Q4 2019 Earnings Call
[music], ladies and gentlemen, thank you for standing by and welcome to the GAAP Deltas fourth quarter 2019 earnings call.
No go over to Mr. Ramesh Shagari, Sir Please go ahead.
Thank you Joanna good morning, and welcome to Glatfelters 2019, fourth quarter and full year earnings Conference call.
This is remains shut a guar vice president Investor Relations and corporate Treasurer.
On the call today to.
Present, our fourth quarter results are Dante Parrini lots, Centrus, 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 todays earnings release and in the Investor slides.
We will also make forward looking statements today that are subject to risks and uncertainties.
Our 2000.
18 form 10-K filed with the FCC 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.
I will now turn the call over to Dante.
Thank you remain good morning, and thank you for joining us.
Today's earnings call marks the conclusion of a very successful and productive year for Gladfelter.
We made significant strides in accomplishing the goals outlined at the beginning of 2019 to.
Formed gladfelter until more growth oriented and higher margin engineered materials company.
Slide three highlights or numerous achievements.
[noise] Airlaid materials posted record EBITDA of $62 million, an EBITDA margins of 15.3%.
90 basis.
Point increase over last year.
Earnings strength was fueled by above target shipment growth of 11% from the legacy business.
And Stein for delivering operating income at the high end of our guidance.
Sportsmen facility was a critical driver for the legacy volume growth.
And the successful integration of Stein for has been.
Catalyst for production mix optimization in Europe, and the sharing of manufacturing best practices across the entire Airlaid platform.
[noise] composite fibers showed a marked improvement in the fourth quarter isn't operated with a vigorous and rigorous focus on cost control and process improvement to counterbalance the challenge in commercial and economic.
I haven't seen in many of its markets throughout the year.
The segment ultimately managed to expand EBITDA margins by 40 basis points compared to 2018, finishing the year at 14.2%.
The volume headwinds and the Metalized portfolio drove us to restructure operations within our current spot Germany facility.
We're eliminating approximately 100 full time positions shutting down the metalized operation that this facility and consolidating all metalized production at our care Philly UK facility.
In January we also announced started tend to reduce one shift at the Dresden, Germany wall cover facility.
The better balanced production with demand.
Well these decisions are difficult on our people.
Our necessary to ensure the long term success of our businesses.
We remain committed to aggressively managing costs and improving operating efficiencies.
As we continue to execute our business transformation strategy.
With the sale of the specialty papers business in late 2018, we committed to realign our corporate cost structure with a new glatfelter footprint and embarked on a path to reduce corporate costs by $14 million to $16 million by the end of 2020.
I'm pleased to report that we achieved our cost reduction goal ahead of schedule.
Well also successfully completing the transition services associated with the sale of the specialty papers business.
Earlier in 2019, we terminated or defined benefit pension plan.
And in December successfully settled our qualified U.S. pension liabilities.
Creating the pathway to.
<unk> approximately $32 million of unrestricted surplus cash should the company.
This event, coupled with the refinancing of our debt and strong earnings enabled us to significantly reduce our financial leverage.
And as we announced in our press release earlier today Glatfelter will be relocating its corporate.
Orders from New York, Pennsylvania to Charlotte North Carolina.
Moving our headquarters to a larger metropolitan area is another important step and our ongoing transformation.
Charlotte provides enhanced access to a larger pool of critical resources and diverse talent for future growth.
In the Carolinas are leading.
Hub for the broader nonwovens industry.
Additionally, being there a premier International airport allows for easier and more efficient business travel.
The transition to our new headquarters will occur and a phased approach starting in mid 2020.
And we will operate a satellite office in York until the transition a.
That is complete.
We value the long and rich history. The Clodfelter has built in New York County.
And wish to thank everyone in the community for the tremendous support and partnerships over the years.
At this point I'll turn the call over to Sam to provide a more in depth review of the fourth quarter results.
I will then offer a few closing remarks before opening the.
Call for questions Sam.
Thank you Dante.
Fourth quarter adjusted income from continuing operations was $7.7 million or 17 cents per share.
The approximate $6 million improvement from the fourth quarter or the prior year was driven by earnings improvement in composite fibers lower corporate spending.
A favorable tax rate slightly offset by Airlaid materials operations.
Slide six shows a bridge of adjusted earnings per share from the fourth quarter of last year of three cents to this year's fourth quarter of 17 cents.
Composite fibers results improved earnings by five cents as inflationary pressures on wood pulp abated.
Driving lower input costs and Airlaid materials results decreased earnings by <unk> earnings per share by one cents driven by on favorable operating performance with a slight offset from improve shipments and foreign exchange.
Corporate costs improved results by three cents as we continued our relentless effort to align corporate overhead with the new operating footprint.
Net interest expense improved earnings by three cents from lower borrowing costs for our debt refinancing earlier in the year and taxes and other items improved results by four cents driven mostly by a significant improvement in the tax rate from one time items.
Slide seven shows a summary of fourth quarter results for the composite fibers segment.
Total revenues were 3% higher on a constant currency basis compared to last year, driven by overall volume increased 2% and nominal selling price improvement.
The increase in shipments was driven by technical specialties products, such as battery pacing papers, dispersible wipes and color catch or what the technical specialties category being up 20%.
Yeah.
Food and beverage products continued to provide growth up 1% well wallcover shipments were down 7%.
Raw material pricing was favorable by $4 million, primarily driven by the decline in wood pulp prices.
Operations were negatively impacted by $1.7 million.
Merrily due to higher labor rates.
The net effect of foreign exchange and FX hedging in the quarter relative to the same period last year was favorable to the piano by $1.1 million.
Looking ahead for the first quarter of 2020 shipments are expected to be 2% higher while selling prices and input costs are expected to be in.
And with the fourth quarter.
Slide eight shows a summary of fourth quarter results for the Airlaid materials segment.
The comparison to the prior year is inclusive of Stein fix results in both periods.
Revenues were up 2% versus the prior year quarter on a constant currency basis, driven by volume improvement of 6%.
Most notably adult incontinence, tabletop and wipes products.
Selling prices declined by $4.3 million due to contractual pass arrangements with customers that are tied to underlying raw material prices, which saw equal and offsetting improvement.
Operations negatively impacted profitability by $1.5 million.
Primarily due to unfavorable production mix and overall manufacturing performance at our Falkenhagen, Germany facility.
For the first quarter of 2020, we anticipate total shipments to increase by 2% sequentially.
Selling prices and raw material prices are expected to decline slightly.
And we expect operating margins to return.
To that 10% to 11% range as seen in the first three quarters of 2019.
And this will contribute approximately $1 million of incremental profit sequentially.
Please note that our guidance for the Airlaid segment going forward will reflect a consolidated view of the legacy business and the Stanford acquisition, we will no longer be commenting on the.
Two units separately.
Slide nine shows corporate costs and other financial items.
For the fourth quarter corporate costs were favorable by $2.5 million.
For the full year glatfelter achieved $15 million of corporate cost reduction when compared to 2018 through receipts for transition services.
And rigorous cost control and Rightsizing.
Bringing us within the previously announced target range earlier than planned.
We continue to expect 2020 corporate costs to be in the range of $20 million to $30 million with a relatively stable quarterly profile.
We also terminated our us qualified pension.
And settled the plan liabilities and replaced it with an enhanced defined contribution plan for our employees.
This event allowed us to monetize approximately $53 million of surplus cash after settled settling the plan obligation.
And in 2020 as part of the process to formerly revert pension surplus to the company.
We plan to use approximately $13 million of the surplus to fund to four one k. suspense account that will be used to satisfy four one k. contributions for the next seven years.
And by establishing the suspense account, we can reduce the excise tax on the cash to be reverted to the company from 50% down to 20% paying approximately $8 million and tax.
As a result, the company will revert approximately $32 million of unrestricted cash for general corporate purposes.
Interest expense and other income an expense are projected to be approximately $2 million lower in 2020, compared to 2019 or about $11 million.
Slide 10 provide some highlights of the announced relocation of our corporate headquarters to Charlotte North Carolina.
As Dante touched upon his opening remarks this move as part of our continued transformation to a global engineered materials company.
Under this relocation we expect to spend approximately $6 million over the next two to three years in one time costs related to the build out of the office space and employee relocation in a phased approach beginning and made 2020.
Concurrently, we will be substantially reducing our office footprint in York, Pennsylvania, where we will maintain a satellite office.
Phased approach will help us better managed the transition in terms of talent retention and upfront relocation costs and effectively reduces operational risk associated with the relocation.
Slide 11 shows are cash flow summary.
During the fourth quarter operating cash flow was $76.9 million higher compared to the fourth quarter of last year, driven primarily by $53.4 million of cash from the qualified pension plans settlement in December 2019.
On a full year basis free cash flow was $75.1 million, reflecting the Fox River liability settlement paid in the first quarter and the pension plan termination and settlement in the fourth quarter.
[noise] capital spending was $27.8 million for the year in line with our previous guidance and lower than 2018 by $14.3 million.
We concluded 2019 with a tax rate on adjusted earnings of 30.4% benefiting from one time discrete items such as the release of reserves associated with the conclusion of tax audits and certain state valuation allowance releases.
We now expect tax rate of 38% to 40% for 2020, given our latest forecast largely reflecting a shift in our international pretax earnings mix between low and high tax jurisdictions.
We expect capital expenditures to be between 30, and $35 million and 2020, and depreciation and amortization expense of approximately $51 million for the year.
Slide 12 show, some balance sheet and liquidity metrics.
Through the combination of our debt refinancing stronger earnings and the cash from the some of the pension plan, we achieved a significant reduction in that leverage finishing the fourth quarter at 2.2 times with available liquidity of $200 million.
We expect liquidity to further improving 2020, as we continue to drive earnings growth from our operating segments.
This concludes my prepared remarks, I will now turn the call back to Dante Thanks him.
Oh first I'd like to start by saying I'm very proud of the significant progress made by Gladfelter people in 2019 to let you know that we're looking forward to another promising year and 2020 as we continue building the new blood folder.
Or transformation toward becoming a more profitable higher growth engineered materials company continues to generate positive momentum <unk> among all stakeholders.
And the results of our teams hard work are clearly reflected in our financial performance.
Or new operating models, enabling us to sharpen our focus on commercial excellence.
Graders supply chain efficiencies more collaborative innovation and rigorous cost optimization.
We intend to build on these capabilities to accelerate the pace of earnings growth in cash generation as we execute our growth and specialization strategies.
On the open a call for your questions.
[noise], ladies and gentlemen, legal now take questions. If you would like to ask a question you meet breath hi, one on your telephone keypad. Once again, you meet France I want to ask the question the farm buying wildly compiled it gave me roster.
Yeah first question comes from the line Oakmark worthy of being more capital markets Mikey or 90 open.
This is just barrone one from work will be good morning, guys.
Good morning.
Just the third just with the H.Q. move could you just just kind of discuss any cultural change your looking from the Sun <unk>. How many people are you looking to have and the new location.
Oh sure so [noise] maybe to provide some context.
Since we devastated, especially papers and 2018, you know our local workforce drop from about 800 to 70.
And so we felt that moving the headquarters to a larger metropolitan area would be another important step as we build a new gladfelter.
Really enhancing our access to a larger pool of critical resources to build the future growth of the company and a larger and more diverse talent pool.
So again as we build our new company and want to be more progressive more growth oriented more innovative organization. I think this is a logical next step among many others with all due respect to your county, and how wonderful they've been to us, but the pragmatic <unk>.
Active.
Tells me that this is the right time and this is the right place and we're very excited about it.
That's helpful. And then just a couple other question from my side, you can just kind of flush out a little bit more about the pension obligation 32 million that you're going to receive it was it just kind of from residual costs there.
A residual so it's laurie.
Yeah. So so when we settled out the liabilities in Q. for we had a surplus of $53 million. So we have that now it is ours in x., we have full access to it it's in our pension Trust account.
Then what we'll do there is instead of paying a 50 per cent excise tax on that I setting up the suspense account, we put 25% into the suspense account, which will fund our four one k. contributions for the next seven years. So then the leftovers only subject to a 20 per cent excise tax and that leaves $32 million.
And cash that we can do whatever we want with plus we've got the additional $13 million that we set aside for four one k. contributions.
Very helpful. And then just kind of a follow up with your leverage coming down quite a bit over the last year, you just kind of talked about capital allocation emanate plans going forward any specific areas of interest there.
Oh sure. So yeah, one of the things we want to do is in a smart fashion continue to build a new gladfelter an AD scale to our new platform, which is in my opinion much more stable higher margin and more cash generative.
Platform and now we're looking at opportunities to make a investments that have the rate return profile to help us had scale.
So I would see a combination of organic and inorganic investments on the horizon as we look at building the new Gladfelter.
And then lastly from my side are you seeing any more attention being paid to a cellulose based nor moving.
Pair too polymer base, nor moving brought up.
Ah, Yes is the short answer and we think that's advantageous to gladfelter because the vast majority of the feedstocks, we use to produce our engineer to materials or plant based.
Okay. That's all for my subtle turnover. Thanks.
Q.
Once again, if you would like prompt questions you need Perl five one on more powerful.
Your next question comes from the line of <unk>, David Davidson Okay.
Thank you good morning, everyone.
<unk>.
So first of all the moves that you're taking to consolidate metallized production. It carefully if I said that right can you put some financial metrics on that you're taken out 100 jobs, presumably some of that will be offset by higher rate, but can you tell us with the financial impact will be what it's all said and done.
Oh sure I'll start and I'll give Sam the opportunity to provide any additional comments. He made choose so of course, the a restructuring is tied to shutting down the middle as operation at the <unk> Buck, Germany facility will consolidate all remaining metallized business into the care of Philly U.K. facility.
So we will operate one discrete facility that does only mentalizing, which we think is a better overall structure for the future.
And then the hundred F.T. reduction is really designed to offset on l. located fixed costs solidify the overall costs profiling garance Buck.
And weed out you know the lower profit or nonprofit product lines from that particular portfolio.
And I would say the one thing to add is given wearing active negotiations with the works Council right now we're not in a position where we can give guidance on the estimated severance Steve.
Gotcha, Okay, well in due course, and then the improved volumes incompetent fibers, which was nice to see.
Excuse me and the expectation that you'll have more growth.
And that business made a turn that you expect to be sustainable.
So we agree that we were pleased to see the volume recovering queue for I do attribute part of this too great effort by our new commercial and innovation team. So this is a reflection of the new operating model. We've put in place, which is brought new energy and new intensity and a new.
New skills and perspectives to that part of the business.
Many of the markets that we serve are are still growing Steve they may be growing more like G.D.P. ish rates, but nonetheless, they're growing and so when we look at two four by way of example, and technical specialties being up 20 per cent. That's a combination from some of the consumer oriented products that we produce like dispersible wipes or the.
<unk> toilet tissue color catcher, which goes into the clothes washing machine or electrical products that go into battery manufacturing and Super capacitors, Yeah. We we've spoken about food and beverage being a very solid and cash generative segment and you know coffee continues single serve coffee continues to be as drunk.
Performer. So then I think it's obvious we're taking steps to address the underperforming parts of the composite fibers portfolio like reducing our exposure and mentalizing and getting everything under one roof. We should have a cost advantage there and we can focus on <unk> optimization and it'll be a less distract.
Thing to the overall business and and also we took a shift we plan on taking a shift out of the Dresden, Germany Wallcover facility to better match demand with production. So overall I think these are very consistent moves with reshaping our portfolio.
And a very practical and measured fashion. So that we can execute well, we can capture and sustained the benefits and we avoid a driving unnecessary j. curves into the near term performance of the business.
Great just a couple of the cookies what accounts for the step up into <unk>. This year is and is the office build out incorporated and that number.
Yeah. So we finish last year that around 28 million a cat backs were guiding to 30 to 35 million. This year I would say two factors for this step up one as you pointed out there there is going to be some cap x. associated with the new H.Q. cost. So so that number 30 to 35 is inclusive the capital we intend to spend on on the move and then also.
You know Fort Smith is now going to be in its third year of a facility. So for the first two years you know it was a pretty nominal cat backs type asset, but we want to continue to invest to insure you know maximum efficiencies and capacity utilization as well.
Okay, which actually is a good segue into my last one you you kind of touch on this the previous question, but with the balance sheet back at target levels. You know there is potential for expansion at Fort Smith.
Is that required yet or what you think the timeframe might be where you'd be constrained on capacity.
Oh sure so our capacity utilization for the broader Airlaid platform, you know I would describe as kind of mid nineties and.
Based on our plans for continuous improvement targeted cat Bucks to D. bottleneck or centres of excellence. We believe we have capacity for a couple more years and as we've said previously as a leader in this particular space and seeing along runway for continued growth we're prepared to continue investing in the segment.
Okay. Thanks Dot here, that's all I had.
Okay. Thank you.
One for one meeting from temperamental, if you would like to ask the question you meet press, Taiwan on your telephone.
Yeah.
<unk> I want to ask the question.
[noise] bigger there I'm afraid that <unk>.
Oh, Yeah, we'll continue.
Okay, well, thank you for joining our call today, and we look forward to speaking with you again next quarter of a good day.
Made a couple of Vermont conclude pretty conference calls thank you offer joining.
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