Q3 2021 Glatfelter Corp Earnings Call
Ladies and gentlemen basis, you're up your conference is about to begin. Please continue to standby. Once again. This is your operator your conference is about to begin please continue to standby.
[music].
Good day and thank you for standing by welcome to Glatfelter. He's earnings conference call. At this time all participants 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 will need to press star one.
On the phone if you require any further assistance. Please press star zero and now I would like to hand, the conference over to your first speaker today that mesh Shetty Garner from Glatfelter. Thank you. Please go ahead.
Thank you Paul Good morning, and welcome to Glatfelter as 2021 third quarter earnings Conference call. This is <unk> <unk>, Vice President of ESG Investor Relations and corporate Treasurer.
On the call today to present, our third quarter results are Dante Perini, Black Belt, Jones, 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 <unk> good morning, and thank you for joining us today.
The third quarter marks an important milestone in Gladfelter is ongoing transformation with the successful acquisition of alcohol.
This business will significantly enhance the scale and diversification of our product and technology portfolio by introducing premium quality spun laced nonwovens to our offerings.
We also completed the first full quarter with Mount Holly under glad filters ownership, which contributed to record operating profit for the airline segment.
Slide three of the Investor deck provides the key highlights for the third quarter.
We reported adjusted earnings per share of <unk>, 21, and adjusted EBITDA of $32 million.
Air lead materials performed well above expectations, driven by the higher than anticipated demand for our tabletop and wipes products.
This strong demand positively impacted segment profitability in the quarter.
We also experienced sequential volume growth of 10% and our hygiene products category.
After being negatively affected in the first half of the year as consumers destock.
Consistent with our previous guidance.
Customer buying patterns in this category returned to more normalized levels during the quarter.
Also our contractual pass through arrangements with customers allowed us to offset elevated raw material costs and maintained solid margins. During this volatile inflationary period.
Composite fibers was challenged in the third quarter by significantly higher energy prices that were well above our expectations along with continued inflation for raw materials and logistics.
For example, electricity prices more than doubled during the quarter in key European countries, like Germany, and the U K, where we have significant manufacturing operations.
In order to mitigate this unprecedented escalation of input costs, we announced in mid September and incremental 12% price increase across the composite fibers product portfolio.
This action was in addition to the 8% price increase announced earlier in the year.
We believe these price actions appropriately reflect the current market conditions as we continue to provide our customers security of supply of high quality products and responsive service during this very dynamic business environment.
In addition, we successfully executed a $500 million bond offering that is primarily being used to finance the Yakov home acquisition.
This transaction marks another significant step forward in our transformation by further broadening our engineered materials products and technology offerings, enhancing enterprise wide innovation capabilities with a focus on sustainability and adding meaningful scale to the company.
I am very pleased to welcome to Yakov home colleagues to Glatfelter, who now represent are spun laced segment.
We will begin the process of enabling close collaborations and technology sharing among this expanded group of industry, leading nonwovens experts.
Our near term priorities for this acquisition will be focused on successfully integrating jaco palm into glatfelter as operating model.
Achieving the targeted $20 million of annual synergies.
And actively delevering the balance sheet.
Sam will now provide a more detailed review of our third quarter results as well as additional comments on the Yakov home acquisition Sam.
Thank you Dante.
Third quarter adjusted earnings from continuing operations was $9 $5 million or 21 per share an increase of <unk> versus the same period last year, driven primarily by strong earnings in the airline segment and a favorable tax rate for the quarter.
Also noteworthy is that Q3 results included the first full quarter of the Mt. Holly acquisition under Glatfelter as ownership.
Slide four shows a bridge of adjusted earnings per share of <unk> 16 from the third quarter of last year to this year's third quarter of 'twenty one.
Composite fibers results lowered earnings by <unk>, <unk>, driven primarily by higher inflationary pressures experienced in raw materials energy logistics and operations.
<unk> materials results increased earnings by <unk>, <unk>, primarily due to strong volume recovery in wipes and tabletop product categories as well as from the addition of a full quarter of Mount Holly results.
Corporate costs were <unk> <unk> favorable from ongoing cost control initiatives and interest taxes and other items was <unk> <unk> favorable driven by a lower tax rate this quarter of 27% versus 48% in the same quarter last year.
Slide five shows a summary of the third quarter results for the composite fiber segment.
Total revenues for the quarter were three 4% higher on a constant currency basis, mainly driven by higher selling prices of approximately $6 million to mitigate the elevated inflationary pressures in energy raw materials and logistics.
Shipments were 6% lower primarily driven by softer demand in our wall cover product category from unexpected customer downtime in the middle of the quarter, although buying patterns began to stabilize as we exited the quarter.
We continued to see firm demand in our composite laminates, and food and beverage categories, which were up 17% and 2% respectively.
Prices of wood pulp energy and freight continue to escalate in the third quarter and negatively impacted results by approximately $12 $5 million versus the same quarter last year.
Sequentially from Q2 of 2021, this impact was $5 $7 million, creating significant headwinds for the segment.
Although we expected some inflationary pressures to continue into the third quarter, our pricing actions announced earlier in the year were unable to fully offset the magnitude of inflation.
The single biggest driver of the sequential inflation impact with energy prices, which increased sharply in Europe. During the third quarter as Dante noted energy prices in the spot market more than doubled during the quarter.
In addition, we experienced higher inflationary pressures in raw materials, particularly wood pulp and in logistics costs, driven by global supply chain disruptions. This had a combined unfavorable impact sequentially of approximately $2 7 million as.
As a result, we announced an additional 12% price increase in the middle of September for all product categories in composite fibers to offset the spiraling inflationary movements.
We expect input cost to remain relatively volatile in the near term and will continue to closely monitor these developments.
We will continue to assess a variety of mitigating actions. In addition to our ongoing focus on managing costs operational efficiencies and leveraging our global scale and integrated supply chain.
Operations were favorable by $2 $4 million driven by strong production on our inclined wire machines to meet the growing customer demand.
Currency and related hedging activity unfavorably impacted results by $1 2 million.
Looking ahead to the fourth quarter of 2021, we expect shipments to be flat on a sequential basis.
Selling prices are expected to be $6 million higher versus Q3 of 2021.
Raw materials and energy prices are projected to be $1 million to $2 million higher sequentially and operations are expected to be in line with the third quarter.
Slide six shows a summary of third quarter results for airlines materials.
Revenues were up about 40% versus the prior year quarter on a constant currency basis supported by the addition of a full quarter of Mount Holly and strong recovery in the tabletop and wipes categories.
Shipments of tabletop and wipes almost doubled when compared to the third quarter of last year.
However, demand for hygiene products was 5% lower versus last year, although improved by 10% versus the second quarter of this year.
All <unk> product categories returned to more normalized demand patterns in the third quarter. After a trough in the first half of this year related to customer Destocking.
Selling prices increased meaningfully from contractual costs pass through arrangements, where we pass raw material price increases along to customers.
However, energy is not part of most pass through arrangements, which reduced earnings by $1 3 million.
And we recently introduced a 10% price increase to those airline customers that did not have costs pass through arrangements to cover the additional inflation.
Operations were lower by $2 5 million compared to the prior year, mainly due to relatively lower output. This quarter as production rates last year were elevated to meet the high demand during the peak of the pandemic.
And foreign exchange was unfavorable by $1 $2 million driven by the FX pass through provisions in our customer contracts.
For the fourth quarter of 2021, we expect shipments to be 3% lower on a sequential basis with unfavorable mix, thereby impacting operating profit by $1 million.
Selling prices are expected to be higher, but fully offset by higher raw material prices.
And energy prices are expected to unfavorable impacts profitability by one to $1 5 million compared to the third quarter.
Slide seven shows corporate costs and other financial items for the third quarter corporate costs were favorable by $1 7 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 $22 million, which is an improvement from our previous guidance of $23 million.
Interest and other income and expense are now projected to be approximately $15 million for the full year higher than our previous guidance of $11 million.
The increase is driven by the recently executed bond offering of $500 million.
Which was used to finance the Yakov home acquisition as well as to pay down our existing revolver borrowings.
Our tax rate for the third quarter was 27% lower than previously expected and driven by the release of certain tax valuation allowances.
We expect the fourth quarter tax rate to be approximately 42%, while our full year 2021 tax rate is estimated to be between 38 and 40% in line with our previous guidance.
With regard to guidance on our new spun laced segment, which is how we will be referring to and reporting results for the <unk> acquisition.
For the two remaining months of the fourth quarter under Glatfelter ownership, we expect shipments to total approximately 13000 metric tons and operating profit to be approximately $1 million. This includes DNA of approximately $3 5 million.
Please note. These estimates are subject to change upon completion of purchase accounting.
Slide eight shows our cash flow summary.
Third quarter year to date adjusted free cash flow was higher by approximately $9 million, mainly driven by lower working capital usage.
We expect capital expenditures for the year to be approximately $30 million to $35 million, including the two months for Jaco pump.
Depreciation and amortization expense is projected to be approximately $63 million, including alcopop.
Slide nine shows some balance sheet and liquidity metrics.
Our leverage ratio decreased to two eight times as of September 32021 versus three <unk> times at the end of June, but higher compared to year end 2020, mainly driven by the Mt. Holly acquisition.
Our pro forma leverage, including the recent bond offering and Yakov home financials synergies and transaction costs is approximately four times.
We still have ample available liquidity of more than $280 million.
As Dante mentioned in his opening remarks, our near term focus will be to ensure a successful integration of our new spun laced segment.
<unk>, the $20 million of expected annual synergies and reduce our leverage.
This concludes my prepared remarks, I will now turn the call back to Dante.
Thanks, Tim.
Looking ahead, we are optimistic about the prospects for the business as we continue building the new glatfelter.
Demand for composite fibers products is expected to remain robust in most categories and we expect that to continue for the foreseeable future.
Our most recent pricing actions were implemented to mitigate additional inflation and should be a meaningful contributor to earnings during the fourth quarter.
Air lead materials demand is steadily improving to pre COVID-19 levels as wipes and tabletop significantly improved in the third quarter, while destocking in the hygiene products is beginning to abate.
Our continued aggressive stance on cost control is contributing to maintaining an efficient cost structure, thereby improving EBITDA and free cash flow.
And we have significant value creation opportunities as we continue to optimize Mount Holly and begin the integration process for Yakov home.
So we're building scale and momentum as we accelerate the pace of expansion for the new glatfelter.
This concludes my closing remarks, I will now open the call for questions.
We will now begin the question and answer session. If you have a question. Please press star one telephone keypad again star one on your telephone keypad. Please standby, while we compile the Q&A roster.
Your first question is from <unk> Shah with BMO capital markets. Your line is open.
Hi, good morning.
Good morning, Hi, I, just wanted to get back to this question of inflation and maybe you could talk a little bit more about the timing and cadence on inflation recovery I know your price increases are going to contribute quite a bit in Q4, but when do you think youre going to be able to fully recover all the inflation well that will that be in 2022.
And then also specifically on European energy.
And what I recall, the timing of the spikes being there should we assume a bigger hit in Q4 than you had in Q3.
So I would say, we're guiding towards $6 million of improvement in prices and I'm talking about composite fibers here right. So I think we obviously are expecting a big pickup on the inflation recovery in Q4 as for sort of full recovery rates, a little bit difficult to predict exactly what's going to continue to.
Happen to these raw material and energy prices in Q4, and Q2, but based on where we think they are and where we think they're going to be for the quarter. We expect a pretty solid recovery getting us back into the range of kind of low to mid teens margins for composite fibers like we've seen over the last few quarters.
The second part was was around energy.
Yes.
Yes.
I mean energy was clearly a challenge, especially in Europe as I mentioned.
More than doubling electricity and natural gas both in places like Germany, and the UK, where we have seven manufacturing facilities.
<unk> was a big factor for us and something that we didn't fully factor in to our forecast when we gave guidance for Q3.
I would say that based on our assessment and what the third party experts are telling us about energy, we expect for composite fibers, perhaps to be slightly higher than the third quarter and it all depends on.
This combination of liquefied natural gas.
Restoration of some of the Green energy sources.
Wind and solar.
And then what kind of interventions may occur through different government reactions to this because it's not just affecting manufacturing, it's affecting consumers, especially with winter coming so we.
We saw a little bit of a peak in October.
But estimating that on a quarter to quarter basis, we will see slightly higher energy costs for Q4.
Right, Okay and Conversely.
We are starting to see fiber and looks like it's rolling over a little bit.
You expect any benefit from that in Q4, and what was the net impact.
In Q3 from fiber costs.
I don't have a Q3 net impact on fiber, but yes, we have started to see abatement there.
But again the energy price was the larger hit in Q3.
Right Okay.
Switching over to air lead I think you mentioned in your outlook for Q4 and unfavorable mix shift can you give a little more detail on that.
Which end markets, you're seeing declining in which are growing two to cause that mix shift.
So were expecting shipments to be about 3% lower and Youre right. There is a bit of a mix negatively impacting the profit by $1 million.
Some of the decline Thats expected as in Q4 seasonality a lot of that relates to tabletop and.
Traditional white tabletop is not at the top of the heap when it comes to the margin profile colored tabletop, which traditionally see a pretty good spike in.
In Q3, and a ramp up for the holidays, that's a very high margin products. So those are some of the mix shifts we're seeing in there.
That's very helpful. Thank you.
And then if I can just ask about you.
You talked about strong inclined wire production in composite fibers.
That exactly and is there a favorable mix component in there and also what are you expecting for Q4.
So the inclined wire production is largely our <unk>.
Food and beverage papers as well as our composite laminates is basically excludes the wall cover and certain electrical papers as well as metallize.
And for Q4 do you expect.
Expect that to recur.
Sure.
Yeah, we're expecting overall volumes to be in line as you know, we don't guide for specific product categories, but we expect the shipments to be in line and operations to be in line with the third quarter as well.
Okay and last one for me is I don't know if you could give any preliminary sense on the inventory step up for you I'll come home I know, it's excluded from your guidance, probably because you are still in process with that but just any sense of what kind of impact we can expect from that.
It's a little it's a little premature on that we're still working through with our advisors on the on the purchase accounting I wouldn't feel comfortable putting a number out there yet.
Alright fair enough thanks very much.
Mhm.
And I don't see additional questions at this time I'll hand, the conference back over to Dante <unk> CEO for closing remarks.
Okay, well, thank you for joining our call today, and we look forward to speaking with you again next quarter have a good day.
Ladies and gentlemen. This concludes today's conference call. Thank you for joining you may now disconnect have a great day.
Okay.
Yes.
Yes.
Okay.
Yes.
Okay.
Okay.
For example.
In the future.
Okay.
Okay.
Okay.
Yes.
Yes.
Yes.
Okay.
Yes.
Yes.
Okay.
Okay.
[music].
[music].
[music].