Q1 2021 Glatfelter Corp Earnings Call
Good day, and thank you for standing by and welcome to the glass Vouchers quarterly earnings Conference call. At this time all participants lines are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you'll need to grasp on.
One on your telephone or at least the advice that today's conference is being recorded if you require any further assistance. Please press star zero. Thank you I would now like to hand, the conference over to your first speaker today, Mr. Mesh shut the GARP. Please go ahead Sir.
Thank you Patricia.
Good morning, and welcome to Glatfelter as 2021 first quarter earnings Conference call.
This is Ramesh <unk>, Vice president of Investor Relations and corporate Treasurer.
On the call today to present, our first quarter results are Dante Perini, Glatfelter, as chairman and Chief Executive Officer, and Sam Hillard, Senior Vice President and Chief Financial Officer.
Before we begin our presentation I have a few standard reminders.
During our call. This morning, we will use the term adjusted earnings as well as other non-GAAP financial measures.
A reconciliation of these financial measures to our GAAP based results is included in today's earnings release and in the Investor slides.
We will also make forward looking statements today that are subject to risks and uncertainties.
Our 2020 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 Ramesh and good morning, and thank you for joining us today.
Glatfelter continue to achieve strong overall results, which were ahead of expectations in the first quarter.
Despite the pandemic and its associated challenges.
We delivered adjusted earnings per share of <unk> 19 cents and.
And adjusted EBITDA of $31 million.
Slide three of the Investor deck provides highlights for the quarter.
Yes.
Air lead materials performed below expectations due to ongoing softness in the tabletop category related to government lockdowns and delayed restaurant openings.
During the quarter, we also experienced lower than anticipated demand in wipes home care and feminine hygiene products.
Customers and consumers adjusted their buying patterns to account for higher inventory levels.
As a result, it was necessary to take additional downtime to manage inventories, which negatively impacted profitability.
Although the pandemic is still evolving in our core markets, we remain optimistic about demand recovery for tabletop products as vaccinations increase infection rates decline.
So relax restrictions on dining establishment in the warmer weather arrives.
Composite fibers posted another strong quarter as robust demand for food and beverage and technical specialties products helped drive results when coupled with higher asset utilization profitability for this segment hit its highest level on for years.
We recently announced an 8% price increase for composite fibers products to address cost inflation for raw materials energy and logistics.
We expect the impact of these pricing actions to begin flowing to the bottom line in Q2 with greater realization to occur in the second half of the year.
At an enterprise level, we maintained our focus on the health and safety of Plaid filter people. These efforts kept all facilities operational ensuring uninterrupted supply of essential products to our customers.
Lastly in March we announced the conclusion of the regulatory review process for our pending acquisition of Georgia, Pacific's U S. Nonwovens business and now expect the transition transaction to close in mid May.
We're excited to begin this integration that will enable us to optimize capacity improve operational efficiencies and accelerate innovation efforts across our expanded <unk> platform.
At this point I'll turn the call over to Sam to give an in depth review of our first quarter results.
Thank you Dante.
First quarter adjusted earnings from continuing operations was $8 $4 million or <unk> 19 per share a decrease of <unk> versus the same period last year, driven by pandemic related softness in our <unk> materials segment, and a higher effective tax rate, which I will cover in more detail shortly.
Slide four shows a bridge of adjusted earnings per share of 24 from the first quarter of last year to this year's first quarter of <unk> 19 cents.
Positive fibers results improved earnings by 1%, driven primarily by better mix and improved asset utilization.
Airline materials results lowered earnings by <unk> <unk> due to softness in tabletop products as restaurant dining continues to be significantly affected by the pandemic as well as other COVID-19 related weakness in certain categories.
Corporate costs were <unk> <unk> favorable versus last year's first quarter from lower spending and cost control initiatives and interest taxes and other items drove earnings lower by <unk> <unk> versus the same period last year, mainly due to a higher effective tax rate.
Q1, 2021 had a tax rate of 45% versus a tax rate of 39% for the same period last year, the higher rate versus our previous full year guidance of 38% to 40% was driven by unexpected German tax rate changes that occurred during the quarter.
Slide five shows a summary of first quarter results for the composite fibers segment.
Total results total revenues for the quarter were one 4% lower on a constant currency basis due to lower shipments of <unk> products in 2021 compared to Q1 2020.
As a reminder, we shipped metallize products the entire first quarter of 2020 from our UK and German facilities before the restructuring in early Q2.
Excluding metallize shipments in the quarter were in line with last year.
We continued to experience stable growth in our food and beverage and technical specialty product categories offset by lower shipments in wall cover in composite laminates.
Selling prices were flat versus the same period last year, but improved mix from higher shipments and food and beverage and technical specialty is favorably impacted results by $1 $1 million.
Higher wood pulp and energy prices negatively impacted results by $1 $3 million, but were mostly offset by favorable operations driven by improved material efficiencies and lower spending for labor and maintenance.
Looking ahead to the second quarter of 2021, we expect shipments in composite fibers to be in line with the first quarter and we expect selling prices to be higher as we benefit from our previously announced price increases.
However, we also expect raw material energy and freight inflation to continue to escalate in the second quarter more than offsetting the price benefit with a net negative impact of $1 million to $2 million.
In addition, we have already taken and expect incremental planned downtime over holiday periods in the second quarter to perform required maintenance, which will set us up well for production for the remainder of the year.
This however will negatively impact earnings by approximately $2 million in the second quarter.
Slide six shows a summary of first quarter results for air laid materials.
Revenues were down almost 19% versus the prior year quarter on a constant currency basis, mainly driven by lower shipments of 18%.
The tabletop category was down 55% compared to last year due to continued softness in restaurant demand as COVID-19 drove government imposed lockdowns and dining closures globally.
Also shipments were lower than originally anticipated in wipes home care and feminine hygiene product categories as customers adjusted their order levels during the quarter due to the higher year end inventory reserves built earlier in the pandemic.
As a result, lower volume unfavorably impacted results by $3 2 million versus same period last year.
Higher selling prices from contractual costs pass through arrangements with customers were more than offset by higher raw material and energy prices, reducing earnings by a net $300000.
Operations lowered results by $1.3 million, mainly due to market related downtime in the quarter to manage inventory levels to better align with customer demand.
With the anticipated closing of the G. P. U S. Nonwovens acquisition in mid May we expect to include approximately six weeks of Mount Holly's performance into the air led materials financial results during the second quarter.
Factoring that into our second quarter guidance, we expect shipments of air led materials to be approximately 15% higher although at an unfavorable mix.
We anticipate selling prices and input prices to both be slightly higher offsetting each other.
And we will continue to take market related.
Machine downtime during Q2, including at Mount Holly during the cutover.
As a result, we expect Q2 overall operating profit for this segment to be in line with the first quarter.
Slide seven shows corporate costs and other financial items.
For the first quarter corporate costs were favorable by $1 million when compared to the same period last year driven by continued spend control.
We expect corporate costs in Q2 to be in line with Q1 and for full year 2021 to be between 25 and $26 million lower than our previous guidance of $27 million.
Interest and other income and expense are now projected to be approximately $12 million for the full year reflective of the incremental debt related to the Mount Holly acquisition.
Our tax rate for 2021 is estimated to be between 42, and 44% which is higher than our previous guidance. The higher tax rate overall is driven by recent changes to the local German tax rate that increased in Q1 as.
As well as unexpected uptick in our U K tax rate in the third quarter of this year also related to new legislation.
Slide eight shows our cash flow summary.
First quarter adjusted free cash flow was higher by approximately $2 million, mainly driven by lower capital spending.
We expect capital expenditures for the year to be between 40 and $42 million, while depreciation and amortization expense is now projected to be $62 million. Both figures now incorporate the pending acquisition.
Slide nine shows some balance sheet and liquidity metrics.
Overall, we are very well positioned from a liquidity and leverage perspective.
Our leverage ratio increased slightly driven by higher working capital usage typical in the first quarter. Our net debt on March 31 was approximately $219 million and we had available liquidity of $265 million, providing ample firepower for growth.
We also recently concluded our credit review with Moody's and S&P, both agencies maintain their respective ratings with stable outlooks, while viewing the G. P. U S nonwovens acquisition favorably and finding such investments to be consistent with our growth strategy.
This concludes my prepared remarks, I will now turn the call back to Dante.
Thanks Sam.
From a strategic perspective, I am pleased with the ongoing execution of our business transformation and growth strategy.
Our portfolio of products tied to a central consumer staples will serve us well and provide greater stability to margins and cash flows and the long term.
Demand for composite fibers products is robust and we expect that to continue into the second half.
Demand for air lead products across the broader industry has been negatively impacted by the pandemic in the short term.
Although we expect many of these transitory issues to begin to abate as we enter Q3.
And we're adding new innovative product offerings to our portfolio.
One example is the recent launch of <unk> clean a cellulose based surface disinfecting wipe product line.
This material was just nominated by into for the World of Wipes Innovation Award.
As elevated hygiene standards are expected to prevail in a post COVID-19 world, providing customers with high performing and sustainable plant based materials should further bolster our position as an industry leader.
The mid May closing of the acquisition of G. P. S. U S. Nonwovens business provides glatfelter complementary manufacturing assets, new R&D capabilities, and a talented workforce, while adding scale to our U S operations.
Our aggressive stance on cost reduction will continue to contribute to our growth targets for EBITDA and free cash flow.
And glatfelter people around the world continue to perform exceptionally well responding to the challenges and opportunities that come their way.
In summary, we see the second quarter as an inflection point for the business.
From a timing perspective, we expect the positive impacts from recent pricing actions and new product introductions to lag the headwinds created by significant input cost increases higher logistics costs and uneven demand in Q2.
Our outlook for the second half as constructive as we expect more consistent demand across the portfolio meaningful fall through from pricing actions taken in Q1.
And we integrate the G P nonwovens business into our existing <unk> business.
So we're excited and looking forward to the prospects for an improved second half of 'twenty one.
This concludes my remarks, and I'll now open the call for your questions.
Thanks, and as a reminder to ask a question you will need to press star one on your telephone again Thats far one on your telephone will phosphor momentum compile the Q&A roster.
Your first question comes from the lineup on margin Shah from BMO capital markets. Your line is open.
Hi, good morning.
Hi, how are you get thank you.
I wanted to go back to this tabletop and specifically it sounds like you are thinking about a recovery you know on the third quarter.
Is that true first of all and then second I think in the past you had mentioned that once restaurant traffic comes back you can actually benefit because restaurants may be looking for more on disposable options.
Is that true and does that mean that there'll be an additional lift one's restaurant traffic does come back.
Happy to answer that question I think there are a number of factors lining up that are positive for the tabletop business clearly as the.
Nations increase in our core markets of infection rates decline and governments relax lockdown restrictions and allow restaurants to open and operate at greater levels of capacity.
In the warm weather arrives are all very favorable.
I would say that the U S and North American market is leading that recovery and we expect the European market to follow behind.
In terms of the dynamics that we think will influence our tabletop demand in the form factors of choice for customers.
We do think that disposability will be in favor with consumers as they have far greater sensitivities toward the transmission of terms and things of that nature and I think perhaps people have taken a bit of a time out on their focus on plastic and petroleum based feedstocks vs plant based on cellulose feedstocks.
And its impact on waste streams landfills.
Et cetera, and so.
Glatfelter has product offering of having a very soft in class like feel material. That's made from biodegradable plant based feedstocks. I think is also an advantage to us so from a broader ESG perspective, I think it lines up quite well.
Great. Thank you.
And then can we just maybe talk about capital allocation given that the C. P transaction is about to close.
Is M&A failure preferred use of cash are there other right. How are you thinking about capital allocation.
Sure.
So as you know our transformation and growth strategy was designed to reset the company established the correct base for us to build the new glatfelter and to become a more profitable growth business over time, so clearly the G. P U S business fits into that strategy and.
Envision.
Acquisitions, and so maintaining good balance sheet capacity is going to be very important and I expect glatfelter to be a participant in helping to consolidate the different parts of the market that we participate in.
Okay. Thank you very much.
And then a few years ago I think you mentioned on interest in building out your position in filtration media and technical specialties things like batteries and other consumer products.
Is that still an area of interest for you and maybe you can give an update on your thoughts there.
Certainly.
As we look at areas for investment and how to expand our portfolio.
Certainly investments that help us broaden and expand our existing platforms will be the most synergistic and perhaps the easiest to understand and convince ourselves that we are the rightful owners of these assets.
The two G P acquisitions in 2018 and now in 2021 are perfect examples of those.
We've also talked about categories, whether that's the broader categories of filtration.
The continuum of technologies that are used to supply health hygiene and home care markets, we've talked about <unk>.
Electrical and we're seeing part of the reason why is I see composite fibers continuing to strengthen as the recovery categories on our portfolio, we're seeing gaining strength, so whether thats materials that go into battery construction capacitors and things of that nature.
And we think the electrification of the World will continue so I think those are important and interesting areas.
To name a few.
Great. Thank you and then my final question is just on the tax rate.
I know you mentioned on the German tax rate and the U K legislative change, but it has been above 40%.
I think about two years now.
Not mistaken what what's driving it higher.
If you can just remind us and is this a lot.
Long term sort of level or are there things you can do over time.
Sure. So again, we had guided to a rate below 40 for this year, but unfortunately with these changes in the rates in UK and Germany that that's causing it to tick back up to above 40.
We do we do think we have the capabilities to bring it back down well below obviously, a new J theres a lot of pending.
Legislation in terms of tax reform around the globe and in the U S. So it's hard to predict exactly what's going to happen but.
Ignoring what could or Couldnt happen there I do think we see good potential to low our tax rate. The biggest driver is the fact that we're operating at a loss in the U S. You know after we sold our specialty papers business. We only had one facility remaining in the U S. But we had a U S based corporate costs U S based interest expense.
Which.
Yeah.
Factors for US and then we are unable to get deductions for our foreign income taxes due to some of the provisions around around guilty. However, with the acquisition of something like Mount Holly We closed the GAAP meaningfully in terms of the losses that we're generating in the U S. We're not out of the woods and we need to continue to grow our income in the U S.
So additional income in the U S either organic or acquisition will help lower that tax rate over time.
That's very helpful. Thank you very much.
Thank you.
There are no further questions at this time.
Please proceed.
Okay, well. Thank you for joining our call today, we look forward to speaking with you again next quarter have a great day.
This concludes today's conference call. Thank you all for participating you may now disconnect.
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