Q4 2021 Glatfelter Corp Earnings Call

February 10, 2022

Ladies and gentlemen, this is the operator.

Yeah.

Today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold thank you for your patience.

Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold thank.

Thank you for your patients.

[music].

Good day, and thank you for standing by and welcome to the Glatfelter as fourth quarter earnings Conference call. At this time, all participants are in a listen only mode.

After the speaker presentation.

Will it be a question and answer session.

To ask a question during the session you will need to press star one on your telephone. Please be advised today's conference is being recorded.

If you require any further assistance please press star zero.

Now I'd like to hand, the conference over to your speaker today, Mr or Ms Shadow Guar from Glatfelter. Thank you. Please go ahead.

Thank you Abigail and good morning, and welcome to <unk> 2021 fourth quarter earnings Conference call. This is Ramesh <unk>, Vice President of ESG Investor Relations and corporate Treasurer.

On the call today to present, our fourth quarter results are Dante Perini, Gladfelter, 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.

In the Investor slides.

We will also make forward looking statements today that are subject to risks and uncertainties.

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's earnings call marks the conclusion of a very pivotal year in Gladfelter as transformation as we successfully delivered on our commitment to scale up the company through two sizable acquisitions of leading engineered materials businesses.

At the same time 2021 was also a very challenging year as we continued to navigate a pandemic that included severe macroeconomic headwinds.

In the first half of the year, our <unk> segment was negatively impacted by customers Destocking.

While the second half ended with unprecedented energy inflation in Europe , and significant raw material price increases that adversely impacted all three segments.

As we closed out the fourth quarter continued escalation in energy prices in Europe , raw material inflation supply chain disruptions and pockets of pandemic driven labor constraints.

Negatively affected our financial results.

The intensity with which these inflation factors unfolded.

It was not fully anticipated nor reflected in our previous guidance and the timing of these events is handicap the Yakov home acquisition from having the quick and positive start we had expected.

Despite the significant impact of these external factors, we remain confident in the strategic rationale of our two acquisitions.

Mount Holly is in line with our near term expectations and has the capability to overachieve our original goals.

And our new spun laced segment provides scale and further expands our product and technology portfolio, which positions us favorably for the longer term.

Ultimately, our leading positions in the broader nonwovens sector will facilitate our ability to deliver meaningful value to our shareholders and customers.

While it is too soon to project when these extraordinary external pressures will dissipate, we are taking swift and aggressive steps to manage through this period of volatility.

I will speak more about this later.

If you go to slide three in the Investor deck provides the key highlights for the fourth quarter.

We reported adjusted earnings per share of <unk>, <unk>, and adjusted EBITDA of $26 million.

Air lead materials performance was generally in line with expectations as contractual costs pass through arrangements protected margins from raw material inflation.

Although energy cost escalation.

In Europe was a drag on earnings.

This segment had a very good year over year profit growth driven by the addition of Mount Holly and a strong recovery in the tabletop category.

Composite fibers results were much lower than expectations, driven by the unprecedented rise in energy costs in Europe , and higher raw material inflation.

Energy prices further spike to record levels in the fourth quarter negatively impacting earnings by approximately $4 million versus our prior guidance, which had already reflected about $1 $5 million of energy inflation.

To combat this spike in costs, we introduced an energy surcharge in November for customers in all three segments to specifically target the recovery of mounting energy costs.

Volumes were also lower as some price sensitive customers predominantly in the work category altered their buying patterns in response to the additional pricing actions we implemented.

And our spun laced segment results were lower than expectations, driven by higher raw material and energy costs and a production delay at one of our manufacturing sites caused by a key raw material shortage that impacted shipments.

This is our first reporting quarter for the spun laced segment since the October 29th acquisition date.

The integration work is well underway as we continue to focus on aligning processes technologies and commercial strategies, while addressing the external factors impacting near term results.

I will elaborate more on spun laced integration in my closing remarks.

I will turn the call over to Sam now to provide more details on the quarter.

Thank you Dante <unk>.

Fourth quarter adjusted earnings from continuing operations was $1 6 million or <unk> <unk> per share a decrease of 18 versus the same period last year.

This was primarily driven by an unprecedented increase in European energy prices and from higher interest expense related to the bond issuance completed in October to finance, the <unk> and Mount Holly acquisitions.

Slide four shows a bridge of adjusted earnings per share of 22 from the fourth quarter of last year to this year's fourth quarter of <unk>.

Composite fibers results lowered earnings by <unk> 15.

Driven primarily by significant inflationary pressures experienced in energy raw materials and logistics.

<unk> materials results increased earnings by <unk>, <unk>, primarily due to strong volume recovery in the tabletop products category as well as from the addition of Mount Holly results compared to the prior year.

Spun laced results lowered earnings by <unk>, <unk>, driven by inflationary headwinds experienced in energy and raw materials and unfavorable operations.

Corporate costs were in line with the same quarter last year.

Interest expense lowered earnings by <unk> <unk>, driven by the issuance of the new bond to finance the two acquisitions.

Taxes, and other items were <unk> <unk> favorable due to a lower tax rate this quarter from a valuation allowance release of approximately $3 million.

Slide five shows a summary of fourth quarter results for the composite fiber segment.

Total revenues for the quarter were one 3% higher on a constant currency basis, mainly driven by higher selling prices of approximately $9 million.

This was the result of multiple pricing actions taken in 2021, and an energy surcharge in late November .

However, this was not enough to mitigate the extreme prices for energy and Europe during the fourth quarter and the relentless inflationary pressures in raw materials and logistics.

Shipments were down 11% or nearly 3900 metric tons with wall cover accounting for more than 75% of the decline.

Shipments for wall cover in Q4, 2020 were very strong as the supply chain recovered from the shutdowns during the pandemic, creating a difficult comparison this quarter.

In addition, our pricing actions in wall cover to recoup the sharp rise in key raw materials, such as wood pulp and the cost of energy did alter the buying patterns of some price sensitive customers.

Prices of energy wood pulp and freight continue to escalate in the fourth quarter and negatively impacted results by $16 $6 million versus the same quarter last year.

Sequentially from Q3 of 2021, this impact was $5 $4 million primarily.

Driven by rising energy prices in Europe , which escalated even further during the quarter. Despite the savings provided by our existing energy hedging program.

This was the single largest factor in missing our guidance for composite fibers in the fourth quarter.

We expect input costs, particularly energy prices to remain relatively high in the near term.

In addition to our ongoing focus on managing costs and operational efficiencies. We are also assessing a variety of mitigating contractual actions with our customers, which Tom will cover in more detail.

Operations were slightly unfavorable by $200000 in currency and related hedging activity unfavorably impacted results by $900000.

Looking ahead to the first quarter of 2020 to higher selling prices are expected to be fully offset by raw materials and energy prices we.

We expect to lower volume and market related downtime to have a cost penalty of approximately $2 million.

Sure.

Slide six shows a summary of fourth quarter results for <unk> materials.

Revenues were up 48% versus the same prior year period on a constant currency basis supported by the addition of Mount Holly and strong recovery in the tabletop category.

Shipments of tabletop almost doubled while wipes were 74% higher when compared to the fourth quarter of last year.

Additionally, demand for homecare and hygiene products were lower by 2% and 3%, respectively, reflecting changes in buying patterns at year end.

Selling prices increased meaningfully from contractual cost pass throughs as well as from price increases, including the 10% price increase actions implemented in the third quarter for customers without cost pass through arrangements. We also implemented an energy surcharge on all customers served from Europe to offset rising energy costs.

While these actions together helped the segment to offset the higher raw material prices. They fell short of recovering the higher than anticipated energy price increases unfavorably impacting results by a net $1 $2 million.

Operations were lower by $1 $7 million compared to the prior year, mainly due to higher spending and inflationary pressures and.

Foreign exchange was unfavorable by $1 2 million, mainly driven by the lower euro rate.

For the first quarter of 2022, we expect shipments to be 3% higher on a sequential basis with favorable mix, thereby improving operating profit by $1 million.

Selling prices are expected to be higher, but fully offset by higher raw material prices.

And we expect energy prices to be fully offset by the energy surcharge, assuming energy does not continue to spike further.

Slide seven shows a summary of fourth quarter results for the spun laced segment from October 29th acquisition date until the end of the year.

Revenue for this segment was approximately $58 million in the quarter shipments for the quarter were approximately 12500 metric tons, which were slightly below our expectation of 13000 metric tons.

Lower shipments were mainly driven by softer demand in the wipes category due to year end inventory management by a large customer and from a production delay at one of our manufacturing sites due to raw material and labor availability.

Lower shipments coupled with unfavorable mix negatively impacted results by $700000.

The segment also experienced higher than anticipated raw material inflation, particularly on synthetic fibers as well as higher energy costs at its European sites.

Lowering profits by approximately $1 5 million.

Operations were unfavorable from lower production higher than anticipated waste rates and COVID-19 related labor challenges.

The preliminary purchase price allocation resulted in depreciation and amortization of approximately $1 $7 million after including the acquisition step up to fixed and intangible assets.

For the first quarter of 2022, we expect shipments per month to improve in Q1 slightly outpacing the two month run rate of ownership in 2021.

We expect higher raw material and energy costs on a sequential basis to outpace price increases and energy surcharges and we expect improved operations. However, due to inflationary pressures, we expect a loss for the first full quarter at a similar run rate as the first two months of ownership.

<unk> approximately $2 million for the first full quarter.

Clearly this projected loss outlook is being addressed and Dante will cover several key actions were taking going forward.

Slide eight shows corporate costs and other financial items for the fourth quarter corporate costs were mostly in line with the same period last year, our corporate costs for full year 2021 of $22 4 million were approximately $4 $9 million lower than prior year and mostly in line with our guidance from last.

Quarter.

Costs related to strategic initiatives for the full year was $31 million, mainly pertaining to our two acquisitions and the associated financing.

Interest and other income and expense for the full year was $15 million and in line with our previous guidance for.

For 2022, we expect corporate cost to be approximately $27 million.

Higher than 2021, where we had lower overall spending due to COVID-19 , but in line with 2020 costs.

Our tax rate for the full year was 32% lower than our previous guidance of 38% to 40%. This was largely driven by the release of a valuation allowance of $3 million, reflecting a change in the recovery of deferred tax assets, primarily due to changes, resulting from completing the recent Yakov home acquisition.

Given the unusual level of volatility in our tax rate components, which is highly dependent upon how much income we generate from within each of our respective jurisdictions. We are limiting our tax guidance to Q1, only rather than providing a full year tax rate projection at this time.

We expect our Q1 2022 tax rate to be between 48% and 50% on adjusted earnings and full year interest and other financing costs to be approximately $35 million reflecting.

Reflecting the recent bond issuance.

Slide nine shows our cash flow summary, 2021, adjusted free cash flow was lower by approximately $10 million driven mainly by lower cash earnings and capital expenditures.

We expect capital expenditures for 2022, including spun lace and Mount Holly to be between 45, and $50 million $7 million to $8 million of which pertains to spun laced systems integration costs, which we previously announced as costs associated with generating our targeted synergies.

Depreciation and amortization expense is projected to be approximately $74 million, reflecting a full year of ownership for Mount Holly and the acapella.

Slide 10 shows some balance sheet and liquidity metrics are.

Our leverage ratio increased to four six times as of December 31, 2021 versus year end 2020 of one seven times, mainly driven by the Mt. Holly acquisition for $175 million and the Yakov home acquisition for $302 million.

We successfully executed our previously mentioned $500 million bond offering in October 'twenty, 'twenty, one and we still have ample available liquidity of approximately $260 million. Our near term focus will be to successfully integrate yakov home realize the $20 million of expected annual synergies and actively delever that.

Balance sheet.

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

Thanks Sam.

Looking ahead 2022 will be a very important year for glatfelter as we continue our integration efforts and navigate the challenging macroeconomic environment to optimize profitability and cash flow.

We are directing our focus on a shortlist of imperatives.

Our top priority is to restore spun laced profitability and drive the overall financial performance of this segment to levels more consistent with our legacy business.

Given its criticality.

Asked our chief commercial officer, and 12 year Glatfelter executive Chris Astley to take full responsibility for the spun laced P&L and all integration activities, including synergy delivery.

Christmas former experiences business unit President of the air lead materials segment.

His leadership significantly drove growth accelerated innovation and boosted profitability will be invaluable as we integrate this new business into glatfelter.

Chris and his team will focus on driving with greater speed and urgency to achieve more consistent top line growth and asset utilization cost reduction and margin expansion.

Secondly, we're taking actions to reduce the volatility in the composite fiber segment by implementing raw material and energy cost pass through mechanisms like we have within our <unk> business.

This construct is necessary for us to continue to supply high quality engineered materials to our customers, while maintaining stable margins.

Our objective is to move as many customers as possible to a dynamic pricing model with the goal of migrating approximately 50% of the revenue base to this new structure in 'twenty two.

While it is likely energy prices will remain elevated in the first half of the year. We will continue to closely monitor price trends and work with our customers to implement additional pricing actions as warranted.

At the same time, we will step up our cost reduction activities focus on energy efficiency and reduction and continue to monitor the effectiveness of our energy hedging program. During this period of dramatic price volatility.

Additionally, we are fully committed to achieving the synergies we announced for the two acquisitions and we'll continue to progress this work throughout the year.

The foundation is set for us to accelerate the profitability of their respective segments and mitigate the challenges of inflation.

In summary, I want to reiterate that we strongly believe in the strategic benefits of expanding and enhancing the glatfelter portfolio with our recent acquisitions.

As a leading global Nonwovens company, we have the most attractive set of manufacturing assets technologies and talent to support our customers' needs.

To bring new innovative and sustainable engineered materials to market and to deliver meaningful value to shareholders.

While 2021 was a challenging year. It was also a constructive year as we advanced our growth and transformation objectives.

As we look ahead at 'twenty, two we're redoubling our efforts to address the impacts of inflation integrate our new acquisitions and optimize profitability and cash flows.

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

And as a reminder to ask a question you will need to press star one on your telephone.

A question press the pound key.

Again to ask a question you will need to press star one on your telephone.

Our first question comes from the line of <unk> Shah with BMO capital markets. Your line is now open.

Hi, good morning.

Good morning.

Just wanted to go back to that news you just gave about pass throughs in composite fibers did.

Did I hear correctly that energy will be included in the pass through there.

Yes, Sir you have an energy okay thats.

That's great actually and can you talk about I don't know, if it's too preliminary but any sort of reception that <unk> gotten so far with customers on this.

Well I would say energy is preliminary because it.

Discussions have been ongoing but I will say that.

<unk>.

The speed and the magnitude of input cost inflation, whether it's across raw materials shipping and logistics.

Energy labor is affecting all businesses not just glatfelter and so it is impacting our customers our suppliers and the order of magnitude and the speed is I think creating a bit of a platform for us to sit down and have very pragmatic strategic conversations with our customers.

So that we can find mutual interest switches.

In a more predictable and consistent cost and profitability and to reduce volatility and uncertainty across our businesses and so I believe we are aligned in those aspirations and we are actively engaged in working through the details of how we structure. The mechanism of these pass through arrangements in a way that is fair.

Notable and reflective of where we might be in the cycle.

Great.

And then given that so looking looking at your bridge on slide four it looks like Youre entering 2000, 22022 with a <unk> 12 per share price cost headwind, which is probably even a bit higher because you only owned yakov home for two months.

Given all of that in this new today can you talk about the price cost headwind going into 2022, and then how much you think you might be able to recover.

This year, given the energy surcharge and all these pricing actions et cetera.

And maybe some help on how you think it might cadence out during the quarter.

I think it really depends on exactly how quickly we can get some of these contracts underway, let's stick with composite fibers first I think your point is correct about the price gap on a full year run rate being a little bit bigger given the shorter timeframe for spun laced, but as Don said, we're in active negotiations with these.

But to be able to sort of capture where we think it is going to play out and how it runs out over the year, it's probably too early but we're also excited about putting <unk> in charge of the spun laced segment and going after similar types of actions with with key customers, but at this point I don't think we can give more specifics than what we've given for one quarter at a time here.

That's fair.

Okay switching over just one lease can you talk about customer year end inventory management was that a surprise to you and then also on the bridge on slide seven price itself non price copper price is actually slightly negative I think to the tune of 300000 can you just give a little more detail on what happened there.

Sure.

And then finally on spine leaf.

Notice you noted higher than anticipated waste rates was that sort of a learning curve issue is you've got to know the business, Brian just maybe a little more detail on what happened there.

Sure I'll start on price. So I think we gave expected guidance in Q4.

Based on what we had learned from just sort of taking over the business and the Yakov home business had announced a price increase publicly just before we took ownership of the company.

And I would say that they had less success in gaining traction with that price increase than we expected when we when we gave that guidance out. So that's the first part as far as waste, yes, I do think that as a big opportunity for us and it was something we identified when we did our due diligence and it's a big part of our synergies is reducing that waste and it.

Was a little bit higher than we expected for the quarter, but we're again very excited about.

Putting some strong leadership in there and being able to bring those numbers down into more respectable levels and that'll be a big driver of the improvement and I think I missed one of your other three questions I think I got to the inventory management that year end customer inventory management was that a surprise.

A little bit.

Yes.

It's 60 days worth of ownership so.

We don't have our new colleagues fully immersed in our sales and operations planning process.

And synchronizing, how we look at the unconstrained demand and constrained demand forecast and how that rolls through operations.

Another reason why we wanted to put one seasoned gladfelter executive in charge of the entire spun. This segment. So that we can move with greater speed and intensity and address these issues more quickly.

Yes, all fair.

Switching over to a wall cover can.

Can you talk about the instability in Russia, and Ukraine, and whether that's having an impact on your ability to raise prices.

And second I think some years ago, you introduced some lower price will cover product.

Is that still being offered and did that help put some of this price sensitivity.

Sure I'll address.

Your comments on <unk>.

<unk>.

Political scientists, but clearly when there are geopolitical tensions with Russia Ukraine.

That the whole world is paying attention to that level of uncertainty is never a positive in the short term so can that be impacting consumers seiki and our customers.

Thought process around risk and currency and sanctions.

Certainly.

We have modified our product portfolio on our offering over time, so that we were able to recalibrate, our offering to fit the needs and expectations from a performance and a price and value delivery to our customers, so thats reducing basis weights.

Looking at recipes to reduce expensive raw materials et cetera, and so we still have those products in our portfolio.

And I would say that this part of the business in this jurisdiction has always been a bit more volatile over time I think it's also.

History is any indication of the future it shows that it bounces back much faster than almost any other part of our portfolio than any other jurisdiction, where we operate so.

I think we have.

A history now of.

Eight years of operating in the region and working through the dynamics in the ebbs and flows of what may or may not be happening from an economic standpoint, and a geopolitical standpoint.

And I think our scale and leading share position, we will certainly be helpful to us.

But the short answer is nobody likes uncertainty and so we'll have to manage as much more carefully and actively as we have in previous instances in the region.

Okay. Thank you very much.

And then just a few more for me.

Can you talk about the contribution from Mt. Holly in a quarter early.

Maybe.

Yes.

I think there are operating profit was around $2 million for the fourth quarter, but I'd have to double check that is that what youre asking yes exactly.

Yes, and keep in mind, we're going to be breaking out less and less of that detail on Mount Holly going forward, just because of the way we're integrating it into our portfolio within the U S. Now, particularly going forward, we'll be able to and that was part of the strategic rationale for the acquisition was to be able to optimize centers of excellence make longer production runs.

Minimize waste and downtime so.

We have one organization that is selling products to the same customers that can be made either at fort Smith or at Mount Holly or up in Canada. So that's.

Specific performance will be a little less meaningful because you can't necessarily isolated.

Okay.

And then last one for me can we get an update on the food and beverage part of composite fibers. It looks like volumes were flat in the quarter.

Was that a surprise or was there a tough comparison going on and then what are you expecting for 2022.

Yeah.

Yes, so I would say that if you look at <unk>.

Comparatively speaking across the composite fibers portfolio, our food and beverage business, which is about half of that segment performed the best.

<unk>.

As flat so I would say that big picture, that's still a very important part of the portfolio and is less volatile.

In terms of 'twenty two.

We don't give guidance for full year across categories, but we have spoken in the past about the outlook for demand for tea and coffee notwithstanding perhaps the immediate market environment, which is a bit harder to predict but we say that to you will be 2% or so two to three but say, 2% and that <unk>.

Serve coffees in the 5%, 6% range for <unk> six it certainly depends period to period, and we don't see that changing at all from a mid to long term perspective, but we could see a little bit more variation period to period, just because of what's going on in the world and it was flat on a year over year.

Year basis, but in terms of sequentially from Q3 to Q4 food and beverage was actually up a little bit versus we had guided to a flat. So I would say net net it was a positive.

Got it okay. That's all very helpful. Thanks very much.

Okay. Thanks, Thank you.

And there are no further questions at this time I will now turn the call back over to Mr. Dante Perini.

Okay, well. Thank you for joining our call today, we look forward to speaking with you again next quarter.

Good day.

Yes.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

Yes.

Okay.

[music].

Yes.

<unk>.

Yes.

Sure.

Okay.

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Okay.

Great.

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No.

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Yes.

[music].

Good day, and thank you for standing by and welcome to the Glatfelter as fourth quarter earnings Conference call.

At this time all participants are in a listen only mode.

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

To ask a question during the session you will need to press star one on your telephone.

Please be advised that this conference is being recorded.

If you require any further assistance please press star zero.

I would like to hand, the conference over to your speaker today, Mr or Ms Shadow Garre from Glatfelter. Thank you. Please go ahead.

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

On the call today to present, our fourth 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.

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 <unk>.

Good morning, and thank you for joining us.

At the same time 2021 was also a very challenging year as we continued to navigate a pandemic that included severe macroeconomic headwinds.

In the first half of the year, our <unk> segment was negatively impacted by customers Destocking.

The second half ended with unprecedented energy inflation in Europe , and significant raw material price increases that adversely impacted all three segments.

As we closed out the fourth quarter continued escalation in energy prices in Europe .

Raw material inflation supply chain disruptions and pockets of pandemic driven labor constraints.

Negatively affected our financial results.

The intensity with which these inflation factors unfolded.

Not fully anticipated nor reflected in our previous guidance and the timing of these events has handicap the jaco palm acquisition from having the quick and positive start we had expected.

Despite the significant impact of these external factors, we remain confident in the strategic rationale of our two acquisitions.

Mount Holly is in line with our near term expectations and has the capability to overachieve our original goals.

And our new spun laced segment provides scale and further expand our product and technology portfolio, which positions us favorably for the longer term.

Ultimately, our leading positions in the broader nonwovens sector will facilitate our ability to deliver meaningful value to our shareholders and customers.

While it is too soon to project when these extraordinary external pressures will dissipate, we are taking swift and aggressive steps to manage through this period of volatility.

I will speak more about this later.

If you go to slide three in the Investor deck provides the key highlights for the fourth quarter.

We reported adjusted earnings per share of <unk>, <unk>, and adjusted EBITDA of $26 million.

Air lead materials performance was generally in line with expectations as contractual costs pass through arrangements protected margins from raw material inflation.

Although energy cost escalation.

And Europe was a drag on earnings.