Magnera Corp (MAGN) 2015 Q3 法說會逐字稿

Good morning.

My name is Brandi, and I will be your conference operator today.

At this time I would like to welcome everyone to the Glatfelter third-quarter earnings conference call.

(Operator Instructions) Mr. John Jacunski, Chief Financial Officer, sir, please go ahead.

Thank you, Brandi.

Good morning and welcome again to Glatfelter's 2015 third-quarter earnings conference call.

Before we begin our presentation this morning, I have a few standard reminders.

During our call 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 2014 Form 10-K filed with the SEC and today's 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 forward-looking statements speak only as of today, and we undertake no obligation to update them.

And finally, we have made available a slide presentation to accompany our comments on this morning's call.

You may access the slides on our website or through this morning's webcast provider.

I will now turn the call over to Dante Parrini, Glatfelter's Chairman and Chief Executive Officer.

Thank you, John.

Good morning and thank you for joining us to discuss our third-quarter 2015 results.

During the quarter we continued to manage the significant macro-level challenges we've been facing all year.

We continue to grow in key markets like tea, single-serve coffee, and electrical.

We saw improved demand for our advanced airlaid materials business during the quarter.

However, market conditions impacting our nonwoven wallcover business in Russia remain severe.

The euro was weak, and pricing in the US uncoated free sheet market continues to drift lower.

This notwithstanding, I am pleased with the resolve of Glatfelter people as we work hard to grow key areas of our business while driving our cost reduction initiatives to improve areas of our business within our direct control and to mitigate the effects of external factors.

As shown on slide 3, we generated adjusted earnings per share of $0.47 in the third quarter, down compared to $0.70 in 2014.

Our third-quarter results were negatively impacted by lower selling prices across our board, lower unit volumes, and market-related downtime in certain segments, along with the impact of foreign currency.

Growth in key market segments within composite fibers; improved demand for advanced airlaid materials, particularly in specialty wipes; and significant progress in our cost reduction initiatives, although very meaningful, were not enough to offset declines from our 2014 record third quarter.

Revenue for the quarter was $420 million, down 4.3% on a constant currency basis compared to last year.

Revenue for composite fibers was down 1% on a constant currency basis, reflecting both weakness in nonwoven wallcover and solid demand in all other product segments this quarter.

Shipments of nonwoven wallcover were down 23% compared to the third quarter of 2014 due to continued weakness in Russia and the Ukraine.

However, wallcover was up 1.5% when compared to the second quarter.

The operations team in CFB delivered another outstanding performance, increasing output by 3% on its incline wire machines to support the growing demand for products produced on these assets.

Year-to-date, shipments of tea and coffee products are up over 4%, while technical specialties nearly doubled as a result of increased shipments of electrical products and the inclusion of the Oberschmitten acquisition.

Advanced airlaid materials saw improved demand over the second quarter of this year, with shipments up almost 10% -- although when compared to the third quarter of 2014, shipments were down 6% and operating profit was also down due to lower shipments of hygiene products and related costs for market downtime in Germany.

Significant growth in specialty wipes, which were up 37% in the quarter and nearly 50% year-to-date, partially offset the combination of slower demand in certain economies, and some one-time factors that increased order patterns last year.

While we are facing some near-term market challenges, we continue to expect longer-term growth for both absorbent-core hygiene materials and specialty wipes.

Revenue for specialty papers decreased 6%, driven by lower selling prices.

Shipping volumes were down 2% compared to last year and down 1% year-to-date, slightly ahead of the broader uncoated free sheet market.

While many of the markets we serve are very competitive and pricing is a challenge, we continue to focus on excellent customer service, new product development, and new business development to differentiate Glatfelter.

We are also pleased with the 3% year-to-date growth in our engineered products segment.

On the operations side, pulp production and specialty papers was below our record 2014 third-quarter.

We will continue to focus to improve overall pulp production and asset reliability in addition to disciplined cost control to deliver improved operating results in future quarters.

Finally, we continued to make substantial progress on our workforce efficiency and cost reduction initiatives.

Year-to-date we have reduced our total headcount by 3.1% and have generated cost savings of $22 million.

So we are on-plan to achieve the high end of our target of $25 million to $30 million of total cost savings for the year.

John will now provide a more in-depth review of our third-quarter results, and then I will offer some closing comments.

John?

Thank you, Dante.

For the third quarter we reported net income of $13.5 million or $0.31 per share.

After excluding noncore business items, we reported net income of $20.8 million or $0.47 per share compared to $0.70 in 2014.

Slide 4 shows a bridge of adjusted earnings per share from the third quarter of last year to this year.

Composite fibers results reduced earnings per share by $0.07, with a negative impact of $0.02 coming from foreign currency.

Advanced airlaid materials results reduced earnings per share by $0.01, and specialty papers results reduced earnings per share by $0.17, driven by a weaker market environment, resulting in lower selling prices and market downtime.

Slide 5 shows a summary of third-quarter results for the composite fibers business.

Outside of wallcover, this business continues to perform very well.

Shipping volumes increased 6% on an organic basis; and, when coupled with the success of our efficiency improvements and cost reduction initiatives, margins have expanded.

These results, however, have been more than offset by the weak wallcover market.

Total revenue for this business was $134 million, a decrease of 1% on a constant currency basis compared to last year, with shipping volumes down 3%.

Lower selling prices, primarily in wallcover and metalized products, negatively impacted operating profit by $3.9 million when compared to the third quarter of last year.

During the third quarter, we grew each of our major product segments other than wallcover.

Technical specialty shipments were up 6% year-over-year, excluding the Oberschmitten acquisition, driven by demand for electrical products.

Composite laminate shipments were up 16%, and metalized product shipments increased 11%, driven by demand for wet glue label products.

Demand for tea and single-serve coffee products continues to be solid, with shipping volume up 1% compared to the year-ago quarter and up 4% year-to-date.

Shipments of nonwoven wall cover products continue to be challenging but have stabilized, with shipments up 1.5% versus the second quarter but down 23% compared to the third quarter of last year.

As we have previously mentioned, demand for our wallcover products continues to be impacted by macroeconomic challenges in Russia and Ukraine.

While we have introduced a lower basis weight product to reduce the cost and make our products more competitive in the current environment, the weak ruble has more than offset this impact.

And consumer demand continues to be impacted by the protracted recessionary environment.

We had another solid quarter from an operations perspective.

In Dresden, production was down 22% to match demand.

Excluding Dresden, production volume was up 7.5%.

Material usage rates improved, and the business generated benefits from cost reduction initiatives and continuous improvement projects.

Overall these items added $2.2 million to operating profit for the quarter.

So operating profit for the quarter was $14.1 million, down $4 million last year, including a negative currency impact of $1.3 million.

For the fourth-quarter 2015 when compared to the third quarter, we expect shipping volumes and the selling prices to be in line and raw material and energy prices to be slightly higher than the third quarter.

Advanced airlaid materials results are summarized on slide 6. This business performed well during the quarter, with improved demand it operating performance from the second quarter.

Revenue during the quarter was $63.2 million, down 6% on a constant currency basis compared to last year, with shipments also down 6% in the comparison.

Shipments of wipes, wipes products, were up 37%.

We expect continued growth in this segment as airlaid technology continues to gain share in the market.

In the feminine hygiene market, shipments were down 5% compared to a year ago due to consumers moving to lower-priced products in certain weaker economies, particularly in Eastern Europe.

However, on a sequential-quarter basis, we saw healthy growth, with shipments up 9%.

For the adult incontinence market shipments were down significantly, as the year-ago quarter included heavier demand to support a customer product launch.

Operating income for this business declined to $6.8 million compared to $7.5 million last year.

Our results were negatively impacted by $700,000 due to lower shipping volume as well as $1 million from downtime to align production with demand at our facility in Germany.

These negative impacts were partially offset by lower raw material and energy costs and benefits from cost reduction initiatives, which drove an improvement in margins for the business.

For the fourth quarter of 2015, we expect shipping volumes to be slightly lower than the third quarter.

Average selling prices and raw material prices are expected to be in line with the third quarter.

Slide 7 provides a summary of the results for specialty papers.

The weakened competitive market environment led to a negative selling price variance of $5.7 million and market downtime that created a negative cost variance of $3.1 million compared to the third quarter of last year.

This led to a $10 million decline in operating profit for the quarter.

Net sales for the quarter were down 6% due to lower selling prices and a 2% decline in shipments when compared to third quarter of last year.

During the quarter, shipments of book publishing products were up 12%, and shipments of envelope products were flat.

Engineered products decreased 3%, and carbonless and non-carbonless forms products were down a combined 10%.

Specialty papers had an inconsistent quarter in operations.

Pulp production was down 7% compared to the record quarter in 2014, negatively impacting operating profit by $3.7 million.

This was driven by unplanned production outages.

During the third quarter we also completed the annual outage for our co-gen facility.

Last year this outage was completed in the fourth quarter, negatively impacting the current-quarter comparison by $1.4 million.

And we took market downtime in select assets to better align our inventory with expected demand.

While our cost reduction and cost savings initiatives have more than offset general inflation, they were not enough to overcome the market and production challenges when compared our record third quarter in 2014.

For this business in the fourth quarter, we expect shipping volumes to be in line with the third quarter.

Selling prices are expected to decline slightly, as industry operating rates, inventory levels, and continued demand declines create a competitive market environment.

We expect input costs to remain in line with the third quarter, and we do not expect to have any market-related downtime in our paper machines in the quarter.

Slide 8 shows corporate costs and other financial items for the quarter.

Corporate costs for the third quarter were down compared to last year, reflecting cost control initiatives, workforce efficiency activity, and lower spending.

This was offset somewhat by higher legal costs for the Fox River matter.

As recorded by accounting standards, we annually test our non-amortizable intangibles for impairment, which includes the Dresden tradename.

The continuing economic instability in Russia and Ukraine has negatively impacted the forecasted revenues used to value the Dresden tradename.

As a result, we recorded a $1.2 million non-cash pretax impairment charge during the quarter.

During the third quarter of last year, we recorded a similar charge of $3.3 million.

With respect to the Fox River environmental matter, as we discussed in previous calls, we are involved in ongoing and complex litigation related to PCB contamination is the Fox River.

Last quarter, we discussed the US District Court opinion that had been issued holding that NCR's liability for a portion of the river would be divisible rather than joint and several with us and other responsible parties.

That could have been less favorable to Glatfelter than joint and several liability, which the court would allocate equitably among the responsible parties.

Several parties, including Glatfelter, asked the judge in the matter to reconsider his opinion; and in October, the court reversed its opinion.

Although we view this outcome favorably, the ultimate responsibility for remediation costs continues to be subject to extensive litigation, including a trial currently scheduled for July 2016.

Also, we previously disclosed that we expect to complete remediation work during 2015 estimated to cost $10 million.

During the third quarter, we were notified by the Department of Justice that we should prepare to perform remediation work in 2016.

It is our understanding that an initial draft of the work plan for 2016 has been submitted to the government for review.

We do not have an estimate of the cost of the work that has been proposed, nor has any work been assigned to particular parties.

Therefore, considering the work we performed in 2015 and based on our best estimate of the range of costs in which the work we may perform in 2016 may fall, we have increased our reserved by $10 million this quarter.

As is more completely discussed in our 10-Q, to be filed later today, we believe after appropriate consideration and a retrial of the Whiting litigation in July 2016, the courts will reinstate previous decisions consistent with assigning zero or perhaps some small level of responsibility for the downstream work to Glatfelter.

Although we are unable to determine with any degree of certainty the amount we may be required to fund for interim remediation work, the amounts could be significant.

Any amounts we pay or any other party pays in the interim may be subject to reallocation when the Whiting litigation is resolved.

Slide 9 shows our free cash flow.

During the third quarter we generated adjusted free cash flow of $24 million, in line with the third quarter of last year.

On a year-to-date basis we have generated adjusted free cash flow of $11 million, well ahead of the year-ago period.

Lower cash we utilization for working capital more than offset lower EBITDA generation in the

Capital expenditures have increased, primarily due to investments for boiler environmental compliance.

During the third quarter we also used $6 million for Fox River remediation.

We expect to generate the strong adjusted free cash flow in the fourth quarter, which is typically our strongest quarter for cash flow generation.

Slide 10 shows some balance sheet and liquidity metrics.

Our net debt on September 30 totaled $315 million, up $10 million from the end of 2014.

We finished the quarter with $74 million of cash and $157 million available under our revolving credit facility.

So our balance sheet remains in good shape, with leverage on a net debt basis of 2.0 times at September 30.

We believe this provides sufficient liquidity to meet our near-term investment needs and continue to execute our growth strategies.

Finally, in October, we completed the sale of 9,803 acres of timberlands for $17 million in cash.

We expect to recognize an after-tax gain of approximately $9.1 million in the fourth quarter, which will be excluded from adjusted earnings.

This concludes my comments.

I will turn the call back to Dante.

Thanks, John.

Glatfelter has taken aggressive steps this year to address the challenges we are facing related to weak economic conditions in some key markets, the weak euro, as well as increased competition for declining volumes in the more commodity segments of the uncoated free sheet market.

In composite fibers, we continue to grow in key markets where we have leadership positions.

Excluding wallcover, our year-to-date shipping volume is up in every major product segment.

By way of example, we are up approximately 4% in food and beverage, 9% in composite laminates, and nearly double the volume in technical specialties.

We have integrated the Oberschmitten electrical products business well, and we are delivering on the business case for this acquisition.

Our operations team is continuously improving its operating metrics, and our new dispersible wipes product is in the final stages of qualification, with commercial shipments expected by year-end.

In the airlaid business, while market demand has been a challenge for our hygiene products, quarter-three demand was an improvement to the first half.

And we expect similar volumes in quarter four.

Longer-term, we continue to see growth opportunities in our core product categories.

We are working closely with our customers to develop the next generation of products in feminine hygiene, adult incontinence, and specialty wipes to bolster our leadership position in these markets.

We are also focused on manufacturing excellence and continuous improvement techniques to improve our cost position and increase the output from our current installed asset base, especially in North America.

In specialty papers, we continue to focus on improving the consistency of our operations and are taking actions to drive costs out of this business.

On the commercial side, we will continue to leverage our new business and new product development capabilities, our customer service expertise, to grow in more specialized engineered product categories.

Finally, we will continue implementing our enterprisewide cost reduction initiatives to complement our ongoing continuous improvement activities.

Based on our progress in the first nine months of the year, we expect these cost reduction measures and our continuous improvement initiatives to achieve $30 million in cost savings for the year, representing the high end of our savings target.

In closing, we remain committed to executing our longer-term growth strategy, with a sharp focus on addressing our near-term challenges.

We will continue driving our cost reduction efforts and continuous improvement initiatives while introducing new products and leveraging our leading positions in growing market segments.

I believe this approach will balance our need to actively manage the macro-level shorter-term issues impacting our business while still positioning Glatfelter for future success.

At this point, I would like to open the call for questions.

Anojja Shah, BMO.

It's Anojja on Mark Wilde's team.

I just wanted to ask about market downtime in 3Q.

So in 4Q in specialty paper, there is no market downtime.

And you guys called out $3.1 million in 3Q associated with market downtime.

But then there's also some lower pulp production.

When I think about what comes back for 4Q, is it $3.1 million plus a little bit of that pulp production?

Or how would you have us think about that?

On the downtime, we don't expect any downtime on our paper machines.

We will still have some downtime on a few coders.

So I would say in broad estimates about two-thirds of that downtime we would expect to come back in Q4 as a benefit.

With respect to pulp production, certainly we are obviously striving to maximize our pulp production.

We had some relatively small issues that created downtime and impacted Q3, so we certainly are pushing to increase pulp productivity.

So to the extent we can increase it, we will have a benefit to Q4.

But I don't have an estimate for you as to what the level of pulp production would be.

I guess my question was more how interrelated were those two, like from --?

No, they're separate.

So the downtime of $3.1 million is related to paper machine and coater downtime.

Any unplanned downtime we had in the pulp mill was wrapped up in that pulp production number.

Got it.

Okay, that's helpful.

And then about Fox River, the $10 million charge sounds like it is just for 2016 only.

Can you talk about your longer-term outlook for this issue, or how you think we should think about it in 2017 and beyond?

Sure.

As I mentioned in my prepared remarks, there is a trial that is scheduled for July of 2016, and we have been consistent with our view on what we think the outcome of that trial will be.

And so our expectation is that with the trial in July 2016, there will be a decision before the remediation season in 2017.

So our accrual is related to 2016.

It is still unknown what level of work we may do in 2016, but we think the $10 million is a broad estimate.

So again, we expect a trial and a decision before the 2017 remediation season.

And our expectation, based on what we know of the remediation plan, is that remediation will be completed in 2017 or 2018.

Okay, thank you.

And then last one for me: volumes in airlaid were little softer than we had expected.

And I know you called out some slower demand in Eastern Europe.

Can you just give a little more color on what's going on overall there in that segment?

Sure.

On a year-over-year basis, volumes were down; but on a sequential-quarter basis, our volumes were up about 10%.

So as we entered the year, and as we have commented in past calls, we felt that the first half of the year was impacted by a number of transitory issues that range from inventory management, recessionary environments in certain regions of the world that drove end-use consumers toward lower-priced products, the Russian embargo of Ukrainian-produced feminine care products, and things of that nature.

When we go back up to the bigger-picture level, we still are optimistic that these markets on a global basis are growing around 5% per year and that we have a leading share position and relationships with the major market makers.

So we are encouraged by the improvement that we saw in volumes in Q3.

And we believe it is sustainable as we think about Q4 and rolling into 2016.

Okay, great.

Thank you so much.

That's it for me.

(Operator Instructions) Debbie Jones, Deutsche Bank.

Could you guys talk a little bit more about the lower pulp production?

I know you said there were some special, I guess, one-time issues.

What exactly were they?

And how much confidence do you have that they won't repeat?

First, I will say we've made a lot of progress improving the performance of the major assets of both Spring Grove and Chillicothe, and we have continued to strengthen the staff in key parts of our mill operations and we continue to focus on making critical process improvements.

So there were no big issues.

We just had a handful of smaller one-off and unrelated issues that range from a pump failure in one part of the mill to a crack in a pipe somewhere else.

But in aggregate, the downtime that we took to make these repairs had a negative impact on overall pulp production.

So I am confident that the path that we are on in terms of improving our overall maintenance cadence, and the process, and the training, and the skill level that we've introduced to both of our mills through external hires and subject matter experts will help address these issues.

And it's the single biggest focal point for SPBU operations is finding a way to maximize pulp production and maintain asset reliability.

Okay, thank you for that.

I wanted to talk about the nonwovens business.

I think you mentioned last quarter that you had made some adjustments in terms of the mix that you were selling into Russia and the Ukraine to kind of help to alleviate some of the currency pressures that your customers were facing.

I was just wondering if that is continuing, accelerating -- if you could just kind of give us an update on that.

Sure.

We introduced from lower basis weight products and expanded the mix of products to try to address the needs of our customers as they were coping with a rapid inflationary environment, a devaluing currency, and local competition.

So I would say that these products were qualified and successfully embraced by our customers.

And the issues that we continue to confront is the ebb and flow of the currency valuation.

So when the ruble is close to 70 in relationship to the euro, it puts more pressure on the gap between other cost alternatives that are produced in Russia.

And as you may recall, about 45% of Dresden's book of business is Russia/Ukraine.

So we are also working on managing our cost base in Dresden and finding ways to fully utilize the assets and take advantage of a very challenging and dynamic market environment in Russia/Ukraine.

Okay, all right.

One more question, and then I will turn it over.

You sold more timberland that you normally do.

Is there one specific reason for that?

And two, of what you have left, would you say the attributes are kind of comparable to the land you just sold?

I am trying to get a sense of what is remaining for Glatfelter.

From an acreage basis we have about 7,800 acres left in Delaware.

So the land we sold was the balance of our Virginia properties.

So we have about 7,800 in Delaware and about 4,600 in Pennsylvania.

It is -- typically the Delaware properties have sold at a higher price, although we have a mix of eased and uneased properties remaining, which has an impact on the value.

And then the properties in Pennsylvania have typically been slightly above where we sold the Virginia property.

So I think the Virginia is -- the land which is sold is a little bit on the low side when you compare to those other states.

Okay.

Well, again, thank you for, by the way, the disclosure on Fox River.

It seems like a favorable outcome for you guys there on that ruling.

So I just wanted to mention that.

But I will turn it over.

Thank you very much.

(Operator Instructions) Dan Jacome, Sidoti & Company.

Maybe I missed it.

What were the fem hygiene shipments up in the quarter?

For the quarter, they were down a little bit.

Let me just look the number up for you.

So feminine hygiene in total was down about 5% versus the year-ago quarter.

Okay.

And then do you have those numbers for fem hygiene and specialty wipes for last year?

I just want to know what you were comping against.

Do you mean what the increase was in 2014?

Yes, 3Q 2014, if you have it handy.

I don't, but I can follow up with you after the call with that.

Okay, no worries, that was it.

Thanks a lot.

There are no additional questions at this time.

I would now like to turn the conference back over to Dante for closing remarks.

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

Enjoy the rest of your day.

Thank you.

Ladies and gentlemen, this does conclude today's conference call.

You may now disconnect your lines.