as compared to 2015 when they declined in many of our markets. For the Composite Fibers business, shipments increased 3% compared to last year and 10% compared to the first quarter. As mentioned during our last call, the Russia and Ukrainian wallcover markets continue to show signs of stability with some pockets of improvement which led to a 12% increase in shipments. While the economic situation remains tenures, we do expect near term demands to remain at this higher level. Our shipments of tea and coffee products improved from the first quarter and we’re generally in line with the second quarter of last year. We expect the inventory reduction efforts of some customers to continue into the third quarter with shipments returning to normal growth patterns in the fourth quarter. Composite Fibers’ operating profit for the second quarter was $15.3 million, down $1.4 million primarily due to foreign currency. In Advanced Airlaid Materials, we had another strong quarter with shipments up 8% and operating profit up 118% over the same quarter last year. Customer demand for our hygiene and wipes products continues to growth with hygiene products up 5% and wipes up 2% year-to-date. Success with our continues improvement program led to the second straight quarter, a record production in our Canadian facility allowing us to increasing demand and improve our cost structure. For Specialty Papers, shipments were up 2% compared to last year, again outperforming the broader uncoated freesheet market. Selling prices were down on a year-over-year basis but up from the first quarter on many of our white paper grades as we implemented recently announced increases. During the second quarter, we successfully completed our annual maintenance outages at the Ohio and Pennsylvania facilities in line with expectations. The decrease cost of this year’s outages led to a $4 million reduction in Specialty Papers operating loss for the quarter. This concludes by opening remarks. John will now provide a more in-depth review of our second quarter results. Then I’ll offer some closing comment before taking your questions. John?

Thank you, Dante. For the second quarter, we reported net income of $2 million or $0.04 per share. After excluding non-core business items, we’ve reported net income of $2.8 million or $0.06 per share compared to $0.04 in 2015. Slide 4 shows a bridge of adjusted earnings per share from the second quarter of last year to this year. Composite Fibers results reduced earnings per share by $0.02 including a negative $0.0 2 impact from foreign currency. Advanced Airlaid Materials results increased earnings per share by $0.06 primarily driven by strong volume growth. Specialty Papers results increased earnings per share by $0.07, driven by the lower cost of the annual maintenance outages. Higher corporate cost for professional services, incentive compensation and the Fox River legal matter reduced earnings per share by $0.07 and the income taxes reduced earnings per share by $0.03 driven by a tax benefit recorded in the second quarter of last year related to the release of reserves for the completion of tax audits during that quarter. Slide 5 shows a summary of second quarter results for the Composite Fibers business. Total revenue for this business was $136 million, a decrease of 3% on a constant currency basis compared to last year with overall shipping volumes up 3%. As a result of declining prices in 2015, selling prices negatively impacted operating profit by $1.6 million compared to the second quarter of last year. However, prices have been flat on a sequential quarter basis for the last two quarters. Demand for tea and single serve coffee products was down 1% compared to the year-ago quarter but up 9% over Q1 of this year. During the first half of the year, our few key customers have been reducing inventory levels. We expect this to extend into the third quarter with shipments returning more normal growth in the fourth quarter. Shipments of wallcover products were up 12% this quarter, reflecting stable and improving demand in this market. While the economic situation of Russia and Ukrainian remains difficult, we expect the improved demand to continue in the third quarter. And finally, we continue to see our growth in our composite laminate products with shipments up 4% compared to last year. Overall raw material and energy cost decline compared to the year ago quarter, continued tightness and the availability of abaca fiber, as well the substantial increases in prices for this fiber. These increases have been more than offset by lower prices for purchased pulps and energy. We continue to drive operational performance for our continues improvement programs, but the impact was offset by higher depreciation expense and general cost inflation. Overall, operating profit decreased for the quarter to $15.3 million compared to $16.7 million a year ago, including a negative $1 million impact from foreign currency and related hedges. For the third quarter when compared to the second quarter, we expect shipping volumes to be slightly higher. We expect selling prices and raw material and energy price all to be in line with the second quarter. During the second half of the year, we will be taking some machine downtime to manage inventory levels. We expect the negative cost impact from this downtime in the third quarter to be offset by cost reduction initiatives. Advanced Airlaid Materials results are summarized on Slide 6. This business continues to perform very well with strong growth in demand and operating income compared to the same quarter year ago. This drove a significant improvement in EBITDA margins to 15% compared to 9.1% last year. On a year-to-day basis, EBITDA margins were 14.8% the highest in our history. Revenue during the quarter were $61million, up 5% on a constant currency basis compared to last year with shipments up 8% driven by increase demand for hygiene products. The higher shipping volumes were partially offset by lower selling prices from customer contract provisions that recorded in the pass through of raw material cost changes. Shipments of specialty wipes were down 1% during the quarter and up 2% year-to-date. We expect demand for specialty wipes to strengthen the second half of the year compared to the first half of the year and prior year. Operations for the yearly business performed well with less market and maintenance downtime in 2015. Record yearly production in our Canadian facility is supporting the growing demand in North America. As a result, operating income for this business increased to $6.8 million compared to $3.1 million last year. For the third quarter, we expect shipping volumes to increase slightly compared to the second quarter. In addition, we expect average selling prices and raw material and energy prices to be in line with the second quarter. Slide 7 provides a summary of the results for Specialty Papers. Shipments for Specialty Papers increased 2% when compared to the second quarter of last year. Growth in book publishing and envelope products more than offset the decline in carbonless products. Selling prices in the second quarter were below year ago levels resulting in a $3.7 million impact on operating profit. During the second quarter, we began implementing the recently announced $60 per ton price increase on a range of products. Based on in current markets, we expect to realize about third of the announced increase on most products. During the second quarter, we successfully completed our annual maintenance outages at a total cost of $26.3 million compared to $33.4 million last year. The outages last year reflected a broader scope of work to address additional equipment maintenance. Excluding the favorable impact of the outages, operations were unfavorably impacted by lower pulp production rates compared to the record second quarter of last year and due to higher levels of incentive compensation. The net results of $4.2 million improvement to operating results compared to the year ago quarter. For this business in the third quarter, we expect shipping volumes to be approximately 5% higher than the second quarter with selling prices increasing slightly. Increases in raw material and energy prices are expected to slightly outpace selling price increases. We also expect maintenance spending to decrease by approximately $23 million reflecting normal patterns on maintenance expense. Slide 8 shows corporate cost and other financial items. During the quarter, corporate cost was $7.8 million compared to $3.9 million in 2015. The increase was driven by higher professional services, incentive compensation and Fox River legal costs. We expect corporate cost to decline $1 million to $2 million in the third quarter compared to the second quarter. Slide 9 shows our free cash flow. During the second quarter on an adjusted free cash flow basis, we generated $15.7 million compared to $5.7 million in the second quarter of last year. The improvement was primarily due to improved earnings from our business and lower reaching capital spending. Total capital expenditures have increased due to the 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. Spending on Fox River remediation in the first half of the year, totaled $1.2 million. We continue to expect our total spending for 2016 to be less than $10 million. Slide 10 shows some balance sheet and liquidity metrics. Our net debt at June 30th, totaled $309 million, up $54 million from the end of 2015. The increase was driven by the $56 million spent in the first half of the year on our two major capital programs. We finished the quarter with $59 million of cash and $258 million available on the 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 out near term investment needs and to continue to execute our growth strategies. This concludes by comments. I’ll turn the call back to Dante.

Thanks, John. Following year of significant macro level headwinds in 2015, we’ve seen improvement in the first half of 2016 with adjusted earnings up 25%. For our Composite Fibers business with the global leader in markets like tea, single serve coffee and wallcover with healthy long term growth rates and we expect to continue working on building our positions in electrical products, dispersible wipes and other technical specialties. The wallcover markets in Russia and Ukraine have stabilized and are now improving and we expect this improvement to continue at least in the near term. Prices for some of the key products and Composite Fibers decline in 2015 due to soft market conditions and increased capacity and competition. However in 2016, we have seen prices stabilize and in some cases improved. Our Specialty Papers business continues to deliver our new product and new business development initiatives that are producing the 12th consecutive year of outperforming the broader uncoated freesheet market. We are seeing some benefit from price increases all will be at a lower level then we’d like. And we continue to make good progress in our environmental compliance projects in both facilities which we expect to complete by the end of the year. I am very pleased with the first half performance of our Advanced Airlaid Materials business with earnings up 59%. The stability of these market have returned the growth in our hygiene segment as well as a continued growth in specialty wipes is promising. I am equally encouraged by the Canadian operations team’s ability to increase Airlaid production to meet our customers’ growth demand as we work to bridge the supply gap until our new capacity comes online. The construction of our new Airlaid facility in Fort Smith, Arkansas is progressing as planned. This facility will add 22,000 tons of capacity to serve the growing demand for wipes and hygiene products in North American. We expect the facility to be operational in the fourth quarter of 2017 with commercial shipments beginning in the first quarter of 2018. As we navigate through a slow growth environment, Glatfelter will continue to leverage its capabilities and continues improvement, cost management and commercial excellence to bolster its leading positions and maintain a competitive cost structure. This approach is focused on driving near term results while preserving liquidity that can be utilized for targeted growth investments as we look to the future. I’ll now open the call for your questions.

[Operator Instructions] Our first question comes from the line of Mark Wilde with BMO Capital Markets.

Good morning, Dante. Good morning, John.

Hey Mark.

Good morning, Mark.

Dante, I wanted - if we could maybe start in Composite Fibers, you could give us a little bit more color on its pick up that you are seeing in the wallcovering market, you sounded a little bit tentative in your comments about how durable it’s going to be?

Sure. So as we said earlier, volumes were up 10% in the quarter and that market environment and currencies are more stable. It’s still a recession area environment but if you compared to 2016, when the Russian economy was down 4%, its projected to down one 1.5% this year and maybe plus one next year. So it’s still tenures and a bit volatile, so I want to be measured in my comments that we’re pleased with the progress we are making, we are leveraging our leading market positions in the relationships that we have with all the major players. We’ve expanded our product offerings to create greater optionality for our customers and we remain positive about the longer term growth prospects and we expect the demand patterns that we’ve seen to continue in the near term but it’s difficult for us to be very specific about far out in the future based on what we see today.

Okay. Is it possible to get a sense of kind of where that Dresden [indiscernible] [0:16:31] at right now in terms of either operating rates or margins, that was a very high margin when you acquired that several years ago?

You know Mark, I think you know margin-wise it’s certainly not at the level when we acquired it but it is compares favorably to the average margins we have for the business unit. So we’ve been able to manage the cost structure in a way that’s continued pretty healthy margins just not quite at the level where when we acquired. From a capacity perspective, we’re operating in sort of 80%-85% range of capacity utilization. So we still have fair bit of working capacity.

Okay, right. And it sounded like over on food and beverage that your - this inventory issue that you talked about last quarter is curing into that the year half of the year, what would be a reasonable expectation you think for food and beverage when we think about the full year for volumes?

Yeah, so maybe I’ll add few comments and John you can give some guidance. But the second quarter was actually a little bit better than we expected. And so the destocking in many ways just shifted a quarter, so that’s kind of what we are seeing and we do anticipate more normalized growth rates to resume in the fourth quarter. From a year-over-year perspective, John how would you like to guide?

Yeah, Mark you know we won’t provide guidance of for one quarter. So we’ve said that we expect overall shipping volumes for Composite Fibers be up slightly in the third quarter that would include some of this destocking in the food and beverage sector. And we expect to get back to normal growth rates in the fourth quarter and we typically are using 3% to 4% as the overall growth rate for the tea and coffee products.

Okay, alright, that’s helpful. And then in Airlaid, John, I just kind of curious your volume was up almost 8% year-on-year but if I look at your waterfall slide in that segment, actually all that volume has very little impact on EBIT and that was a little puzzling to make?

Well, last year we had some downtime in the second quarter both because of some weaker volumes and also because we had a maintenance product on a winder. So we got a benefit from having more capacity utilization in the second quarter in the operation side and we also the record production in our Gatineau facility consecutive quarter. So that helps. So from a volume mix somewhere thousands where we came out with the 8% growth, but we’re able to take advantage of better cost structure on the operating side.

Okay, and I wondered in that business, can you kind of help us understand kind of where the growth is coming in the kind of hygiene versus wipes and where that will shift - how that will shift one Fort Smith is up and running? As I recall when you first bought this business, it was primarily making observant core material and it sounds like you know the mix has changed in the time that you’ve owned the business and I just wondered how that - what that looks like right now and what it’s going to look like two years down the line ?

Sure. So you are correct that when we bought the business, the vast majority was feminine hygiene and the vast majority of that category was the absorbent core that goes into the various fem-care products. And Q2, we had 8% year-over-year growth at our feminine hygiene business. Our wipes are ramping up and we expect very strong demand in the second half as we manage the ramp up process with our existing assets and bridge to start up a Fort Smith. And for the years we expect wipes growth to be above market levels which are 5% to 6%. So as Fort Smith becomes more operational and that adds 22,000 tons to our existing platform, it will be 120,000-130,000 tons per year total capacity in the Airlaid business depending on basis weight et cetera, but our modeling as we push that closer to 130-129. So a big part of that growth and the big part of Fort Smith will be on the lower basis where it’s specialty wipes products. So you’ll see a higher contribution and we’re able to do this is a way that doesn’t compromise our ability to meet the needs of our key fem-care products customers today and into the future, will actually be able to establish centers of excellence and streamline our manufacturing processes and get greater production efficiencies as we allow certain machines to make certain products and certain basis weights that they best designed to do. Not to dissimilar to what we did with CFPU as we built that business overtime and added scale. So we are optimistic about how we are going to manage the product platform, how we’ll establish centers of excellence and how adding Fort Smith doesn’t cost us a lot of additional money from a G&A point of view and why we think this will give us a nice lift in terms of the overall profit profile and cash flow profile the Airlaid business once we get into 2018 and 2018 when Fort Smith is generating EBITDA. And bring a little additional balance to the portfolio which I think is a good thing and at the same time sending message to all of our customers that were willing and able to continue to support their growth. So I think it’s a good story.

Alright. Last thing I wondered about is just kind of price cost in the specialty business in the third quarter, I think John you gave us kind of part of the answer, in your comments, you said you expect there only about a third of that spring price like to roll I and I am sure that doesn’t roll in on all of your business. So can you help us think about sort of just the net effect on positive price in the third quarter and then where you are really seeing the inflationary cost pressure on your inputs?

Sure. So on the $60 per ton increase that was announced on the range of products early this year and I think this has been well reported. We expect we’ll get a lot of thirds of our $20, we began implementing that April 1, so it gets faced in over the quarter. So just round number we realized about half in Q2, we expect to realize the other half of the $20 in Q3. And so from a - and that’s on a limited amount of volume about half a million tons over an annual period. From a input cost perspective, the largest driver here is wood cost, so we’ve tend to start to purchase more wood in the third quarter both because our annual maintenance obviously are behind us an because we begin to build some inventories for the winter months where it’s harder to source wood during the cold weather periods. And so we expect prices to move up a little bit on wood and then softwood pulp prices increased as we went for Q2 and we expect they might be up a little bit, maybe flattish in Q3, but when we compare the full Q3 versus Q2, we expect to be up a little bit. And so those are the two primary drivers of the cost increase.

Okay, that’s great, thanks guys. I’ll turn it over.

Your next question comes from the line of Debbie Jones with Deutsche Bank.

Hi, good morning.

Hi Debbie.

I wanted to talk about the comments you made about the downtime in Composite Fibers, I think you said this will be offset by cost reductions and I just wanted to talk about how that’s achievable, one and then two, just given that you are coming modest volume growth, the assumption I think is that you should see higher earnings sequentially in Composite Fibers in Q3 and I just wanted to sure that that was what you are implying?

Sure. So yeah, so we’ll take some downtime and we’ve had a long track record of using our continues improvement initiatives to help drive down overall costs and so we’ll continue to do that. So this is a combination of some project base work, it’s also very closely managing other costs in the business. And so as we take some downtime which has the fixed cost penalty, as we look through the third quarter, we expect that that will - that cost will be offset by those cost initiatives that again are part of our ongoing continues improvement program. As we get to Q4, that is our view there is still being developed. We expect to take some downtime in Q4 as well and we’re working towards how to offset that. So out guidance for Composite Fibers for Q3 was bounce up slightly and then raw material selling prices and raw material prices overall to be in line with Q2, so that when imply certainly higher earnings in Q3 versus Q2.

Okay, thanks, that’s helpful. And then looking at specialty papers, you know the lower pulp production impact and the higher incentive comp, I think it was a bit more of a headwind than I’d expected. Could you just talk about how that relative to what you thought going into the quarter?

So, incentive comp, we’re talking about a quarter-over-quarter - I am sorry a year-over-year view, Q2 of this year versus Q2 of last year. You may recall that we had a pretty difficult Q1 of a year ago, and we had - so had a boiler issue in Pennsylvania and so from a short term incentive comp perspective, we were not forecasting to hit the internal targets. The situation is different this year. We talked about the improvement, profitability, so both Q1 and Q2 profits were up compared to year ago and we are projecting that we will achieve the incentive payout. So that is a cost that we didn’t have a year ago because of lower profitability. As far as pulp production, we have record pulp production in the second quarter of last year. We had some issues with water quality that affected the pulping operation after we started up from the annual outage in Ohio. And took a little bit of time to resolve it, it’s been resolved and production got back to normal levels in the second half of June but it did impact the full quarter. So certainly we are working hard to make sure that we finish as much focus we can, it’s a significant drive of the overall profitability of the business. So we are looking to improve on that in Q3. But that’s what impacted from Q2 perspective.

Okay, that’s helpful. And then just last question, I was wondering if you could give us - you just kind of where we be at a timeframe drive understanding how the Fox River spend could impact 2017, because it sounds like the 10 million you are anticipating for this year is not changing, I am just trying to get a sense of how this is couldn’t impact your cash flow next year and if you don’t know you know when we might know?

So Debbie the remediation work is not planned for 2017 at this point, there is only broad outlines of what the work will be. And so it’s a little bit difficult to give real color guidance but based on our view of the situation and what we think is our responsibility. At this point, we would expect 2017 to be sort of similar to 2016. We do have the trial coming up in March and there are a number of different legal issues that could have an impact on who pays for remediation in the near term, but based on what we see today, we expect 2017 will be a sort of similar type view as 2016.

Okay, thanks. I’ll turn it over.

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

Hey, good morning.

Good morning, Dan.

Just quickly on CapEx, I know your full year guidance didn’t change but it looks like the part for the environmental compliance stepped up by about 5 million, I am not be nitpicky, but could you just elaborate on what drove that and do you think there is any more risk that that could creek up or you think you have a pretty much of backed in into what you are at?

Sure. So Dan, so the total project cost estimate that we have has not changed, so it’s just a little bit of timing between 2016 and 2017. So in our last quarter we had guided 2016 to be 40 million to 45 million and 2017 to be 7 to 17 million. So we’ve essentially just shipped $5 million from 2017 into 2016 based on the timing of work. So that’s all that’s happening there.

Okay, got you. And then did you an update on the timberland, I think you still have about 8,000 acres in Delaware if I am not mistake or if I miss it?

That’s right, we have 8,000 acres in Delaware. We sold most of the rest of our land last year. There is not a whole lot of activity in Delaware, it’s still pretty difficult market from a land perspective. So we continue to stay closer the market and understand what the pricing is and the opportunity is and if we are able to double, we think is a fair price we will sell the land but we had just haven’t got into that point yet. So again it’s a little bit of a difficult market and we intend to hold until we get what we think is appropriate price.

Okay, thanks a lot, understood.

And then your final question comes from the line Mark Wilde with BMO Capital Markets.

Yeah. I wondered just thoughts on sort of any breaks that fall out for your guys I know that you have two or three facilities in the UK in Composite Fibers?

Sure. Yeah, we do have two facilities in the UK, one is England, one in Wales. It’s still very early and there is a lot of negotiation that’s going to take place over the next couple of years. But we don’t expect an impact on our business to our markets based on what we are seeing now today.

Okay. And the other thing I wondered about just any general view on sort of where capacity is moving in the Airlaid business, just other capacity additions out there, you know this is a business which has encountered oversupply points in the past?

Right. To my knowledge there is no new announced capacity coming to the market, so our announcement of Fort Smith is the new capacity. So things to be remained pretty stable and the other regions of the world.

Okay, alright, that’s helpful. Good luck in the second half of the year, guys.

Thank you.

And I would now like to turn the conference back over to Dante for closing remarks.

Okay, well, thanks everyone for joining us on our call today and we look forward to speaking with you next quarter. Have a good day.