Q2 2020 P H Glatfelter Co Earnings Call
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I would now like to have the conference over to your speaker today run Bacheta guar from Gladfelter. Thank you. Please go ahead Sir.
Thank you Kyle.
Good morning, and welcome to Glatfelters, 2022nd quarter earnings Conference call.
This is remains shut a guar vice president of Investor Relations and corporate Treasurer.
On the call today to present, our second quarter results are Dante Parrini, Black 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 do 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 2019 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 them.
I will now turn the call over to Dante.
Thank you remain.
[laughter] good morning, and thank you for joining us.
Glatfelter delivered another solid quarter, continuing the positive momentum we've been building.
We generated adjusted EBITDA of $29 million.
Earnings per share of 22 cents, a 16% improvement in U.P.S. over the same period last year.
Airlaid materials posted record EBITDA of $17.8 million, an EBITDA margin of 19%, a 360 basis points increase over the same quarter last year.
Our Airlaid segment successfully delivered strong quarterly earnings on the back of robust demand for home care and health and hygiene products, coupled with disciplined focus on spending.
[noise] this performance paved the way for delivering record breaking earnings and margins. Despite the negative impact of reduced tabletop volumes caused by pandemic related restaurant closures around the world.
Composite fibers delivered a better than expected quarter in terms of profitability.
Demand for wall cover products was favorable relative to the initial week outlook at the beginning of the quarter.
And we experienced continued strong volume growth in the food and beverage category.
Aggressive cost control actions across the segment helped to mitigate the anticipated negative earnings impact from lower lower overall shipments and market related downtime.
EBITDA margin for the quarter was approximately 15% and on par with Q2 2019.
At the enterprise level, our operations and human resources leadership teams and production employees continue to keep all facilities operating despite the ongoing threat of cobot 19.
The hygiene and safety protocols, we instituted are serving us well and have been pivotal and keeping our employees healthy unsafe.
While maintaining the uninterrupted supply of critical products to our customers.
As for our nonmanufacturing workforce the work from home arrangements have been successful in very productive and remain in place today.
At this point I'll turn the call over to Sam to provide an in depth to review of our second quarter results.
I will then offer some closing remarks before opening the call for your questions Sam.
Thank you Dante.
Second quarter adjusted earnings from continuing operations was $9.9 million or 22 cents per share an increase of three cents versus the same period last year.
On a GAAP basis, we had a loss from continuing operations of $2.3 million or five cents per share.
The GAAP loss was driven primarily by the pension plan settlements excise tax accrual of $8.3 million Metalized restructuring expenses and other cost optimization charges of $5.4 million and a noncash impairment of the dressed and wall cover trade name of $900000.
Slide four shows a bridge of adjusted earnings per share of 19 cents from the second quarter of last year to this quarters. This year second quarter of 22 cents.
Composite fibers results reduced earnings by two cents from lower demand for wall cover products and related market downtime in dressed in but were partially offset by strong shipments in the food and beverage category improved operations and aggressive cost control actions.
Airlaid materials results improved earnings by three cents, despite lower volume driven by favorable sales mix and strong shipments and wipes homecare and feminine hygiene products.
Volumes overall were impacted by the decline in demand for tabletop products as restaurants globally remained closed four operated at dramatically reduced capacity.
Corporate costs were relatively inline with last year's second quarter and taxes and other items favorably impacted results by two cents driven by a lower tax rate for the quarter due to a delay in the timing of tax legislation enacted in the UK originally expected for the second quarter, but now expected to occur in the third quarter.
Slide five shows a summary of second quarter results for the composite fibers segment.
Total revenues for the quarter were 6.3% lower on a constant currency basis compared to last year, driven by weaker wallcover shipments year over year, a 49% a direct effect of the cobot 19 pandemic as global wall cover retail markets remained closed for most of the quarter.
The decline of Wallcover products was partially offset by strong shipments in the food and beverage category, which were up 12% representing growth in both tea and coffee product lines.
Selling prices decreased by $2 million, but would more than offset by lower raw material and energy prices of $3.1 million, primarily related to easing wood pulp prices.
Operations were slightly unfavorable as our dressing facility had significant market related downtime in the second quarter due to reduced demand, but this was mostly offset by strong production on inclined wire machines to meet customer needs.
Additionally, aggressive cost control actions were taken across the segment in anticipation of the lower wall cover demand.
The net effect of foreign exchange and hedging in the quarter relative to the same period last year was slightly unfavorable by $200000.
Looking ahead to the third quarter shipments for the overall segment are expected to be up five plus percent relative to the second quarter driven by the expectation of gradual recovery in the wall cover markets with retailers slowly reopening and stocking up on new designs.
The favorable impact of the wall cover recovery is expected to be partially offset by unfavorable mix driven by seasonal slowdown in demand for food and beverage product products in the third quarter.
Selling price and raw material prices are expected to be in line with second quarter.
However, we expect operations to be unfavorably impacted by $1 million as increased wallcover production in our dress and facility will be more than offset by market downtime on some of our inclined wire production assets necessary to manage inventory levels and for seasonal maintenance.
We expect Q3 earnings for composite fibers to be approximately in line with Q2.
Slide six shows a summary of our second quarter results for Airlaid materials.
This segment posted another record quarter with operating profit of $12.3 million, an operating margin of 13% exceeding our margin guidance of 10% to 11% provided at the beginning of the year.
Despite the uncertainty in global markets EBITDA margin of 19% was another quarterly record set by Airlaid materials.
This underscores the relevance of our product categories as essential consumer staples in times of economic uncertainty.
Revenues were down 7.2% versus the prior year quarter on a constant currency basis, driven by lower selling prices at $4.6 million from contractual cost pass through arrangements with customers. However, this was more than offset by lower raw material and energy prices of $5.1 million.
Shipments were 2% lower driven by softer than expected tabletop demand as restaurants around the world largely remained closed during the quarter.
However, the Airlaid segment experienced favorable mix with strong demand for wipes homecare and feminine hygiene products as the Covance pandemic brought about increased consumer focus around hygiene products in general.
Operations Favourably contributed to profitability by $900000 driven by higher production at our North American facilities to me elevated customer demand and disciplined cost control actions taken to mitigate the impact from the decline in tabletop.
For the third quarter, we anticipate total shipments to increase slightly sequentially, mainly driven by the gradual recovery of tabletop products as global economy slowly reopened.
Selling prices and raw material prices are both expected to increase slightly but fully offsetting each other.
We expect operations to be unfavorable by $1 million on account of lower production to manage inventory levels.
Slide seven shows corporate costs and other financial items.
For the second quarter corporate costs were slightly unfavorable by $300000 when compared to the same period last year.
In April we completed the previously announced closure of our Metalized operations in Garden stock, Germany with all Metalized production now based in our carefully UK facility.
Year to date, we have recorded $6.2 million for employee severance related costs and $4.9 million to accelerate the depreciation of equipment idle during the quarter inch write offs spare parts and miscellaneous inventory better no longer usable.
We also implemented cost optimization initiatives and other European locations. During the first six months to further improve our cost structure.
As it relates to our pension plan settlement, we held $55.5 million excess plan assets. Following a post settlement true up adjustment.
After transferring $14.1 million to a suspense account to fund future for one K. contributions and then accruing $8.3 million of excise taxes, we're left with $33.1 million of excess cash that has now been formerly referred it for general corporate purposes.
We continue to expect 2020 corporate costs to be in the range of $28 million to $30 million consistent with previous guidance.
Interest and other income and expense are projected to be approximately $3 million lower in 2020 compared to 2019.
Or about $10 million in total for this year.
Slide eight shows our cash flow summary.
During the first half of the year operating cash flow was negative $900000, an $18.4 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 half of 2019, we successfully settled the litigation related to the Fox River matter with the payment of approximately $21 million.
Correspondingly in the first half of 20 to 20, we made restructuring and cost optimization related payments of $9 million and higher incentive compensation payments of approximately $5 million.
Our tax rate for 2020 is estimated to be between 38, and 40% consistent with prior guidance, but we expect the Q3 rate to be approximately 47% driven by the UK tax rate increase originally expected to take effect in Q2, but now projected to occur in the third quarter.
We expect capital expenditures for the year to be between 30 and $33 million slightly below our previous guidance.
Depreciation and amortization expense is projected to be $52 million.
Slide nine show some balance sheet and liquidity metrics.
Overall, we're very well positioned from a liquidity and leverage perspective, following the successful cost optimization initiatives debt refinancing completed in 2019.
Our net debt on June Thirtyth was $271 million with leverage of 2.4 times and available liquidity of approximately $190 million.
We expect our liquidity and leverage to further improve in 2020 as earnings and cash flow increase.
And finally, we continue to be encouraged that both moodys and S&P reaffirmed their respective ratings for glatfelter during the second quarter as well as maintaining their stable outlook.
This concludes my prepared remarks, I will now turn the call back to adopt.
Thanks, Tim.
Although we continue to operate in a volatile and unpredictable environment, we remain confident in our ability to deliver value to our customers and shareholders.
As a result of our ongoing business transformation Glatfelters now equipped with a highly defensible portfolio of a central products, a talented and dedicated workforce and a robust balance sheet.
Our board also shares the sentiments and demonstrated its confidence and the strength of our business and cash flow profile by rewarding shareholders with the dividend increase in the second quarter.
Also during the quarter, we fully completed the termination and settlement formalities of our US defined benefit pension plan, returning just over $33 million of excess cash back to the company.
Our continued ability to generate strong earnings and translate them into free cash flow is creating the opportunity to delever, our balance sheet and build capacity for growth investments that will better position the company for the future.
And we remain prepared to whether any potential near term disruptions related to the pandemic.
In closing our top priorities remain keeping our employees healthy unsafe and providing our customers premium quality products and outstanding customer service. During this critical time.
We will continue to find ways to optimize our trusted brands strong customer relationships and robust demand for central consumer staples.
Monitoring the performance of the wall cover and tabletop product categories that are most adversely impacted by the pandemic.
We remain focused on operational excellence and outstanding tactical execution, while building critical capabilities that will enable glatfelter to continue to deliver solid performance.
Emerge from the pandemic even stronger.
I will now open the call for your questions.
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Yes.
Your first question comes from the line and now just shot from BMO capital markets and no. Joe Your line is now open.
Thank you good morning.
I'm wondering from winning.
It was a very nice quarter, and Airlaid and a I noticed that home care was up 64% can you give a little more detail on that and what products specifically did well in there.
Sure. So I would say homecare had another strong quarter and that was driven by a few things one I see.
In emerging shift in the hygiene standards that consumers are using for home care. So this would be things like disposable form ups by way of example.
And over the last several quarters, we have forged a strategic supply relationship with a major player in that category, which is also bolstering our sales.
Great. Okay. Thank you.
My next question is when you think about Airlaid capacity over the next five years or so.
Do you see yourself, adding more capacity and a with some of your competitor struggling does that create more opportunity or any opportunities for you.
Yes, so since in the second quarter.
Tire fairly segment operated capacity utilization levels in the mid Ninetys. So we still have some upside.
And as we look at continuous improvement and ways to further optimize our production wheel and how we produce certain products on the lines that they are best suited for we'll be able to continue to.
Eke out some incremental production capacity and drive down unit costs.
And I think I've said several times that this is a category that we.
Our committed to we're committed to the customers. We think we have a technology advantage and we're prepared to continue to invest in growing our platform whether that be through organic investments inorganic investments or both.
Great. Thank you.
And then just on that 33 million available for general corporate purposes, the cash freed up from termination of the pension plan can you give any specifics yet on how you're planning to use that.
I would say you know just general debt reduction at this point, we obviously you know as Dante meant just mentioned continue to keep a focus on growth investments as well.
No earmarked for nothing at this point.
Okay, great. Thank you very much.
Thank you.
We also have a question from Cortina your friend D.A. Davidson Kurt Your line is now open.
Yes. Thanks. Good morning, everyone. Appreciate you taking my questions.
Good morning, I just wanted to start in composite fibers could you talk about the mix impacts there.
Okay, and how that impacted pricing in the quarter. I mean is that improvement versus Q1, really just a function of wall cover being lower and that kind of being a higher basis, we product.
Sure. So as you might recall Q1, our wall cover year over year shipment volume was up 18% and we had guided down rather substantially although we did better than we had anticipated given the fact that the Russian wallcover market started to reopen in June but.
But if you do look at mix, our food and beverage category, which had a very strong quarter up 12% year over year and both T. had a very very strong quarter.
Yes those products.
Transact at higher price per ton.
They have more specialized input costs. So if you recall baca is used to produce these grades and that's a.
More of a nish.
Tree free fiber that's.
That we harvest in the Philippines, predominantly along with Central America.
And so that helps with our mix. So when we have very strong food and beverage quarter.
That helps to sweeten the mix.
Got it makes sense and I guess for just pricing more broadly in composite fibers I mean, how is that trended and.
Is there any concern around maybe given a little bit of but that back just with pull costs coming down in general.
It varies across product category in region.
When we when you do see rather pronounced downturn input costs. There are times, where some of that has returned to the customer too.
The value proposition fair and equitable across Counterparties, but I would say if you look at our overall profit performance.
If you think about how we guided.
Impact of dramatically reduced wall cover and fixed cost absorption penalties that comes from taking substantial downtime and the fact that we still delivered 15% EBITDA margins in the middle of a pandemic. When you had a very included view to demand when customers couldn't really tell us very well what to expect.
I think the team did a very good job being aggressive with our cost control managing things within our span of control being very agile and course correcting it adapting very quickly and cost effectively to serve our customers and to earned the trust and confidence of all of our customers. So.
I would say that it varies by category I think all in all was a really solid quarter with.
A lot of good performance on execution and around things that were with within our span of control and I think we also did a good job of mitigating those factors that were outside of our span of control.
Right right. Okay. That's helpful. And then obviously, a very strong quarter for airlaid kind of outside.
Tabletop segment.
It sounds like you're taking a little bit of downtime in Q3, and maybe that's just seasonal but any thoughts or concerns around maybe a little bit of.
Then Tory hang over there.
I would say no.
Big picture concerns at all continued to be very bullish on the outlook for the Airlaid form factor and the categories that we serve I also think that some of the lasting impacts of this pandemic are going to favourably impact this part of our business.
Consumers around the world continued to increase their hygiene standards and studies of prove that when consumers elevates hygiene standards. They rarely go backward and I think that will help us across these categories.
It's not typical to go through such a volatile and tumultuous period of time entering a global pandemic and some of this was unprecedented so having some period to period anomalies, whether its home care up 64% table top down 63%. These are not reflective of the trends of the categories. It's Russ.
Selective a point in time that was quite volatile in an unprecedented so I'd say big picture, we're very bullish on.
All the categories with center Airlaid space, I think tabletop overtime those restaurants open.
We will see recovery I also believe that there could be some substitution from linens to airlaid as consumers may prefer disposable tabletops products as opposed to linen product set our laundered.
Right, Yeah that makes that makes a lot of.
Okay.
And.
It sounded like wall cover recovered a bit in June and it seems like across the world things are starting to slowly kind of reopen and I was wondering if you could just talk about the volume progression within.
Those two areas.
Wall cover and table top through the quarter and maybe how you're thinking about.
Regression to the mean so to speak over the next 12 to 18 months.
Yes. So if you look at Wallcover as we entered Q2 was rather anemic because the primary markets were under shelter in place.
Restrictions and the retail outlets were closed.
And so those.
Russia, Ukraine, specifically and across Europe.
Countries and regions began to restrict shelter in place conditions and reopened slowly and reopened retail.
Then we started to see demand from our customers, which was driven by consumers pick back up and so.
June was a much stronger month in the quarter than April and May for wall cover.
And we see that trend continuing into Q3.
I'd say that just because of so much uncertainty and whether or not there is a coded wave two or regulations around different jurisdictions change quickly, which they can.
It makes it a little bit more difficult to predict with great accuracy over the near term I would say over the longer term.
Let's say statistically it's a reversion to the mean typically happens as long as there are no. Other isagen, a shock said could either favorably or unfavorably influence the trajectory of these businesses. So we expect wallcover to migrate to something that's more typical a normal over the 12 to 18 month period.
We have the same attitude about tabletop, how fast and when it's very difficult to forecast at this stage of the game.
Right right. Okay, and then just to two final quick ones hopefully I'm on the tax rate could you remind us how we should be thinking about that for 2021.
And whether there's any real difference between cash and book taxes.
And then also Sam I think you mentioned.
You expect cash flow generation to improve over the back half any any I guess color as to what you think that might be or how much you think you could de lever by yearend.
Yes, I guess couple of things first on the tax just a reminder, that we do expect the rate for Q3 to be elevated because of the timing of this expected rate change in the UK. So we're looking at 43% or excuse me, 47%, but we reiterate our full year guidance. So it's kind of a Q2 to Q3 shift here, but no major impact on the full year.
We.
Have withdrawn sort of formal guidance for long long term tax rates.
At this point you know for modeling purposes, I would probably use a similar 40% rate that we guided to this year, but but again, that's something we'll give a refresh on as we enter enter next year.
As far as the cash flow, we don't we don't issue public.
Leverage targets, but I would say you know as we noted we expect that to continue to decline as as earnings increases and as we get some of these onetime cash charges in our rearview mirror as well.
Got it Okay. That's helpful I'll turn it over thank you guys.
Thank you.
Yes.
I'm showing no further questions at this time Mr. Perino. Please continue.
Okay, well. Thank you for joining our call today, we look forward to speaking with you again next quarter.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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