Magnera Corp (MAGN) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Glatfelter’s Third Quarter 2020 Earnings Release Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Ramesh Shettigar. Thank you. Please go ahead.

Thank you, [Jerome]. Good morning, and welcome to Glatfelter’s 2020 third quarter earnings conference call. This is Ramesh Shettigar, Vice President of Investor Relations and Corporate Treasurer. On the call today to present our third quarter results are Dante Parrini, Glatfelter's Chairman and Chief Executive Officer; and Sam Hillard, Senior Vice President and Chief Financial Officer. 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 2019 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 statements speak only as of today and we undertake no obligation to update them. I will now turn the call over to Dante.

Thank you, Ramesh. Good morning and thank you for joining us. In the third quarter, Glatfelter continued its track record of delivering results that meet or exceed expectations, as both segments safely produced and shipped high-quality engineered materials amid a volatile environment created by the pandemic. We generated better-than-expected adjusted EBITDA of $29 million and adjusted earnings per share of $0.16, which was in line with expectations. Airlaid Materials posted another record quarter by achieving adjusted EBITDA of $18.6 million boosted by a stronger euro and favorable product mix. Profitability was better-than-expected as shipments grew 4% versus the prior quarter driven by an improvement in tabletop products in Europe, and healthy demand for hygiene related products. Composite Fibers shipments increased 21% on a sequential quarter basis, driven by a recovery in wallcover products after a severe contraction in the second quarter due to the pandemic. At the start of the third quarter, we began to see demand gradually return in this discretionary category, which remained stable throughout the quarter. However, profitability in this segment was unfavorably impacted by manufacturing downtime taken to manage inventory levels, reduce labor costs, and optimize cash flow. At an enterprise level, we maintained our focus on keeping Glatfelter people safe while ensuring uninterrupted supply of essential products to our customers. Consistent and solid execution coupled with strong earnings resulted in year-to-date adjusted free cash flow improvement of $7 million and net leverage of 2.4 times at quarter end. From a governance standpoint, we recently elected Darrel Hackett to our Board of Directors. Darrel brings to Glatfelter deep financial acumen, capital markets expertise, and a wealth of experience from various leadership roles at Bank of Montreal, and his tenure in management consulting at McKinsey & Company. We look forward to his contributions in guiding the strategic direction of the company. Also concurrent with our recent name change, the Glatfelter Corporation, we completed the relocation of our corporate headquarters to Charlotte, North Carolina with the opening of our new corporate office. At this point, I'll turn the call over to Sam to give an in-depth review of our third quarter results. I will then provide closing remarks before opening the call for questions. Sam?

Thank you, Dante. Third quarter adjusted earnings from continuing operations was $7 million or $0.16 per share, a decrease of $0.06 versus the same period last year. On a GAAP basis, we had income from continuing operations of $6.5 million or $0.15 per share versus $8.6 million or $0.19 per share in the same period last year. Slide 4 shows a bridge of adjusted earnings per share of $0.22 from the third quarter of last year to this year's third quarter of $0.16. Composite Fibers results reduced earnings by $0.01 primarily due to lower selling prices that were partially offset by lower raw material costs and elevated demand for most product categories except Metalized. Airlaid Materials results improved earnings by $0.02 driven by favorable sales mix despite lower overall volumes from softness and tabletop products. Corporate costs were slightly favorable versus last year's third quarter and taxes and other items unfavorably impacted results by $0.07 driven by a higher tax rate this quarter of 48% versus 27% in the same quarter last year. Slide 5 shows a summary of third quarter results for the Composite Fiber segment. Total revenues for the quarter were 0.5% lower on a constant currency basis, compared to last year. Shipments overall were up 5%, but selling prices were lower by $3 million. Volume growth was driven by recovery in demand for wallcover and continued steady growth in the food and beverage and technical specialties product categories. Lower Metalized shipments were the result of our exit from the more commoditized parts of this business earlier this year as discussed in prior quarters. Input costs improved meaningfully by $2 million driven primarily by favorable wood pulp prices. Operations were in-line with last year as improved efficiency and cost control actions were offset by machine downtime previously planned to manage inventory levels and optimize cash flow. In response to the weakening demand for wallcover at the beginning of the pandemic, we eliminated two shifts at our Dresden, Germany facility in June and we have maintained that lower staffing and output level through October. As a result, the higher-than-expected wallcover demand during the quarter was serviced from inventory on hand and the lower production in wallcover negatively impacted profitability for the current period. In early November, we added one of the two shifts back at Dresden and to increase output and rebuild inventory levels. The net effect of foreign exchange and hedging in the quarter relative to the same period last year was slightly favorable by $100,000. Looking ahead to the fourth quarter, we expect shipments to be roughly flat compared with the third quarter and selling prices and raw material prices are expected to be in line with the third quarter. And we expect improved mix and production levels combined with operating efficiencies to incrementally benefit operating profit by approximately $2 million as we ramp up production to return wallcover inventory to normalized levels. Slide 6 shows a summary of third quarter results for Airlaid Materials. This segment posted another record quarter with operating profit of $12.9 million and an operating margin of approximately 13%, exceeding our margin guidance provided at the beginning of the year of 10% to 11%. Revenues were down 6.4% versus the prior year quarter on a constant currency basis driven primarily by lower selling prices of $3.5 million from contractual cost pass-throughs with customers. However, this was mostly offset by lower raw material and energy prices of $3.1 million. Shipments were 3% lower driven by continued softness in demand for tabletop products, as restaurants globally operated at dramatically limited capacity. Although tabletop volumes in the quarter declined 38% versus last year, they improved by 98% sequentially from the second quarter. The shortfall in tabletop volumes during the quarter was mostly offset by stronger demand for home care, feminine and hygiene, and wipes products. Operations slightly improved profitability by $100,000 driven by disciplined cost control actions and efficient operations and foreign exchange contributed favorably to operating income by $1.2 million driven by the strengthening of the euro. For the fourth quarter, we expect shipments to be lower by approximately 5% driven primarily by reduced year-end demand in the feminine and hygiene category. Selling prices and raw material prices are expected to increase slightly, fully offsetting each other. Operations and fixed cost absorption are expected to be lowered by $1 million to $2 million from lower production to manage inventory levels. Slide 7 shows corporate costs and other financial items. For the third quarter, corporate costs were slightly favorable by $300,000 when compared to the same period last year. We also completed the build-out of our new corporate headquarters in Charlotte, North Carolina. We expect 2020 corporate costs to be $27 million for the year, which is below our previous guidance of $28 million to $30 million. Interest and other income expense is projected to be approximately $2 million lower in 2020 compared to 2019 or about $10 million in total for this year. Slide 8 shows our cash flow summary. During the first nine months of the year, adjusted free cash flow was $17.3 million, $7 million higher versus the same period last year. This improvement was driven primarily by stronger cash earnings and lower cash interest and tax payments. Also, in the first nine months of 2019, we successfully settled the litigation related to the Fox River matter with a payment of approximately $21 million. Correspondingly, in the first nine months of 2020, we made restructuring and cost optimization related payments of $8 million, as well as the pension excise tax payment of $8.3 million. We expect capital expenditures for the year to be between $28 million and $30 million below our previous guidance. Depreciation and amortization expense is projected to be $53 million. Slide 9 shows some balance sheet and liquidity metrics. We are very well-positioned from a liquidity and leverage perspective following the successful cost optimization initiatives and debt refinancing completed in 2019. Our net debt, on September 30, was approximately $273 million, with leverage of 2.4 times and available liquidity of $195 million. Leverage was flat compared to the second quarter and slightly higher than year-end in 2019 due to foreign exchange and the pre-funding of 401(k) contributions. We expect our liquidity and net leverage to further improve as earnings and cash flow increase. This concludes my prepared remarks. I will now turn the call back to Dante.

Thanks, Sam. After another quarter of solid performance in Q3, we're focused on bringing the year to a strong finish despite the resurgence of COVID-19. While the pandemic has challenged our company in many ways, during the first nine months of 2020, the business generated an 11% increase in adjusted EBITDA over the same period in 2019. We continued to succeed due to the relentless determination of our employees combined with our reshaped portfolio of engineered materials used to produce essential consumer staples and our improved cost structure. We will identify ways to further leverage the attributes of our operating model to drive Q4 performance and deliver another year of improved earnings and cash flow as we continue to build the new Glatfelter. I'll now open the call for questions.

[Operator Instructions] Your first question comes from Mark Wilde with Bank of Montreal. You may now ask your question.

Good morning, Dante, Sam, Ramesh.

Good morning, Mark.

Hey, Mark.

Hey. Dante, there's just – there's a lot of different niches within both of your segments. I wondered if you can just kind of step back and give us a sense in each of those two segments where the different businesses are relative to your long-term expectations right now. I mean, we know from what you've said that, you know, tabletop is still off pretty sharply, but if you could just walk us through the different business lines right now so we get a sense of, you know, what's performing well versus the baseline and what is – where the drags are?

Sure. So I'll start with the Airlaid business. The product category that has been most adversely impacted by COVID is tabletop. And that's simply a correlation with restaurant utilization. And so, you've seen a lot of volatility quarter-to-quarter. You know, we nearly doubled our volume in Q3 versus Q2, but we're still behind normal levels. So, I'd say we saw a partial bounce back, but we're still not at normalized levels. The Home Care category has been a very strong category and has picked up some household penetration because of COVID. And, you know, we think that's strong a category. Although it's difficult to project secular changes in markets, I think from a big picture theme point of view, there will be a permanent change in overall hygiene practices around the world as a result COVID. And so, products that are used to keep people and households and equipment, clean and sanitary, we think we'll see a permanent improvement in overall demand. And we're seeing household penetration numbers across most of those categories improving through 2020. So the Wipes, there are a variety of different wiping materials. One of the larger applications for us is baby. So there is a pickup in volume and the outlook for baby wipes is still about 5% per year over the long-term. Where there's been a short-term spike has been more in the hard surface disinfecting wipes and that's had probably the biggest improvement tied to reaction to COVID. And then, moist toilet tissue, the flushable toilet paper, which we do make out of our Lydne, UK facility, we've seen an improvement there and we expect those categories to continue to do well and experience growth over the next couple of three years, I would say. You know, food packaging has also done reasonably well. You know, we see period-to-period of volatility, Mark, simply because it's very difficult for our customers to forecast at a granular level. It's, you know, more challenging for Glatfelter to forecast at a very granular level. I think if you look at our performance year-to-date in aggregate, we have a much more stable performing business. We have much greater exposure to a central consumer staples, more than 85% of our revenue, and net-net, we're able to, I think, provide an outlook on a quarter-to-quarter basis that nets out pretty accurate. And we may undershoot in some areas, overshoot in other areas, and part of that may be our own conservatism and some of it may be just a lack of comfort in our customers’ ability to forecast accurately. Finishing out Airlaid with Fem Hy, you know, we've had a pretty good year so far. We're in the 2% to 3% volume growth range where we are expecting a softer Q4, and we saw this last year as well. And so, you know, it's a variety of factors. Again, I see nothing secular changing in this particular category at the moment and we still expect to deliver 2020 with 2% Fem Hy growth and for Europe and North America that's a good growth rate. Asia is expected to grow above that. If I move to Composite Fibers, food and beverage has been – is the largest category for that segment and has continued to be a very stable performer. You know we've had a very strong growth in single-served coffee as that form factor becomes more adopted by households in North America. Very pleased with our tea shipments this year. And so, you know, we say tea is going to grow 1% or 2% per year and we say single-served coffee will be in the mid-single digits. We expect that from a market point of view that will continue. You know, we've seen a little bit of uptick in composite laminates, both for flooring applications and kitchen countertop applications and this is more reaction to many consumers being home more often still having disposable income and choosing to take their vacation money and investing it in their houses. So, replacing flooring and upgrading cabinets’ countertops is something that we're seeing, which will be helpful for composite laminates. The Metalized business, as you know, the year-over-year comparisons are not very accurate because we shut down the operation in Gernsbach, Germany and consolidated a smaller business in our Caerphilly facility in the UK. Technical Specialties is the combination of products that range from electrical, so things that go into automotive batteries and capacitors. The automotive industry was hit hard because of COVID in Q2 and Q3. We've seen a bit of a recovery there and the vast majority of lead-acid batteries are sold at the retail level aftermarket, so to speak. And so, you know, our battery pasting paper was up about 7% in Q3 and that's encouraging. I mentioned moist toilet tissue type product was up about 20% in Q3. We also make a laundry product called color catcher that takes pigments out of the washing machine and that was up about 40% in Q3. So again, small niches either seeing recovery from COVID or being supported by cleanliness and hygiene practices. And then, nonwoven, wallcover has been the most volatile for Composite Fibers. We had a very strong Q1 with things dropped rather precipitously and dramatically in Q2, we saw a much stronger bounce back in Q3 more V shaped and this is largely due to weather countries and economies stay opened for business and whether consumers feel – comfortable being active out in the marketplace. So I know, I feel like I've rambled a bit, but we have a lot of different categories and hopefully that addressed your questions, if not I'm happy to provide additional color.

Dante I just – I'm curious in the Airlaid business, given what you've described, where would your operating rate be particularly at Fort Smith where you put in the new capacity?

Yes, I'd say for the third quarter, the Airlaid business operated in the mid-90%.

Okay.

And it was a little bit higher in Europe and a little bit lower in North America. I'd say North America was in the high-80% – 88%-ish or so.

And just given that, how might we think about plans for any kind of incremental capacity in that business?

I think we've addressed that in the past.

Yes.

So, we are committed to growing this segment, we think there are a variety of ways to do that organically and inorganically. And so I would say that will be very focused on making sure that we support the market growth and support our customers through a variety of different growth investment opportunities that may present themselves.

Okay and then just two other ones. Can you discuss that $3 million price drag in Composite? And also that fee that you call out for government oversight on the Fox River is – should we assume that there is some ongoing, monitoring and maintenance cost for you on the Fox?

Sure, so selling prices and – when you look at our bridge, you see that there was a rather large impact on selling price change year-over-year in general for the company, I would say about half of that was raw material pass-through and another 25% or 30% of that was either incentives or rebates tied to certain volume thresholds. And so what we saw in Composite Fibers was less of raw material pass-through and more of the incentives and rebates or entitlements for volume thresholds achieved.

Okay. And then finally just [Fox River].

Sam do you want to address – yes, Samuel.

Yes on the Fox, so the large payment was paid out in Q1 of 2019 that settled the litigation and the liability. We do have some ongoing maintenance and monitoring costs over the next 20 or 30 years, but frankly we think that our accrual we have on the balance sheet is more than ample to cover that, but it will be spread out over time, Mark.

Okay. All right, sounds good. I'll turn it over.

Your next question comes from Steve Chercover with D.A. Davidson. You may now ask your question.

Thanks. Good morning, everyone.

Hi, Steve.

Good morning.

So, it's encouraging to hear that wallcover starts – is starting to recover, because, you know, well it's small, I think it's generated disproportionate share of negative headlines in any event. So will the full quarter was impacted by that early downtime? Do you think you've turned the corner? And we can stop talking about wallcover, if the current demand continues?

So, if the current demand continues, the answer is yes. What we don't know is, how COVID manifest itself over the winter, cold and flu season, and what impacts that might have on decisions governments around the world make on whether they cause their citizens to shelter-in-place and what businesses stay open and what could closed. So, I would say that, you know, our trajectory with wallcover heading into 2020 was good, you might remember Q1, our volume grew about 19% year-over-year, and then Q2 was – when COVID hit and we saw a nice recovery. And then the other thing is that the EBITDA margin of the business even though it's been impacted is still at or higher than the reporting segment. So, there's still a lot of incentive to us to run that operation full, to keep the cost structures lean and aggressive as possible, so that we can flex when markets flex. And the team did an amazing job, it's not so easy to take two shifts of workers out in the middle of a pandemic, and then all of a sudden within a couple of months your customers are calling back and saying, we have a lot more demand than we told you we were going to have and we need to rely on you. And so our operations crew did yeoman's job at finding way to ramp back up, crew back up, do it safely, do it with consistent quality and find a way to support our customers and give them confidence that we can manage through the cycle, even when that's as volatile as this one.

That makes sense. It's important to note that those margins are good. So whether it's wallcovering or whether it's the overlay that you put on some of the other flooring and shelving type applications? Are you guys getting any benefit from what I'll call the COVID home improvement mania, I mean, it's obviously not like decking and fencing where – what has just gone off the rails, but are you getting a COVID bump in repair and remodel as well?

Yes, I would say it's nowhere near as dramatic as the lumber industry is experiencing, but as I commented about Composite Laminates where we see an uptick in flooring products and countertop products. We tie that to uptick in do-it-yourself investments.

Great. And I think Mark Wilde was in my head a little bit. So, he has taken a few of my questions. But with respect to Airlaid, it sounds like you're starting to cleanup in the house and then pun intended. But it's unlikely in my view that tabletop is going to come back at least through the winter, but I was surprised do you even hear any seasonality in the wipes and hygiene. So is that just the way the retailers or the producers of particularly feminine and hygiene build up their inventories, because I wouldn't think it would be a seasonal product maybe you can elaborate on that?

Yes, so 2020 is a much more challenging year to get granular, because you have a whole host of issues that are going on across the customer base and across the supply chain that range from some manufacturing environments are more impacted by COVID and staffing and production issues, which may in a quarter slowed down, typical demand, you've got some pantry stuffing that occurred in Q2; people ramped up, when it comes to Fem Hy [indiscernible] biological habits and needs don't change based on a pandemic necessarily, but whether you have adequate supply or not. So, all of those have been additional factors, which make the very granular period-to-period forecasting more challenging this year. I go back and say, we had three consecutive record quarters in this particular reporting segment. It's a form factor of choice. It has a long runway for growth and a number of the categories are going to be bolstered by a change in hygiene practices. There are a whole portfolio of wipes, so some of our customers that make everything from Baby to Hard Surface disinfecting to Moist Toilet Tissue sometimes they have mix changes from period-to-period, but I would say that all the wiping categories are growing categories and these are areas of interest to us, and I wouldn't be overly bothered by one quarter of a change or a little bit of softness, especially coming out of three record quarters in a row.

Sure. No, I can see some seasonality maybe Armor All Wipes for your cars go down in the winter, but can you quantify what you think the actual disinfectant wipe uptick has been, like on a year-over-year basis?

I mean, all that I can tell you is data from studies I’ve read and there was a significant increase in household penetration of Hard Surface Disinfecting Wipes that on a say it was a 25% to 50% increase from where the household penetration rate was pre-COVID.

But Steve, just to remind you, the vast majority of our wipes are Baby Wipes.

Correct.

Got it, Okay. And then just switching gears, I think your balance sheet is effectively at the target leverage ratio. So, can you prioritize how you'll use excess capital going forward?

Sure, we're not out of the pandemic yet, so we want to continue to be thoughtful and appropriately conservative when preserving balance sheet capacity. In the short-term, we'll continue to pay down our debt, and we are at the same time looking at ways to invest profitably in growing our company. We didn't go through all of the difficulties of divesting our legacy business and cutting ourselves in half to stay small. So, we want to grow again in a very thoughtful and measured way that has appropriate return profile associated with it and so that balance sheet capacity will be useful as we look at ways to grow the company.

Would you hazard a guess on a timeframe when something material might happen?

Yes. We don't really comment or speculate on acquisitions or divestitures of any nature other than it's an important part of our ongoing strategy to profitably grow our company.

Good enough. Okay. Thanks for taking my questions.

[Operator Instructions] There are no further questions at this time. I'll hand the call back to Dante Parrini for any remarks.

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

Thank you presenters and thank you ladies and gentlemen for joining us today. That concludes today’s conference. Thank you all for joining. You may now disconnect.