Q2 2021 Glatfelter Corp Earnings Call

August 3, 2021

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Good day and thank you for standing by welcome to get some filters quarterly earnings release conference call. At this time with Arthur just punch line are in listen only mode.

After the speaker's presentation, there will be a question and answer session.

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I'd now like to hand, the call over to your speaker today instead of a mesh shattered guard. Please go ahead.

Thank you <unk> good morning, and welcome to Glatfelter as 2021 second quarter earnings Conference call. This is <unk> <unk>, Vice President of Investor Relations and corporate Treasurer.

On the call today to present, our second 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.

You were much.

Good morning, and thank you for joining us today.

Glatfelter delivered positive overall results versus expectations, despite entering the quarter anticipating softer demand and market related downtime associated with customer destocking for the <unk> segment.

These outcomes were driven by a recovery in demand for tabletop products and strong performance from Mount Holly.

Also consistent with the execution of our ongoing transformation and growth strategy, we announced the pending acquisition of Yakov home a leader in the non woven sector.

I'll provide more details about this important acquisition throughout the call.

As for second quarter results, we reported adjusted earnings per share of <unk> 18.

And adjusted EBITDA of $28 million slide.

Slide 3 of the Investor deck provides the highlights for the quarter.

Per lead materials performed above expectations, driven by a rebound in the tabletop category.

In person dining began to recover globally.

Mount Holly contributed favorably to the quarterly results following the team's excellent execution and closing the transaction.

Standing up a new integrated system, and restarting production and shipping all within 48 hours after closing.

We're excited for the ongoing opportunities we see with the addition of Mount Holly to the Glatfelter portfolio.

While overall volume growth was healthy we did experience lower than anticipated demand in hygiene products as customers continue to destock from elevated inventory levels maintained during the pandemic.

We expect the buying patterns in this category to return to more normalized levels during the third quarter and positively impact segment profitability in the second half of the year.

Composite fibers results were below expectations as unfavorable mix and higher than anticipated energy prices negatively impacted profitability in <unk>.

Shipping volume was up meaningfully inflationary headwinds proved to be challenging for this segment.

The pricing actions announced in the first quarter helped to address some of the raw material input cost pressures, but not enough to offset the higher than anticipated energy prices and logistics costs during the second quarter.

We expect a more meaningful benefit from the price increases take effect in the third quarter.

At an enterprise level, our focus remains on the health and safety of Glatfelter people on.

Our efforts continue to keep all facilities operational as they did in the quarter, while ensuring uninterrupted supply of our central products to our customers. Despite the current evolving nature of the pandemic.

It goes without saying that 2021 has been a momentous year, thus far in executing glatfelter as ongoing transformation and growth strategy.

In May we closed on the acquisition of Mt, Holly, which has strategically positioned us to more fully benefit from the long term growth in the health and hygiene category, while also being immediately accretive to earnings.

And as I mentioned in my opening remarks on July 20, <unk>, We announced the acquisition of Yakov home, a global leading manufacturer of premium quality nonwovens with an attractive platform to expand glatfelter scale technologies product portfolio and global reach.

I'll provide additional commentary on the <unk> acquisition after Sam completes his review of our second quarter results Sam.

Thank you Dante second.

Second quarter adjusted earnings from continuing operations was $8 million or <unk> 18 per share.

A decrease of <unk> versus the same period last year, driven by pandemic related softness in our <unk> materials segment and reflected in our guidance last quarter.

Also noteworthy is that Q2 results include the acquisition of Mt. Holly, reflecting 6 weeks of ownership during the quarter.

Slide 4 shows a bridge of adjusted earnings per share of 22 from the second quarter of last year to this year's second quarter of 18.

Composite fibers results lowered earnings by <unk>, <unk>, driven by higher inflation in raw materials and energy.

<unk> materials results lowered earnings by <unk>, <unk>, primarily due to softness in the hygiene category and lower production as customers continue to destock from pandemic driven elevated inventory levels co.

<unk> costs were <unk> <unk> favorable from ongoing cost control initiatives and interest taxes and other items were in line with the second quarter of last year.

Slide 5 shows a summary of second quarter results for the composite fibers segment.

Total revenues for the quarter were 7.1% higher on a constant currency basis, driven by higher selling prices of $2 million in the near doubling of our wall cover volume from the trough of the pandemic in 2020.

Excluding metallize shipments in the quarter were approximately 26% higher driven by strong growth in wall cover technical specialties and composite laminates.

The food and beverage category, however was impacted by shipping container shortages, thereby resulting in lower volumes during the quarter.

The strong demand overall required increased levels of production driving a $3 million benefit to earnings.

Higher wood pulp and energy prices negatively impacted results by $6 million, creating a significant headwind for the segment.

We continue to implement announced pricing actions, but during the quarter.

Selling price realization only partially offset the higher input costs.

And currency and related hedging activity unfavorably impacted results by $600000.

Looking ahead to the third quarter of 2021, we expect shipments in composite fibers to be 2% to 3% higher sequentially favorably impacting results by approximately $400000.

We expect higher selling prices to fully offset raw material energy and logistics inflation when compared to the second quarter.

And operations are expected to be in line with the second quarter.

Slide 6 shows a summary of second quarter results for <unk> materials.

Revenues were up 5% versus the prior year quarter on a constant currency basis supported by the addition of Mount Holly and a strong rebound in tabletop demand as in person dining began to recover globally.

Demand for hygiene products, However was lower for the quarter as customers continue to destock from high inventory levels maintained during the pandemic as.

As previously stated we believe this decline is transitory and as a result, we are projecting meaningful growth in Q3 in all product categories.

As evidenced demand for wipes has picked up materially in July and hygiene has started to improve we expect more normalized buying patterns in all of our categories to return in the second half of the year.

Selling prices increased from contractual costs pass through arrangements with customers, but were more than offset by higher raw material and energy prices, reducing earnings by a net $800000.

Operations lowered results by $1.9 million, mainly due to lower production in the quarter to manage inventory levels and better align with customer demand.

And foreign exchange was unfavorable by $300000 versus the second quarter of last year.

For the third quarter of 2021, we expect shipments in <unk> materials to be approximately 15% to 20% higher.

Selling prices and input prices are both anticipated to be higher but fully offsetting each other.

Additionally, we expect higher production levels to meet the strong customer demand and also to prepare for a Q4 machine upgrade.

The increased production is expected to favorably impact operating profit by approximately $1 million to $2 million sequentially. In addition to the increased volume.

Slide 7 shows corporate costs and other financial items for the second quarter corporate costs were favorable by $1.9 million when compared to the same period last year driven by continued spend control.

We expect corporate cost for full year 2021 to be approximately $23 million.

Which is an improvement from our previous guidance of $25 million to $26 million.

Interest and other income and expense are now projected to be approximately $11 million for the full year lower than our previous guidance of $12 million.

Our tax rate for the quarter was 33% and full year 2021 is estimated to be between 38, and 40% lower than our previous guidance of 42% to 44%.

The lower overall tax rate is driven by changes in the jurisdictional mix of pre tax earnings slightly offset by an increase in the U K right.

Slide 8 shows our cash flow summary.

Second quarter year to date adjusted free cash flow was lower by approximately $6 million, mainly driven by higher working capital usage after adjusting for special items.

We expect capital expenditures for the year to be between 30 and $35 million with the reduction.

<unk> being driven largely by our better than anticipated execution on Mount Holly integration costs.

Depreciation and amortization expense is projected to be approximately $60 million.

Slide 9 shows some balance sheet and liquidity metrics.

Our leverage ratio increased to 3.1 times at June 32021, mainly driven by the Mt. Holly acquisition, we completed in May 2021, which increased our net debt by approximately $175 million.

Even after this acquisition, we continue to maintain liquidity of approximately $200 million.

These figures do not include the recently announced pending acquisition of Yakov home.

Which Dante will cover more shortly.

We also have additional financing details located in the appendix of our investor deck.

This concludes my prepared remarks, I will now turn the call back to Dante.

Okay.

Looking ahead, we remain very optimistic about the prospects for the second half of the year on beyond as we continue building momentum for the company.

Demand for composite fibers products is robust and we expect that to continue for the foreseeable future.

Our pricing actions are taking hold and will be a meaningful contributor to earnings in this segment as we offset inflationary pressures.

We will continue to work to mitigate the effects of input cost inflation and global supply chain constraints in order to optimize operations and deliver on strong customer demand.

<unk> materials demand is strengthening across all categories.

Tabletop is benefiting from improved demand conditions as consumers resume leisure travel and in person dining.

July was very strong for wipes and we believe we are exiting the period of demand weakness associated with Destocking that took place during the first half of the year.

Additionally, demand on the hygiene category is beginning to recover with the second half of the year expected to return to more normalized levels.

Our continued aggressive stance on cost control and is contributing to maintaining an efficient cost structure, thereby improving EBITDA and free cash flow.

And glatfelter people are performing exceptionally well responding to challenges seeking new opportunities for growth and delivering on the Mt Holly integration and synergy realization.

From a strategic perspective, I am pleased with the accelerating pace of execution of our business transformation and growth initiatives.

As noted we signed a definitive agreement to purchase Yakov home for $308 million.

We're very excited about this new addition to the portfolio, which will add meaningful scale, new technologies and product diversification and will expand glatfelter as growth platforms and global footprint.

Jakob home as a leading producer of spun laced materials and sustainable non woven fabrics, providing access to new customers in the personal care hygiene industrial and medical categories.

Headquartered in <unk>, Switzerland, the company has 4 manufacturing facilities.

In the United States, and 1 each in France, and Spain the.

The company is organized in 3 operating units.

Montero professional a former Dupont business.

Health and skin care and personal care.

As you can see from slide 12, there are operating units offer an expansive product portfolio covering diverse applications with a prominent customer base.

In the 12 months ending June 30, the <unk> home business generated revenue of approximately $400 million.

And EBITDA of approximately $45 million.

Of these earnings we believe $10 million to $15 million can be attributed to COVID-19 driven demand that is expected to normalize.

We project this transaction to be highly synergistic with significant value creation opportunities that will benefit all glatfelter stakeholders.

Through product line optimization operational improvements strategic sourcing savings and cost reductions, we anticipate annual synergies of approximately $20 million within 24 months after closing.

The estimated cost to achieve these synergies is $20 million.

The acquisition is subject to customary antitrust regulatory review and is expected to close later this year.

While we have obtained 100% committed financing for this transaction, we intend to finance the purchase with the issuance of a new $550 million senior unsecured bond.

With the Yakov home transaction.

Glatfelter has net leverage is expected to increase from approximately 3 times to 4 times pro forma at closing when reflecting the COVID-19 adjusted EBITDA and synergies.

This acquisition will create an exceptional portfolio of premium quality sustainable engineered materials with opportunities for long term growth that aligns well with post COVID-19 lifestyle changes.

It will also increase glatfelter has global scale with pro forma annual sales of approximately $1.5 billion.

As you can see these are exciting times at glatfelter.

<unk> 13 provides a brief snapshot of the breadth and depth of the Companys evolution and recent transformation actions on outcomes.

Our near term priorities and value creation focus.

We'll be on integrating our new acquisitions with an emphasis on capturing synergies and deleveraging.

Accelerating innovation by fully utilizing our growing portfolio of technologies assets and intellectual property.

And exploring the next wave of growth investments, both organic and inorganic with continued balance sheet discipline.

We are truly generating momentum and accelerating the pace of execution as we build the new glatfelter.

This concludes my closing remarks, I will now open the call for your questions.

As a reminder to ask a question you will need to grow star 1 on your <unk>.

On the phone to withdraw your question press to thank you and please.

Please standby, while we compile the Q&A roster.

Your first question is from Mark will be of bank of Montreal. Your line is now open.

Good morning, Dante Good morning, Sam.

Good morning, Mark Hi, Mark.

Sam I Wonder if we could start by just.

Thinking about the third quarter in terms of what it means in terms of price cost in both <unk> and composite fibers.

A little bit of GAAP in the second quarter.

Or like but a much bigger GAAP in composite fibers in your comments it wasn't clear to me, whether you simply expect that to kind of maintain your current position in the third quarter in composite fibers or whether we're actually going to recover some of that second quarter, GAAP, which you had.

We expect them to maintain.

Both both the raw material price, but also the selling prices to be fully offsetting each other.

So when would you expect.

Would it be the timeline on actually we're covering some of that negative GAAP, which I think was about $4 million on the case of composite fibers.

I think it's a little hard to give a specific timeframe here I mean, obviously, we don't have direct visibility into long term raw material prices Mark, but it's something we monitor very closely and we'll keep keep a good pulse on in terms of the raw material and energy price balance with pricing and I think we've done a good job of announcing.

Earlier price capture increase in trying to get as much of that in the market as we can but as you know it's a delicate balance trying to make sure we keep our customers happy in and maintain our positions in the market.

And is there any reason you wouldn't be making a little more heavily in the third quarter here I mean, I can understand sort of lags, but it but it seems like we might expect you to start kind of catching up to those earlier cost increases in the third quarter.

So youre talking specifically composite fibers here just to make sure yes, because I think because I think we'll see some of that on the airline side. Obviously as you know we've got the pass through has built in the past or is there a pretty good yes.

So mark maybe I can add a comment so the pricing.

Actions that we took at the end of Q1. It has started to materialize on there was some fall through in Q2, we expect a more significant contribution from the.

Announced and negotiated and in place pricing actions for Q3 and Q4, so that will definitely help.

Compensate some of the input cost inflation elements.

I think the point Sam was making is with some of these logistics issues and some of the supply chain dislocations that one's a little bit more challenging to project with great specificity.

But we definitely expect a little bit more of a match up with inflation factors and offsetting cost actions, we're taking internally and pricing actions that are put in place and will be more material in Q3, and Q4 as compared to Q2.

Okay. That's helpful.

And then I noticed the volume was pretty weak in tea and coffee on a year over year basis on the second quarter I mean for the last several years, Tim Coffey have been big drivers in that business can you give us some sense of what you expect for the full year on where you see kind of trend growth now in the tea and coffee volumes.

Yes, I would say big picture, we still are.

Holding to our projections of segment or category growth for both tea and coffee.

For <unk> more so than coffee, we had a pretty strong comp on a year over year basis, because Q2 was.

1 of the early products have benefited from pantry stuffing were tea bags. So that was a factor in and Sam also referenced some of the logistics challenges and shortages of containers.

Sometimes you get some geographic or regional mix changes that can affect a period to period comparison I would say from a coffee point of view, we still had a good quarter for coffee on a year over year basis, and we're anticipating that.

Mid single digit growth rate to continue so I would say generally speaking.

No real issues with tea and coffee other than having to react to some of these.

Nuances that are provided by the supply chain dislocations around the world.

Okay.

Turning to the balance sheet, we're going to be up about 4 times. Following alcohol can you just remind people of what your target leverage range would be.

So mark we don't have a target leverage range out there I mean, I think historically, though we can point to the fact that when we have levered up in the wake of an acquisition. We have been very focused on on committing to deleveraging and you saw that after we had the sale of specialty papers with the simultaneous acquisition of the Steinhardt mill from GP, we were levered.

<unk> up over 2 times and then.

As recently as last quarter, we're down to around 1.8 so we'll we'll replicate that playbook here, obviously coming up to 4 times is higher than what we have typically been at but we don't have a specific target target range out there mark.

Okay.

Just turning to alcohol on can you help people understand sort of the differences between your existing business and what Yakov home will do for you from just.

Where you sit in the product spectrum.

Certainly.

So the acquisition is very consistent with our ongoing transformation and growth strategy, we've talked mark on several occasions about investments that we felt would add scale to the business would broaden and complement our existing lines of business or could add.

New product categories, or even a new business unit. If we felt that the adjacencies were the correct ones and that we could be the rightful owners and investors in these types of businesses. So on the continuum of nonwovens technologies.

Yakov home business kind of fits in nicely in terms of filling some holes or some gaps in terms of our technology portfolio. As you know we have wet laid nonwovens capacity through our inclined wire assets in composite fibers, we have <unk> assets in the OLED materials segment.

And now with <unk>.

<unk> home, which is predominantly a spun laced producer.

Helps broaden our existing lines of business Theres still overlap with hygiene and personal care field.

Filtration.

And then it provides some new benefits I would say specifically about spud late not to get too technical but it offers very high web strength and good uniformity a very wide range of basis weights very wide range of filament diameters and fiber shapes. So it gives us.

<unk> to produce a lot of different types of materials with a lot of different feedstocks.

Sometimes people associate spun laced with petroleum based.

Inputs and 1 of the things that we appreciated about the alcove home was the fact that about 50% of their feedstocks across the entire business portfolio are plant based and that they have a stated goal prior to glatfelter has ownership of within the next 10 years or so having 100%.

Sustainable alternatives for all product categories. So we're excited at the prospects of combining the businesses the technology platforms that knowhow the intellectual property to continue to advance and progress our issues around sustainable engineered materials, So again very complementary.

And 1 other attractive aspect of the <unk> home business is.

On a handful of years ago, the acquired Dupont on Terra business, which is a very well respected franchise and it also produces finished goods.

So this will introduce a new set of.

Process technology.

Element along the value stream that would be helpful to glatfelter as we think about additional growth vectors over time, so again, a lot of very attractive complementary fit with <unk> and really filled in some holes on our portfolio.

Okay.

For either you are seeing on but if we.

Take out the kind of Covid related benefits that you think <unk> gotten on when we add in your synergies it's still yields in an EBITDA margin, which is lower than Youre currently related business and when you look at the portfolio of what they do it.

It actually seems to be a lot of stuff that would be fairly value additive to you might expect the margins to actually be a little better on.

The implied margins are actually quite a bit lower than your existing margin. So can you address that issue.

Yes.

So in some ways there are parallels between when we acquired concert industries, which was a small subscale independent player and the broader nonwoven space and Mark If you may recall year 1 of.

Concert industry Slash, our <unk> business, our EBITDA margins were 6.5%.

And through a lot of dedicated effort and hard work, we were able to put the glatfelter business model.

And play and put scale into these businesses and build centers of excellence and find more cost efficiencies and by better because.

Because we had more scale, we could attract a different caliber of talent and so there were a multitude of factors that went into bringing scale and a little bit more of a broader more global per view and a seat at the table as a key strategic supplier across a lot of these product categories.

We expect the same to be the case with Jaco pumps. So I would say the jumping off point of normalizing.

Their EBITDA by.

$10 million to $15 million reduction after 45 trailing 12, and then $20 million of synergies on top as a good jumping off point, but thats, not where we envision the endpoint to be.

We will continue to apply continuous improvement built in our centers of excellence leverage the scale that we are building and look for accelerating innovation, especially as the world is much more sensitized to sustainability and ESG and we think the portfolio that we're building is.

A perfect solution for those applications.

Okay and last 1 from a just.

When we get to the.

Think about your capacity base.

Knowing this machine rebuild but I think you said youre doing in the fourth quarter.

How much.

Slack capacity would you have the company what would be the point at which you might need to think about either acquiring or organically.

Organically growing capacity glatfelter.

Yes.

So first I'll start with Q2.

Capacity utilization rates across our segments so for composite fibers.

In the high eighties and for the <unk> business. We are on the high Seventy's. So we still have room to go to utilize our existing asset base to accommodate market growth and any types of.

Share changes that may accrue to glatfelter based on earning customer's trust and confidence.

Lee, we're going to be very focused on execution.

And making great use of our shareholders' money that we just put to work at Mount Holly and.

Expecting post close for <unk> home and synergy realization and deleveraging.

To tag on to the question use Sam about leverage targets. My tenure goes back a bit longer and you may recall, we made 2 acquisitions in 2006 when we.

<unk> made an investment in the United States and 1 in Europe and are leveraged to.

The low to mid force when we were a much smaller and less sophisticated company and we made it our priority to Delever quickly and we did.

I think this team is much more capable and we have better tools and.

Execution track record, so I fully expect us to be successful in reducing debt pretty quickly and then we will continue to re up our unconstrained demand forecast across our new and expanded portfolio and identify areas, where we think the market will require and perhaps expect support from glatfelter to.

<unk> <unk>.

Supporting these trends of GDP GDP plus growth across a large part of our portfolio.

So we're not in a position to put a finer point on a date or when that may happen other than thats part of our planning calculus, but we've got some short term tactical execution to make sure. We do a fantastic job with the investments that we're making today and that we continue to earn the trust and confidence of our customers and as.

As we get closer to.

Being at full capacity and having a clear point of view on what is the logical and best next investment for <unk> whether thats.

Inorganic or organic we will certainly let the investing public note that.

Okay Fair and reasonable response to put a leg on the.

Second half of it.

Thanks Mark.

And there are no further questions. Please continue sir.

Okay, well. Thank you very much for joining us today, and we look forward to talking to you again after our third quarter have a good day.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

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Yes.

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Good day and thank you for standing by welcome to get some filters quarterly earnings release conference call.

At this time of the art has just been flying on 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 will need to press star 1 on your telephone please.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.

I'd now like to hand, the call over to your speaker today instead of net.

Cash shut the guard. Please go ahead.

Thank you went on good morning, and welcome to Glatfelter 2021 second quarter earnings Conference call.

This is Ramesh <unk>, Vice president of Investor Relations and corporate Treasurer.

On the call today to present, our second 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.

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.

Good morning, and thank you for joining us today.

These outcomes were driven by a recovery in demand for tabletop products and strong performance from Mount Holly.

Also consistent with the execution of our ongoing transformation and growth strategy, we announced the pending acquisition of the alcohol a leader in the non woven sector.

I'll provide more details about this important acquisition throughout the call.

As for second quarter results, we reported adjusted earnings per share of <unk> 18.

And adjusted EBITDA of $28 million.

Slide 3 of the Investor deck provides the highlights for the quarter.

And related materials performed above expectations, driven by a rebound in the tabletop category.

As in person dining began to recover globally.

Holly contributed favorably to the quarterly results following the team's excellent execution and closing the transaction standing up a new integrated system and restarting production and shipping all within 48 hours after closing.

We're excited for the ongoing opportunities we see with the addition of Mount Holly to the Glatfelter portfolio.

While overall volume growth was healthy we did experience lower than anticipated demand and hygiene products as customers continue to destock from elevated inventory levels maintained during the pandemic.

We expect the buying patterns in this category to return to more normalized levels during the third quarter and positively impact segment profitability in the second half of the year.

Yes.

Composite fibers results were below expectations as unfavorable mix and higher than anticipated energy prices negatively impacted profitability.

And while shipping volume was up meaningfully inflationary headwinds proved to be challenging for this segment.

We expect a more meaningful benefit from the price increases take effect in the third quarter.

At an enterprise level, our focus remains on the health and safety of Glatfelter people. Our efforts continue to keep all facilities operational as they did in the quarter, while ensuring uninterrupted supply of a central products to our customers. Despite the current evolving nature of the pandemic.

It goes without saying that 2021 has been a momentous year, thus far in executing glatfelter as ongoing transformation and growth strategy.

And as I mentioned in my opening remarks on July 20, <unk>, we announced the acquisition of the alcohol on a global leading manufacturer of premium quality nonwovens with an attractive platform to expand glatfelter scale technologies product portfolio and global reach.

I'll provide additional commentary on the Orca Palm acquisition after Sam completes his review of our second quarter results Sam.

Yes.

Thank you Dante second.

Second quarter adjusted earnings from continuing operations was $8 million or <unk> 18 per share.

A decrease in <unk> versus the same period last year, driven by pandemic related softness in our <unk> materials segment and reflected in our guidance last quarter.

Also noteworthy is that Q2 results include the acquisition of Mt. Holly, reflecting 6 weeks of ownership during the quarter.

Slide 4 shows a bridge of adjusted earnings per share of 22 from the second quarter of last year to this year's second quarter of 18.

Composite fibers results lowered earnings by <unk>, <unk>, driven by higher inflation in raw materials and energy.

<unk> costs were <unk> <unk> favorable from ongoing cost control initiatives and interest taxes and other items were in line with the second quarter of last year.

Slide 5 shows a summary of second quarter results for the composite fibers segment.

Excluding metallize shipments in the quarter were approximately 26% higher driven by strong growth in wall cover technical specialties and composite laminates the.

The food and beverage category. However, it was impacted by shipping container shortages, thereby resulting in lower volumes during the quarter.

The strong demand overall required increased levels of production driving a $3 million benefit to earnings.

Higher wood pulp and energy prices negatively impacted results by $6 million, creating a significant headwind for the segment.

We continue to implement announced pricing actions, but during the quarter.

Selling price realization only partially offset the higher input costs.

And currency and related hedging activity unfavorably impacted results by $600000.

Looking ahead to the third quarter of 2021, we expect shipments in composite fibers to be 2% to 3% higher sequentially favorably impacting results by approximately $400000.

We expect higher selling prices to fully offset raw material energy and logistics inflation when compared to the second quarter and.

And operations are expected to be in line with the second quarter.

Slide 6 shows a summary of second quarter results for air late materials.

Demand for hygiene products, However was lower for the quarter as customers continue to destock from high inventory levels maintained during the pandemic.

As previously stated we believe this decline is transitory and as a result, we are projecting meaningful growth in Q3 in all product categories.

Selling prices increased from contractual cost pass through arrangements with customers, but were more than offset by higher raw material and energy prices, reducing earnings by a net $800000.

Operations lowered results by $1.9 million, mainly due to lower production in the quarter to manage inventory levels and better align with customer demand.

And foreign exchange was unfavorable by $300000 versus the second quarter of last year.

For the third quarter of 2021, we expect shipments in <unk> materials to be approximately 15% to 20% higher.

Selling prices and input prices are both anticipated to be higher but fully offsetting each other.

Additionally, we expect higher production levels to meet the strong customer demand and also to prepare for a Q4 machine upgrades.

The increased production is expected to favorably impact operating profit by approximately $1 million to $2 million sequentially. In addition to the increased volume.

We expect corporate costs for full year 2021 to be approximately $23 million, which is an improvement from our previous guidance of $25 million to $26 million.

Interest and other income and expense are now projected to be approximately $11 million for the full year lower than our previous guidance of $12 million.

Our tax rate for the quarter was 33% and full year 2021 is estimated to be between 38, and 40% lower than our previous guidance of 42% to 44%.

The lower overall tax rate is driven by changes in the jurisdictional mix of pre tax earnings slightly offset by an increase in the U K right.

Slide 8.

Our cash flow summary.

Second quarter year to date adjusted free cash flow was lower by approximately $6 million, mainly driven by higher working capital usage after adjusting for special items.

We expect capital expenditures for the year to be between 30 and $35 million with the reduction being driven largely by our better than anticipated execution on Mount Holly integration costs depreciation.

Asian, and amortization expense is projected to be approximately $60 million.

Slide 9 shows some balance sheet and liquidity metrics.

Our leverage ratio increased to 3.1 times at June 32021, mainly driven by the Mt. Holly acquisition, we completed in May 2021, which increased our net debt by approximately $175 million.

Even after this acquisition, we continue to maintain liquidity of approximately $200 million.

These figures do not include the recently announced pending acquisition of <unk>.

Which Dante will cover more shortly.

We also have additional financing details located in the appendix of our investor deck.

This concludes my prepared remarks, I will now turn the call back to Dante.

Looking ahead, we remain very optimistic about the prospects for the second half of the year on beyond as we continue building momentum for the company.

Demand for composite fibers products is robust and we expect that to continue for the foreseeable future.

Our pricing actions are taking hold and will be a meaningful contributor to earnings in this segment as we offset inflationary pressures.

We will continue to work to mitigate the effects of input cost inflation on global supply chain constraints in order to optimize operations and deliver on strong customer demand.

Day related materials demand is strengthening across all categories.

Tabletop is benefiting from improved demand conditions as consumers resume leisure travel and in person dining.

July was very strong for wipes and we believe we are exiting the period of demand weakness associated with Destocking that took place during the first half of the year.

Additionally, demand on the hygiene category is beginning to recover with the second half of the year expected to return to more normalized levels.

Our continued aggressive stance on cost control is contributing to maintaining an efficient cost structure, thereby improving EBITDA and free cash flow.

And collateral there people are performing exceptionally well responding to challenges seeking new opportunities for growth and delivering on the Mt Holly integration and synergy realization.

From a strategic perspective, I am pleased with the accelerating pace of execution of our business transformation and growth initiatives.

As noted we signed a definitive agreement to purchase Jaco Paul for $308 million.

Welcome home as a leading producer of spun laced materials and sustainable non woven fabrics, providing access to new customers in the personal care hygiene industrial and medical categories.

Headquartered in Basel, Switzerland, The company has 4 manufacturing facilities.

In the United States, and 1 each in France and Spain.

The company is organized in 3 operating units.

The Ontario professional a former Dupont business.

<unk> skincare and personal care.

As you can see from slide 12, their operating units offer an expansive product portfolio covering diverse applications with a prominent customer base.

In the 12 months ending June 30, <unk> home business generated revenue of approximately $400 million.

And EBITDA of approximately $45 million.

Of these earnings we believe $10 million to $15 million can be attributed to COVID-19 driven demand that is expected to normalize.

We project this transaction to be highly synergistic with significant value creation opportunities that will benefit all gladfelter stakeholders.

Through product line optimization operational improvements strategic sourcing savings and cost reductions, we anticipate annual synergies of approximately $20 million within 24 months after closing.

The estimated cost to achieve these synergies is $20 million.

The acquisition is subject to customary antitrust regulatory review and is expected to close later this year.

While we have obtained 100% committed financing for this transaction, we intend to finance the purchase with the issuance of a new $550 million senior unsecured bond.

With the Yakov home transaction.

Glatfelter has net leverage is expected to increase from approximately 3 times to 4 times pro forma at closing when reflecting the COVID-19 adjusted EBITDA and synergies.

It will also increase glatfelter has global scale with pro forma annual sales of approximately $1.5 billion.

As you can see these are exciting times on glatfelter.

<unk> 13 provides a brief snapshot of the breadth and depth of the Companys evolution and recent transformation actions on outcomes.

Our near term priorities and value creation focus.

We'll be on integrating our new acquisitions with an emphasis on capturing synergies and deleveraging.

Accelerating innovation by fully utilizing our growing portfolio of technologies assets and intellectual property.

And exploring the next wave of growth investments, both organic and inorganic with continued balance sheet discipline.

We are truly generating momentum and accelerated the pace of execution as we build the new glatfelter.

This concludes my closing remarks, I will now open the call for your questions.

As a reminder to ask a question you will need the cash firewall on on your telephone to withdraw.

Brian question compressed Becky and please standby, while we compile the Q&A roster.

Your first question is from Mark <unk> of Bank of Montreal. Your line is now open.

Good morning, Dante Good morning, Sam.

Morning, Mark Hey, Mark.

Sam I Wonder if we could start by just <unk>.

Thinking about the third quarter in terms of what it means in terms of price cost and bolt airwave in composite fibers.

A little bit of GAAP in the second quarter.

In <unk>, but a much bigger GAAP in composite fibers in your comments it wasn't clear to me, whether you simply expect that to kind of maintain your current position in the third quarter in composite fibers or whether we're actually going to recover some of that second quarter, GAAP, which you're on.

We expect them to maintain.

Both the raw material price, but also the selling prices to be fully offsetting each other.

So when would you expect what would be the timeline on actually we're covering some of that negative GAAP, which I think was about $4 million on the case of composite fibers.

I think it's a little hard to give a specific timeframe here I mean, obviously, we don't have direct visibility into long term raw material prices Mark, but it's something we monitor very closely and we'll keep keep a good pulse on in terms of the raw material and energy price balance with with pricing and I think we've done a good job of announcing the earlier.

Price capture increase in trying to get as much of that in the market as we can but as you know it's a delicate balance trying to make sure we keep our customers happy in and maintain our position in the market.

And is there any reason you wouldn't be making a little more headwind in the third quarter here I mean, I can understand sort of lags, but it but it seems like we might expect you to start kind of catching up to those earlier cost increases in the third quarter.

So mark maybe I can add a comment so the pricing actions that we took at the end of Q1 started to materialize on there was some fall through in Q2, we expect a more significant contribution from the <unk>.

Announced and negotiated and in place pricing actions for Q3 and Q4, so that will definitely help.

Compensate some of the input cost inflation elements.

I think the point Sam was making is with some of these logistics issues and some of the supply chain dislocations that one's a little bit more challenging to project with great specificity, but we definitely expect a little bit more of a match up with inflation factors and offsetting cost actions were taken into.

Finally on pricing actions.

<unk> put in place and will be more material in Q3, and Q4 as compared to Q2.

Okay. That's helpful.

Yes, I would say big picture, we still are.

Holding to our projections of segment or category growth for both tea and coffee.

For <unk> more so than coffee, we had a pretty strong comp on a year over year basis, because Q2 was.

1 of the early products have benefited from pantry stuffing with tea bags. So that was a factor in and same also referenced some of the logistics challenges and shortages of containers.

Mid single digit growth rate to continue so I would say generally speaking.

No real issues with tea and coffee other than having to react to some of these.

Nuances that are provided by the supply chain dislocations around the world.

Okay.

Turning to the balance sheet youre going to be up about 4 times. Following Paul could you just remind people of what your target leverage range would be.

So mark we don't have a target leverage range out there I mean, I think historically that we can point to the fact that when we have levered up in the wake of an acquisition. We have been very focused on on committing to deleveraging and you saw that after we had the sales specialty papers with the simultaneous acquisition of the Steinhardt mill from GP, we were levered.

Up over 2 times and then.

Okay and then.

Just turning to alcohol on can you help people understand sort of the differences between your existing business and what Yakov home will do for you from just.

So the product spectrum.

Certainly.

Yakov home business kind of fits in nicely in terms of filling some holes or some gaps in terms of our technology portfolio. As you know we have <unk>.

<unk> non woven capacity through our inclined wire assets in composite fibers, we have air lead assets.

The OLED materials segment, and now with Yakov home, which is predominantly a spun laced producer.

Helps broaden our existing lines of business Theres still overlap with hygiene and personal care field.

Filtration.

And then it provides some new benefits I would say specifically about slightly not to get too technical but it offers very high web strength and good uniformity a very wide range of basis weights very wide range of filament diameters and fiber shapes. So it gives us.

<unk> to produce a lot of different types of materials with a lot of different feedstocks.

Sometimes people associate spun laced with petroleum based.

Inputs and 1 of the things that we appreciated about yaacov home was the fact that about 50% of their feedstocks across the entire business portfolio are plant based and that they have a stated goal prior to glatfelter has ownership of within the next 10 years or so having 100%.

Sustainable alternatives for all product categories. So we're excited at the prospects of combining the businesses the technology platforms. The knowhow the intellectual property to continue to advance and progress our issues around sustainable engineered materials, So again very complementary.

And 1 other attractive aspect of Yakov home business is.

On a handful of years ago, the acquired Dupont on Terra business, which is a very well respected franchise and it also produces finished goods.

So this will introduce a new set of.

Process technology.

Okay.

For either you or so on but if we.

Take out the kind of Covid related benefits that you think <unk> gotten on when we add in your synergies.

Still yields an EBITDA margin, which is lower than Youre currently our load business and when you look at the portfolio of what they do.

It actually seems to be a lot of stuff that would be fairly value additive to you might expect the margins to actually be a little better on.

The implied margins are actually quite a bit lower than your existing margin. So can you address that issue.

Yes.

So in some ways there are parallels between when we acquired concert industries, which was a small subscale independent player and the broader nonwoven space and Mark If you may recall year 1 of.

Concert industry Slash, our aerospace business, our EBITDA margins were 6.5%.

And through a lot of dedicated effort and hard work, we were able to put the glatfelter business model.

And play and put scale into these businesses and build centers of excellence and find more cost efficiencies and by better.

Because we had more scale, we could attract a different caliber of talent.

So there were a multitude of factors that went into bringing scale and a little bit more of a broader more global per view and a seat at the table as a key strategic supplier across a lot of these product categories.

And we expect the same to be the case with Jaco pumps. So I would say the jumping off point of normalizing.

<unk>.

Our EBITDA by $10 million to $15 million reduction after 45 trailing 12, and then $20 million of synergies on top as a good jumping off point, but that's not where we envision the endpoint to be.

Perfect solution for those applications.

Okay, and then last 1 from me.

When we get to the.

Yeah.

Think about your capacity base. Following this machine rebuild but I think you said youre doing in the fourth quarter.

How much.

Slack capacity would you have the company what would be the point at which you might need to think about either acquiring or organically growing capacity glatfelter.

Yes.

So first I'll start with Q2.

Capacity utilization rates across our segments. So for composite fibers, we are in the high eighties and for the <unk> business. We were on the high Seventy's. So we still have room to go to utilize our existing asset base to accommodate market growth and any types of share.

<unk> that may accrue to glatfelter based on earning customer's trust and confidence.

Secondly, we're going to be very focused on execution and making great use of our shareholders' money that we just put to work at Mount Holly.

Expecting post close for you al Capone and synergy realization and deleveraging.

Yeah.

Tag on to the question you asked Sam about leverage targets. My 10 year goes back a bit longer and you may recall, we made 2 acquisitions in 2006 when we.

Made an investment in the United States and 1 in Europe and our leverage.

To the low to mid fours, when we were a much smaller and less sophisticated company and we made it our priority to Delever quickly and we did.

I think this team is much more capable and we have better tools and.

Supporting these trends of GDP GDP plus growth across a large part of our portfolio.

As we get closer to <unk>.

Being at full capacity and having a clear point of view on what is the logical and best next investment for <unk>, whether Thats <unk>.

Inorganic or organic we will certainly let the investing public note that.

Okay Fair and reasonable response, good luck on that.

Second half on debt.

Thanks Mark.

And there are no further questions. Please continue sir.

Okay, well. Thank you very much for joining us today, and we look forward to talking to you again after our third quarter have a good day.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q2 2021 Glatfelter Corp Earnings Call

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