Q3 2020 Glatfelter Corp Earnings Call
[music].
Welcome to <unk> earnings release conference call at this time all brick it's good for you know listen only mode. I forget speaker's presentation. There will be a question and answer session to ask a question dream to fashion. He will need to press star one on your telephone. Please be advised that to these conference is being recorded if you recall.
Or any further assistance. Please press star zero I would know like they had the conference over to Ramesh Schottky God. Thank you. Please go head.
Thank you Jerome.
Good morning, and welcome to Glatfelters, 2023rd quarter earnings Conference call. This.
This is remains shut a guar vice president of Investor Relations and corporate Treasurer.
On the call today to present, our third quarter results, our 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 in the Investor slides.
We will also make forward looking statements today that are subject to risks and uncertainties.
2019 form 10-K filed with the FCC.
And todays 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.
Good morning, and thank you for joining us.
In the third quarter Gladfelter continued its track record of.
<unk> results that meet or exceed expectations as both segments safely produced and shipped high quality engineered materials and.
Amid a volatile environment created by the pandemic.
We generated better than expected adjusted EBITDA of $29 million.
And adjusted earnings per share of 16 cents, which was inline 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 wall cover 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 a central 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 Daryl Hackett to our board of directors.
Daryl brings to glatfelter deep financial and human capital markets expertise and a wealth of experience from his various leadership roles at bank of Montreal and his tenure in management consulting at Mckinsey and company.
We look forward to his contributions and guiding the strategic direction of the company.
[noise] also concurrent with our recent name change to 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 will 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 16 cents per share a decrease of six cents versus the same period last year.
On a GAAP basis, we had income from continuing operations of $6.5 million or 15 cents per share versus $8.6 million or 19 cents per share in the same period last year.
Slide four shows a bridge of adjusted earnings per share of 22 cents from the third quarter of last year to this year's third quarter of 16 cents.
Composite fibers results reduced earnings by one cents, primarily due to lower selling prices that were partially offset by lower raw material costs and elevated demand for most product categories, except metalized.
[noise] Airlaid materials results improved earnings by two cents driven by favorable sales mix, despite lower lower overall volumes from softness in tabletop products.
Corporate costs were slightly favorable versus last years third quarter and taxes and other items unfavorably impacted results by seven cents driven by a higher tax rate this quarter of 48% versus 27% in the same quarter last year.
Slide five shows a summary of third quarter results for the composite fibers segment total.
Total revenues for the quarter were half a percent lower on a constant currency basis compared to last year.
Shipments overall were up 5%, but selling prices were lower by $3 million.
Liam growth was driven by recovery in demand for wall cover 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 improve 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 wall cover 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 service from inventory on hand, and the lower production in wall cover negatively.
Packed in profitability for the current period.
In early November we added one of the two shifts back at dressed 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 $100000.
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 while cover inventory to normalized levels.
Slide six 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.
Although tabletop volumes in the quarter declined 38% versus last year, they improved by 98% sequentially from the second quarter the.
The shortfall and tabletop volumes during the quarter was mostly offset by stronger demand for home care feminine hygiene and wipes products.
Operations slightly improved profitability banned by $100000 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 hygiene category.
Selling prices and raw material prices are expected to increase slightly fully offsetting each other out.
Operations and fixed cost absorption are expected to be lower by $1 million to $2 million from lower production to manage inventory levels.
Slide seven shows corporate costs and other financial items.
For the third quarter corporate costs were slightly favorable by $300000 when compared to the same period last year.
We also completed the Buildout of our new corporate headquarters in Charlotte North Carolina weeks.
We expect 2020 corporate cost to be $27 million for the year, which is below our previous guidance of $28 million to $30 million.
Interest and other income and expense is projected to be approximately $2 million lower in 2020 compared to 2019 or about $10 million in total for this year.
Slide eight shows our cash flow summary during.
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.
Also in the first nine months of 2019, we successfully settled the litigation related to the Fox River matter with the 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 pension excise tax payment of $8.3 million.
We expect capital expenditures for the year to be between 28 and $30 million below our previous previous guidance.
Depreciation and amortization expense is projected to be $53 million.
Slide nine shows some balance sheet and liquidity metrics.
We are very well positioned from a liquidity and leverage perspective, following the psus successful cost optimization initiatives and debt refinancing completed in 2019.
Our net debt on September Thirtyth 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 2019, due to foreign exchange and the Prefunding a four one 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, Tim.
After another quarter of solid performance in Q3 were 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 a central 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 will now open the call for questions.
Ladies and gentlemen, as a reminder, if you have worked to ask a question. Please from par then the number one on your telephone keypad. Your first question.
It comes from Mark Landy with.
Bank of America Bank of Montreal, You May now ask your question.
Good morning, Dante San Ramon.
Good morning, Mark and Mark Thanks.
Don 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 from what Youve 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 what's performing well versus the baseline and what is worth the drags are.
Sure.
So I'll start with the Airlaid business.
The product category that has most has been most adversely impacted by cobot as tabletop and Thats simply a correlation with restaurant.
Realization and.
So you've seen a lot of volatility quarter to quarter.
We nearly doubled our volume in Q3 versus Q2, but we are 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 co bid and we think Thats a strong 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 of code and so.
Products that are used to keep people in households and equipment.
Clean and sanitary, we think we will see a permanent improvement in overall demand.
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 you saw pickup.
Pickup in volume and the outlook for baby wipes is still.
About 5% per year over the long term.
Where there has been a short term spike has been more in the hard surface disinfecting wipes.
And.
Thats had probably the biggest improvement tied to a reaction to coated and then moist toilet tissue or though the flexible toilet.
Paper, which we do make out of our Livni UK facility, we've seen an improvement there and we expect.
Those categories and continue to do well and experienced growth over the next couple three years I would say.
Food packaging has also done reasonably well, 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 true.
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.
Is that nets out pretty accurate and we may undershoot in some areas overshoot and other areas and part of that may be our own conservatism and some of it may be.
Just the lack of comfort in our customers' ability to forecast accurately.
Finishing out Airlaid with Fem Hy.
Yes, we've had a pretty good year, so far were 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 it's a 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%.
Some high growth and for Europe, and North America. So thats 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.
We've had very strong growth in single serve coffee is formed.
Form factor becomes more adopted by households in North America.
Very pleased with our team.
Shipments this year and so we see TV is going to grow one or 2% per year, and we say single serve coffee will be in the mid single digits.
We expect that from a market point of view that will continue.
We've seen a little bit of Upticking composite laminates, both for flooring applications and kitchen countertop applications and this is more reaction to.
Many consumers being home.
Home more often still having disposable income and choosing to take their their vacation money and investing it in their houses, so replacing flooring and upgrading cabinet.
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 and Guernsey like Germany, and consolidated a smaller business in our carefully facility in the UK.
Technical specialties is the combination of products that range from electrical so things that go into automotive batteries in capacitors. The automotive industry was hit hard because of coated 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.
Our battery pacing paper was up about 7% in Q3, and Thats encouraging I mentioned moyes toilet.
Tissue type product was up about 20% in Q3.
We also make.
Laundry product called color catcher that takes pigments out of the washing machine and that was up about 40% in Q3. So.
Again small.
Small niches.
Either seeing recovery from coated or being supported by.
Cleanliness and hygiene practices and the nonwoven Wallcover has been the most vulnerable for composite fibers.
We had a very strong Q1 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' economies stay open for business and whether consumers go.
Comfortable being active 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 addresses your question, but not not effective but additional color.
I'm not I'm, just I'm curious in the Airlaid business.
Given what you've described where would the where would your operating rate be particularly at Fort Smith, where you put in the new capacity.
Except for the third quarter, the Airlaid business operated in the mid nineties.
And it was a little bit higher in Europe, and a little bit lower in North America within North America was in the high.
Hi, Eightys, 88% Fisher so.
And just given that you know how might we think about plans for any kind of incremental capacity in that business.
I think weve addressed that in the past so we're committed to growing the.
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 a 3 million dollar price drag in composite.
And also that fee that you call out for our government oversight on the Fox River is should we assume that.
But there are some ongoing.
Monitoring and maintenance costs for you on the Fox.
Sure so selling prices.
And when you look at our bridge you see that the.
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 <unk> and then another 25 or 30% of that was.
Either incentives or rebids tied to certain volume thresholds and so what we saw in composite fibers was less of raw material pass through in more of the incentives and rebates or enticements for volume thresholds achieved okay.
And then finally, just the entre maybe you want to address sandal, yes on the Fox on the Fox. So the large payment was paid out in Q1 of 19 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 as.
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.
Great. Thank you. Your next question comes from Steve Shaw Calmer D.
D.A. Davidson you May ask your question.
Thanks, Good morning, everyone.
Good morning.
So it's encouraging to hear that wall cover starts is starting to recover because well. It's small I think it's generated a disproportionate share of.
Negative headlines.
In any event. So we'll have a full quarter was impacted by that early downtime do you think you've turned the corner.
And we can start talking about wall cover if the current demand continues.
So if the current demand continues the answer is yes, what we don't know is how coded manifest itself over the winter cold and flu season, and what impact 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 in what.
Closed so.
I would say that our trajectory with wall cover heading into 2020 was good you might remember Q1, our volume grew about 19% year over year.
And then Q2 is when posted hit when we saw a nice recovery so.
And then the other thing is that the EBITDA margin of the business, even though it's been impacted.
Is still adder or higher than the reporting segment. So there's.
Theres still a lot of incentive to us to run that operation full to keep the cost structure is 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 yeomans job at finding way to ramp backup 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 one that's as volatile as this one.
That makes sense and it's important to note that those margins are good.
So whether its wallcovering or whether it's the.
Overlay that you put on.
Yes.
Some of the the other.
Flooring and.
Shelving type applications are you guys getting any benefit from what I'll call. The co. Good home improvement Mania, I mean, it's obviously not like that.
Looking in sensing where would has just gone off the rails, but are you getting a cobot bump in 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 will that was in my head a little bit so he's taken a few of my questions but.
Respect to Airlaid it sounds like you're starting to clean up in the house and then on intended.
But it's unlikely in my view that tabletop is going to come back at least through the winter.
But I was surprised even hear any seasonality in the wipes and hygiene. So is that just the way.
The retailers are the producers of particularly feminine hygiene.
Build up their inventories at because I wouldn't think it would be a seasonal.
Product, maybe you can elaborate on that.
Yeah. 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 co bid and staffing and production issues, which may in in a quarter slowdown typical demand.
And you've got.
Some pantry stuffing that occurred in Q2 people ramped up.
When it comes to Fem Hy.
No.
Females 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.
At 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 or are you 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 voice toilet tissue, sometimes they have mixed changes from period to period, but I would say the all the wiping categories are growing categories and these are areas of interest to us and I wouldn't be overly bothered by.
Hi.
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 white sand cars go down in the winter but.
Can you quantify what you think the actual disinfectant white.
Uptake has been like on a year over year basis.
I mean, all I can tell you is a date.
Data from studies I've read and there was a significant increase in household penetration of hard surface disinfecting wipes.
I want to say it was a.
20.
5% to 50% increase from where the household penetration rate was pre code, but Steve just to remind you the vast majority of our wipes our baby wipes correct.
Got it okay and.
And then just switching gears I think your balance sheet is effectively at the target leverage ratio. So can you prioritize how you use.
Use excess capital going forward.
Sure you know, we're not out of the pandemic yet so we want to continue to be thoughtful and appropriately concern.
Conservative when preserving balance sheet capacity in the short term will continue to.
Pay down our debt and we are at the same time looking at ways to invest profitably and growing our company. We Didnt go through all of the difficulties of divesting our legacy business and cutting ourselves and have to stay small so we want to grow again in a very thoughtful and measured way that.
As appropriate return profile associated with it and so the balance sheet capacity will be useful as we look at ways to grow the company.
Would you hazard a guess on time.
Timeframe when something material might.
[music].
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.
Once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
There are no further questions at this time I will hand, the call back to Tom Thank for rainy 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 for some terms and thank you, ladies and gentlemen for joining us today.
Today's conference. Thank you all for joining you may now disconnect.
[music].
[music].
[music].
[music].
Ladies and gentlemen, thank you for standing by and welcome to the club. So first first quarter 2014 earnings release Conference call. At this time all it's good for you know listen only mode. After the speakers presentation. There will be a question. Let me now turn fashion they ask why.
Lets turn dreamed of fashion, you will need to press star one on your telephone. Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I would know like the kind of the conference over to Ramesh Schottky God. Thank you. Please go head.
Thank you Jerome.
Good morning, and welcome to Glatfelters, 2023rd quarter earnings Conference call.
This is remains shugart, vice president of Investor Relations and corporate Treasurer.
On the call today to present, our third quarter results, our 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 in the Investor slides.
We will also make forward looking statements today that are subject to risks and uncertainties.
Our 2019, <unk> form 10-K filed with the SEC.
And todays 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.
Good morning, and thank you for joining us.
In the third quarter Glatfelter continued its track record.
Delivering results that meet or exceed expectations as both segments safely produced and shipped high quality engineered materials a.
Amid a volatile environment created by the pandemic.
We generated better than expected adjusted EBITDA of $29 million.
And adjusted earnings per share of 16 cents, which was in line with expectations.
[music] Airlaid materials posted another record quarter by achieving adjusted EBITDA of $18.6 million.
Boosted by a stronger euro and a favorable product mix.
Profitability was better than expected 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 wall cover 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 a central 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 Daryl Hackett to our board of directors.
Daryl brings to glatfelter deep financial and human capital markets expertise and a wealth of experience from his various leadership roles at bank of Montreal and his tenure in management consulting at Mckinsey and company.
We look forward to his contributions and guiding the strategic direction of the company.
Also concurrent with our recent name change to 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 will 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 16 cents per share a decrease of six cents versus the same period last year.
On a GAAP basis, we had income from continuing operations of $6.5 million or 15 cents per share versus $8.6 million or 19 cents per share in the same period last year.
Slide four shows a bridge of adjusted earnings per share of 22 cents from the third quarter of last year to this year's third quarter of 16 cents.
Composite fibers results reduced earnings by one cents, 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 two cents driven by favorable sales mix, despite lower lower overall volumes for softness and tabletop products.
Corporate costs were slightly favorable versus last years third quarter and taxes and other items unfavorably impacted results by seven cents driven by a higher tax rate this quarter of 48% versus 27% in the same quarter last year.
Slide five shows a summary of third quarter results for the composite fibers segment total.
Total revenues for the quarter were half a percent lower on a constant currency basis compared to last year.
Shipments overall were up 5%, but selling prices were lower by $3 million.
Liam growth was driven by recovery in demand for wall cover 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 improve 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 wall cover 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 service from inventory on hand, and the lower production and wall cover negatively.
Packed in profitability for the current period.
In early November we added one of the two shifts back at dressed 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 $100000.
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 while cover inventory to normalized levels.
Slide six 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.
Although tabletop volumes in the quarter declined 38% versus last year, they improved by 98% sequentially from the second quarter the.
The shortfall in tabletop volumes during the quarter was mostly offset by stronger demand for home care feminine hygiene and wipes products.
Operations slightly improved profitability banned by $100000 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 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 lower by $1 million to $2 million from lower production to manage inventory levels.
Slide seven shows corporate costs and other financial items.
For the third quarter corporate costs were slightly favorable by $300000 when compared to the same period last year.
We also completed the Buildout of our new corporate headquarters in Charlotte North Carolina weeks.
We expect 2020 corporate cost to be $27 million for the year, which is below our previous guidance of $28 million to $30 million.
Interest and other income and expense is projected to be approximately $2 million lower in 2020 compared to 2019 or about $10 million in total for this year.
Slide eight shows our cash flow summary during.
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 the 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 pension excise tax payment of $8.3 million.
We expect capital expenditures for the year to be between 28 and $30 million below our previous previous guidance.
Depreciation and amortization expense is projected to be $53 million.
Slide nine shows some balance sheet and liquidity metrics.
We are very well positioned from a liquidity and leverage perspective. Following this successful cost optimization initiatives and debt refinancing completed in 2019.
Our net debt at September Thirtyth 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 2019, due to foreign exchange and the Prefunding of four one 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, Tim.
After another quarter of solid performance in Q3 were 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 continue to succeed due to the relentless determination of our employees.
Combined with our reshaped portfolio of engineered materials used to produce a central 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 will now open the call for questions.
Ladies and gentlemen, as a reminder, if you will work to ask a question. Please press Star then the number one on your telephone keypad. Your first question.
Comes from Mark Willoughby with Bank of America Bank of Montreal, You May now ask your question.
Good morning, Dante Sam Ramesh.
Good morning, Mark Hey, Mark Hey.
Hey, 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 from what Youve 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 what is performing well versus the baseline and what is worth the drags are.
Sure.
So I'll start with the Airlaid business.
The product category that has most has been most adversely impacted by coded as table top and Thats simply a correlation with restaurant.
Utilization and.
So you've seen a lot of volatility quarter to quarter, we nearly doubled our volume in Q3 versus Q2, but we are 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 cobot, and we think thats a strong 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 of cobot and so.
Products that are used to keep the people and the households and equipment.
Clean and sanitary, we think we'll see a permanent improvement in overall demand.
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 you saw pick.
Pickup in volume and the outlook for baby wipes is still.
About 5% per year over the long term.
Where there has been a short term spike has been more in the hard surface disinfecting wipes.
And.
Thats had probably the biggest improvement tied to reaction to coated and then moist toilet tissue or the flexible toilet.
Paper, which we do make out of our lead in the UK facility, we've seen an improvement there and we expect.
Those categories and continue to do well and experienced growth over the next couple of three years I would say.
Food packaging has also done reasonably well, we see period to period of volatility Mark simply because it it's very difficult for our customers to forecast at a granular level it's Sean.
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 provide an outlook on a quarter to quarter basis.
Is that nets out pretty accurate and we may undershoot in some areas overshoot and other areas and part of that may be our own conservatism and some of it may be.
Just the lack of comfort in our customers' ability to forecast accurately.
Finishing out Airlaid with Fem Hy.
Yes, we've had a pretty good year, so far were 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 it's a 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%.
Some high growth and for Europe, and North America. So thats 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 very stable performer.
We've had very strong growth in single serve coffee is.
Form factor becomes more adopted by households in North America.
Very pleased with our TV shipments this year and so we say T is going to grow one or 2% per year, and we say single serve coffee will be in the mid single digits.
We expect that from a market point of view that will continue.
We've seen a little bit of Upticking 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 their vacation money and investing it in their houses so Rick.
Replacing flooring it upgrading cabinet.
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 Incurrence Buck, Germany consolidated a smaller business.
In our carefully facility in the UK.
Technical specialties is a combination of products that range from electrical so things that go into automotive batteries and capacitors. The automotive industry was hit hard because of Cove. It 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.
Our battery pacing paper was up about 7% in Q3, and Thats encouraging I mentioned moyes toilet.
Tissue type product was up about 20% in Q3.
We also make.
Laundry product called color catcher that takes pigments out of the washing machine and that was up about 40% in Q3. So.
Again small.
Small niches.
Either seeing recovery from covance or being supported by.
Cleanliness and hygiene practices and the non woven wall cover has been the most volatile for composite fibers.
We had a very strong Q1 things dropped rather precipitously in dramatically in Q2, we saw a much stronger bounce back in Q3 more V shaped and this is largely due to weather countries' economies stay open for business and whether consumer Scott.
Comfortable being active 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 addresses your question not it's not a bit of additional color.
Hi, I'm.
Im curious in the Airlaid business.
Given what you've described where where would your operating rate be particularly at Fort Smith, where you put in the new capacity.
Yes, that's it for the third quarter, the Airlaid business operated in the mid nineties.
And it was a little bit higher in Europe, and a little bit lower in North America. It's in North America was in the high.
Hi, Eightys 80, percentish or so.
And just given that no.
How might we think about plans for any kind of incremental capacity in that business.
I think weve addressed that in the past so we're committed to growing the.
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 a 3 million dollar price drag and composite.
Also that.
Fee that you call out for government oversight on the Fox River is should we assume that.
But there are some ongoing.
Monitoring and maintenance costs for you on the Fox.
Sure so selling prices.
And when you look at our bridge you see that the.
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 then another 25 or 30% of that was.
Either incentives or rebids tied to certain volume thresholds and so what we saw in composite fibers was less of raw material pass through in more of the incentives and rebates or enticements for volume thresholds achieved okay.
And then finally, just the Fox River, if you want to address sandal, yes on the Fox on the Fox. So the large payment was paid out in Q1 of 19 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 as.
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.
And your next question comes from Steve Shaw cover it.
The Davidson you May ask your question.
Thanks, Good morning, everyone.
So.
So it's encouraging to hear that wall cover starts is starting to recover because well. It's small I think it's generated destroy portion its share of negative headlines.
In any event. So we'll have a full quarter was impacted by that early downtime do you think you've turned the corner.
And we can start talking about wall cover if the current demand continues.
So the current demand continues the answer is yes, what we don't know is how coded manifest itself over the winter cold and flu season.
And what impact that might have on display.
Decisions governments around the world make on whether they cause their citizens to shelter in place and what businesses stay open and what.
Closed so.
I would say that our trajectory with wall cover heading into 2020 was good you might remember Q1, our volume grew about 19% year over year.
And then Q2 is when cobot hit when we saw a nice recovery so.
And then the other thing is that the EBITDA margin of the business, even though it's been impacted.
Still at or 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 structure is 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 yeomans job at finding way to ramp backup 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 one that's as volatile as this one.
That makes sense.
Important to note that those margins are good.
So whether its wallcovering or whether it's the.
Overlay that you put on it.
Some of the the other.
Flooring and.
Shelving type applications are you guys getting any benefit from what I'll call. The the co. Good home improvement Mania, I mean, it's obviously not like decking and sensing where would is just going off the rails, but are you getting a cobot bump in 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 yes.
We tie that to uptick in do it yourself investments.
Great and I think Mark will there was in my head a little bit so he's taken a few of my questions, but with respect to airlaid. It sounds like you're starting to clean up and now and then how unintended.
But it's unlikely in my view, the tabletop is going to come back at least through the winter.
But I was surprised even hear any seasonality in the wipes and hygiene. So is that just the way.
The retailers are the producers of particularly feminine hygiene.
Build up their inventories because I wouldn't think it would be a seasonal.
Product, maybe you can elaborate on that.
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 co bid and staffing and production issues, which may in in a quarter slowdown typical demand.
You've got.
Some pantry stuffing that occurred in Q2 people ramped up.
When it comes to Fem Hy.
Females 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 have threeq.
Second two 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 or are you going to be bolstered by a change in hygiene practices.
Our whole portfolio of waves. So some of our customers that make everything from baby to hard surface disinfecting to voice toilet tissue, sometimes they have mix changes from period to period, but I would say the 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 to your cars go down in the winter, but we.
Can you quantify what you think the actual disinfectant white.
Uptake has been like on a year over year basis.
I mean, all 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.
I want to say it was a.
20.
5% to 50% increase from where the household penetration rate was pretty code, but Steve just to remind you. The vast majority of our wipes our 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.
Use excess capital going forward.
Sure we're not out of the pandemic, yet so we want to continue to be thoughtful and appropriately concern.
Conservative when preserving balance sheet capacity in the short term will continue to.
Pay down our debt and we are at the same time looking at ways to invest profitably and growing our company. We Didnt go through all of the difficulties of divesting our legacy business.
Cutting ourselves and have 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 the balance sheet capacity will be useful as we look at ways to grow the company.
Would you hazard a guess on time.
Timeframe when something material might.
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.
Once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
There are no further questions at this time I'll hand, the call back to compensate for rainy.
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 for some terms and thank you, ladies and gentlemen for joining us today.
Today's conference. Thank you all for joining you may now disconnect.