Q1 2020 Earnings Call
Just a question during this session you will need to press star one on your telephone. Please be advised to today's conference is being recorded if you require any further assistance. Please press star zero I wouldn't like to kinda condensates over to your speaker today Mr. imagine category. Thank you. Please go ahead Sir.
Thank you Rachel good morning, and welcome to Glatfelters, 2021st quarter earnings Conference call.
This has remained shut a car vice president Investor Relations and corporate Treasurer.
On the call today to present, our first quarter results.
Dante Parrini, Glatfelters, 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 Andy Investor slides.
We will also make forward looking statements today that are subject to risks and uncertainties.
Our 2019 form 10-K, and Q1 2020 form 10-Q filed with the FCC.
In today's release, all three 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 Dotty.
Thank you remain.
Good morning, and thank you for joining us.
We're pleased to report that our business performed extremely well.
The first quarter of 2020.
Delivering adjusted earnings per share of 24 cents and adjusted EBITDA of $32 million.
Not only was this a significant improvement over prior year.
These results also exceeded quarterly expectations.
Our transformation efforts over the last two years, especially the reshaping of our portfolio toward more stable product categories have gained from traction and are delivering meaningful results.
Airlaid materials posted record EBITDA of $17.5 million.
EBITDA margins of 17.7%.
The 250 basis point increase over the same quarter last year.
Our airlaid assets and the materials, we produced to enhance everyday life are playing a critical role in accelerating glatfelters growth and earnings profile.
Composite fibers had a very strong shipment growth of 14% and operating profit improvement of 33% in the first quarter.
Building on the favorable performance deliberate in the fourth quarter of 29 team.
Year over year shipments were up in all product categories driving the segment to expand EBITDA margins by 230 basis points to 16.3%.
Before Sam goes into the details of the first quarter results.
I wanted to share some perspectives on how we've been operating the company as we address cobot 19.
Our top priority is a safety and health of our employees and their families.
We instituted several new safety hygiene and communication protocols throughout our facilities and implemented work from home arrangements where practical.
Our business, including the vast majority of the products. We produce is classified as the central to everyday life and we're proud to play our part and supporting global response efforts to the pandemic.
We're diligently assessing and mitigating risks to ensure the constant supply of engineered materials to enable our customers to produce a variety of critical consumer staples. During this challenging time.
Given these efforts all glatfelter production facilities remain operational.
At this point I'll turn the call over to Sam to provide an in depth review of our first quarter results.
Well done off for closing remarks before opening the call for questions Sam.
Thank you Dante.
First quarter adjusted earnings from continuing operations was $10.8 million or 24 cents per share an increase of eight cents versus the first quarter of last year, the three and a half million dollar improvement in income was attributed to exceptional performance in both composite fibers and airlaid materials segments as well.
As lower corporate costs.
Slide four shows a bridge of adjusted earnings per share from 16 cents in the first quarter of last year to 24 cents in this years first quarter.
Composite fibers results improved earnings by six cents driven by higher shipments across all product categories higher production to support that demand solid operations and lower pulp prices.
Airlaid materials results improved earnings by three cents, driven by strong demand for wipes homecare and tabletop products and highly efficient asset utilization.
Corporate costs improve results by one cents from lower spending.
Net interest expense improved earnings by three cents from lower borrowing costs achieved through our debt refinancing in early 2019.
And taxes and other items on favorably impacted results by five cents driven by higher tax rate relative to 2019, but in line with guidance.
Slide five shows.
Shows a summary of first quarter results for the composite fibers segment.
Total revenues were 5.5% higher on a constant currency basis compared to last year, driven by volume growth of 14% as shipments were higher in all product categories.
Food and beverage was up 2% with growth in both tea and coffee product categories. Given continued strong demand for single serve beverages.
Composite laminates shipments were up 30% lot technical specialties grew 13%, reflecting customer demand changes driven by the pandemic and success of newer products like moist dispersible wipes.
Wallcover recorded meaningful improvement in volume up 18% and Metalized products rose, 27% relative to milder first quarter shipments in 2019.
Selling prices decreased by $2.6 million, but were more than offset by lower raw material and energy prices, a $4 million primarily related to wood pulp.
Operations were favorable by $1 million, driven by efficient operations and elevated production to meet strong demand.
The net effect of foreign exchange and hedging in the quarter relative to the same period last year was slightly favorable by $200000.
Looking ahead to support the second quarter.
Shipments for overall second for the overall segment are expected to be approximately 25% lower relative to the first quarter driven almost entirely by wall cover and Metalized.
The volume decline and wall cover is projected to be between 60% and 65% and is directly related to the effects of the cobot 19 pandemic on global wall cover end markets, including the related decline in oil prices, which is severely impacting the Russian economy, our largest region in terms of demand for these materials.
As a result will be taking downtime in our dressed in facility to adjust production with anticipated shipments.
Metalized volume is projected to be lower approximately 5% to 10% sequentially driven by the consolidation of the Metalized business and our carefully UK facility.
We estimate the combined impact of lower wall cover and metal shipments and downtime in dressed in to negatively impact sequential quarterly resolved by $5.5 million to $6 million.
We expect demand for all other product categories to be flat to slightly down to the first quarter shipment levels.
Selling prices and raw material prices are expected to be inline with the first quarter.
And we expect all production facilities to remain operational in the second quarter.
Slide six shows a summary of first quarter results for Airlaid materials.
This segment posted a record quarter with operating profit of $12 million and operating margin of 12% exceeding our previous margin guidance for Q1 of 10% to 11%.
EBITDA margins of 17.7%.
Was another quarterly record set by Airlaid materials, underscoring strong asset utilization demand profile and cost structure.
Revenues were flat versus the prior year quarter on a constant currency basis, driven by lower selling prices of $4.8 million from contractual cost pass through arrangements with customers.
However, this was more than offset by lower raw material and energy prices of $5.4 million.
Shipments grew a solid 6% coming primarily from wipes tabletop and home care products.
Our commercial team continues to cultivate deep customer relationships to leverage production quality and the proprietary characteristics of our products as key differentiators to the competition contributing positively to ongoing growth.
Operations favorably impacted profitability by $400000, given higher production to meet elevated customer demand, including the coded pandemic driven lift in buying patterns.
For the second quarter, we anticipate total shipments to increase by 3% sequentially.
Selling prices and raw material prices are expected to be in line and we anticipate all airlaid facilities to remain operational.
Slide seven shows.
Chose corporate costs and other financial items.
For the first quarter corporate costs were favorable by $600000.
With glatfelter fully transitioned to the functional operating model, we're seeing the benefits come through went out results.
We expect 2020 corporate costs to be in the range of $28 million to $30 million consistent with previous guidance.
In April we completed the closure of our Metalized production in Karnes Bock, Germany with all Metalized production now consolidated into our care Philly UK facility.
This has resulted in a restructuring charge of $6 million, which we booked in the first quarter and we expect another $4 million to $5 million to be booked over the second quarter.
We have so far recorded $3.5 million for employee severance related costs.
And $2.5 million to accelerate that appreciation of equipment idled.
We have also implemented cost optimization initiatives in other European locations during the quarter to further improve our cost structure.
Interest and other income and expense are projected to be approximately $2 million lower in 2020 compared to 2019.
Or about $11 million in total for this year.
Slide eight shows our cash flow summary.
In the first quarter operating cash flow was negative $5.6 million favorable to the same period last year by $18.5 million.
This improvement was driven primarily by stronger earnings and lower cash interest payments.
Also in Q1 2019, we successfully settled the litigation related to the Fox River matter with the payment of approximately $21 million.
Correspondingly in the first quarter of 2020, we made higher incentive compensation and cost optimization related payments of $7 million.
Our tax rate for 2020 is estimated to be between 38 and 40% consistent with prior guidance.
Also in line with prior guidance, we expect capital expenditures for the year to be between 30 and $35 million, while depreciation and amortization expense is projected to be $51 million.
Slide nine shows some balance sheet and liquidity metrics.
Overall, we're 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 March 30, Onest was $246 million and our leverage was 2.2 times with available liquidity at about $212 million.
We expect our liquidity and net leverage to further improve in 2020 as earnings and cash flow increase.
And finally I would also like to know that both Moodys and S&P have recently reaffirmed their respective ratings for glatfelter as well as they're stable outlook for the company.
This concludes my prepared remarks, I will now turn the call back to Dante.
Thanks Sam.
As part of Glatfelters broader purpose, we're proud to produce innovative materials that are essential for everyday life.
As you can see on slide 10, approximately 85% of Glatfelters revenues are tied to consumer staples.
Whether its hygiene and personal care products to maintain a healthy lifestyle.
Food and beverage products enjoyed on a daily basis, we're solutions that keep customers and their surroundings clean and safe.
Customers can rely on us to fulfill the central role.
And this is made possible with the dedication and resolve of all glatfelter people around the world.
I'm very proud of what our employees have accomplished in the first quarter by staying focused and delivering excellent operational performance. Despite the pandemic.
They've worked tirelessly to keep our mills running in a safe and compliant manner, while exceeding customer expectations and I commend them for their hard work professionalism and unwavering commitment.
Now I'd like to shift gears to some other positive news.
On Earth day, we launched a new website with updated content to keep pace with a new gladfelter and reflect our transformation efforts as a leading engineered materials company.
Our expanded we expanded our U.S.G. reporting to highlight our commitment to sustainability.
Putting various initiatives policies and priorities, we hope you find a new web site informative and easy to navigate.
Also as Sam just reported we recently concluded conversations with our credit rating agencies were both reaffirmed their respective ratings for glatfelter and maintain their stable outlook.
This is another testament to our robust balance sheet strong liquidity profile and the positive direction of our business.
In closing, we remain fully committed to keeping our employees safe and healthy and serving our customers. During this critical time.
Demand for our Airlaid materials remains strong, especially due to elevated health and hygiene standards around the world.
And apart from the wall cover and Metalized categories. Our composite fibers segment is experiencing relatively stable demand for its products.
Even though cobot 19 is having an unprecedented impact on society and the global economy.
We are encouraged by the performance of our business in the face of such volatility and uncertainty.
We're very confident in the durability of our business model and believe glatfelter remains well positioned to generate meaningful value over the longer term.
I will now open the call for your questions.
He is should we might do to ask the question you will need to press star one on your telephone to withdraw your question press the pound.
Please standby will be compiled acuity Boston.
Your first question comes from the line of course, eager and the A. Davidson. Your line is open. Please ask your question.
Yes, good morning, everyone. Thanks for taking my questions.
I don't occur because just wanted this morning I just wanted to start on.
The conference fibers volume guide I mean, if my math correct, you know the wall cover and Metalized components of that are about 25% of sales and so I'm, just having a tough time kind of bridging how.
You know those two segments by themselves can kind of lead to that.
All segment, 25% decline sequentially. So maybe if you could just touch on other I use the portfolio that might be weak as well that would be helpful.
Yes, sure Kurt So first of all your rough math is right I think a wall covering in Q1 was a 15% of composite fiber sales and Metalized was 9%. So it is about a quarter of the revenue for the.
For the segment, but keep in mind that you've got the.
Compounding impact of both the lost volumes, but then also the downtime related to it and it's the downtime, particularly interest and that's that's a meaningful financial impact so that five and a half to $6 million.
Is related to those two segments in the in the combined impact.
Got it okay that makes sense in all within food and beverage and composite fibers are you seeing any benefits from me stay at home orders at all or is it.
Pretty much business as usual there from a demand standpoint.
Well as Sam said, we had year over year growth in both tea and single serve coffee and a as you know in 2019 single the tea category was a little bit soft so weve seen recovery in tea and we continue to have a very strong position in single serve coffee.
Keep in mind that.
Consumers Didnt start to really react in mass to covert 19 until the second half of March so.
We've seen a little bit of a tailwind pickup across a number of categories for people that were.
Whatever you want to call. It. According pantry stuffing just accumulating supplies for the transition to working from home and dealing with uncertainty. So we did see some.
Upside.
And we expect that.
The food and beverage category will continue to perform well in Q2, and Kurt don't forget to that Theres also the b in office consumption of single serve beverages, which obviously would be down in this type of environment.
Right, Okay that makes sense I appreciate that and then just.
Within composite fibers I mean.
Even a potentially weaker demand environment, how are you thinking about the pricing backdrop and just the overall competitive landscape there.
The risks looking forward.
Well I think if you look at our Q1 results you can see the relationship between selling price volume and mix and then input cost and energy changes and so that was a beneficial combination which helped us increase.
Our margins by 230 basis points.
We do recognize it when input costs are down we do have some pass through arrangements for customers, but it tends not to have as much of an impact on the margin. So you know.
But also qualify all of our comments today about guidance for Q2 is I think we have a better view than perhaps many.
But not a perfect view and we know that the current landscape between the pandemic.
And the actions taken by reserve banks and governments around the world are creating a lot of volatility and uncertainty and so we have a bit of an included view.
But we do have a view and we're pretty confident and or the guidance that we are providing for Q2 across both of our reporting segments.
Got it appreciate that on T. and then just last two could you just update us on how you're thinking about capital allocation priorities and then within that 30 to 35 million Capex Guide just remind us maybe some of the more discretionary items within there and what you would.
Think about is more about bare bones capital spending level on an annual basis.
Sure I'll deal with the capital allocation piecemeal it Sam talked about Capex.
So I think it goes without saying that when you're in an environment that we're in.
Making sure you protect your balance sheet, making sure you're very aggressive with your costs and making sure that you have a very acute eye on cash flows are imperatives.
And the actions that we've taken over the last 18 to 24 months put glatfelter and a very good position heading into the crisis and we'll continue to serve us well as we manage through each phase of the crisis. So in the near term we're going to continue to focus on making sure. We have a strong balance sheet, we have a strong liquidity position that we.
Our able to endure and sustain regardless of what comes our way and we also want to be in a position where when it's time to shift gears and be more aggressive about making investments to grow our business, we're willing and able to do that.
Same you want to comment on Capex, yes, sure so.
For Q1, we had $7 million of Capex. So if you annualize that that's $28 million versus the guidance. We've given up 30 to 35 million, so a little bit behind that a fair to say, but we did see similar patterns last year. When we made it up in the back half of the year, but I would say that we're going to continue to watch.
The overall performance to the company in our capital spending in our cash flow like a hakan and respond accordingly, obviously with all the mills continuing to operate we need to make sure that well maintain and we're spending money on maintenance and replacement parts as they were out so thats going to have to continue if something were to happen where that we were no longer firing on all cylinders then sure.
You would expect to have.
Less maintenance and spend needs, but we'll continue to watch that and will deliver capital back if it's not needed.
Great appreciate the color and good luck in the upcoming quarter.
Thank you. Thank you.
Your next question comes from the line of and Norwegian Shaw from BMO Capital markets. Your line is open. Please ask your question.
Hi, good morning.
Yes, Hi, you had mentioned some cost reduction efforts in the you I think that's separate from what you're doing carefully and if so I'm sorry, if I missed that but did you give any sort of financial savings that you expect from that I can you give more details there on the restructuring.
Yes sure since the vast majority of the restructuring spend we reported for this quarter was related to.
To the consolidation from our current spot facility to carefully facility and that's from Metalized production. So that was I think six of the 7.7 million dollar spend.
You did see another kind of million and a half fish spend in any year, which we expect to deliver.
Uh huh.
Certainly saving savings next year or sorry savings for the rest of the year, but but by far the savings are they restructuring spend related to carefully is some of it is in the EU as well because its journey.
Got it so this isn't a separate you sort of program.
I knew program. This is something we yeah I mean, we conveyed to us after Q4 earnings call or during the Q4 earnings call, where we said hey, we're going to shutdown. The Metalized operation insurance book move everything to the UK that'll take out about 150 ease.
We'll do some restructuring of that part of the business to get a better cost structure and have them one discrete manufacturing facility for Metalized. We've also looked at some other European facilities, whether it was Dresden to take a crew out of the Wallcover business and this was pre cobot 19.
Tightening things up a little bit across the portfolio I would say.
Right.
Okay, and then switching gears you mentioned that the switch to the functional management structure is complete and you're already seeing some benefits can you just give a little more in detail on that what you're seeing what you expect to see.
Sure.
I'll start null and void Sam to add any other comments.
The them the drivers of putting in this different operating model was really a function of the divestiture of our specialty business and how we wanted to build the new gladfelter as an engineered materials business and adjust our costs to fit the footprint in the scale of the new business.
And we felt we had duplicative costs that were in these business units structures. We wanted to have standard processes across the globe. We wanted more focus on excellence in commercial execution, more focus and expertise and global supply chain execution, and we've put leaders in place.
So they've built their organizations that are instituting standard business processes streamlining and fitting out. So we have a flight flatter wider organization being able to operate more quickly we were placing an emphasis on agility.
And speed.
Prior to covert 19, so I think that served us well.
And some of the benefits that you saw in Q4 in composite fibers in terms of top line and volume performance and how that carried over into Q1 I believe are representative of a more coordinated and focused commercial effort.
And we're seeing the same play out in our global supply chain, especially as we're having to implement.
Very dynamic in hands on a task forces to make sure that we manage our suppliers and our distribution network and ensure that the our supply chain is strong and reliable. So that we can maintain strong a reliable service to our customers.
And you've also seen continued improvement in our overall corporate costs. So I would say those are a handful of benefits. Some are more quantitative summer qualitative but directionally. We're we're pleased with where we are at this point.
I want to anything so I think that covered it very well maybe just one other tangible example to point to you know in Q4, we are last quarter. We commented that we were looking to improve our airlaid operating margins to tend to 11% Q4 was the first quarter, we had our new SVP of global supply chain in place Q4, he and his team have been firing on all cylinders and we delivered.
Operating margins ahead of the expected improvement we guided to so just one more tangible example that.
Great that's really helpful. Thank you.
Thank you.
There are no further questions I will now turn the call over to Mr., Dan deep hurting.
Okay, well I like to thank everyone for joining our call today and we look forward to speaking with you again next quarter.
Good day and stay well.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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