Magnera Corp (MAGN) 2016 Q2 法說會逐字稿

Good morning. My name is Britney and I will be your conference operator today. At this time, I would like to welcome everyone to the Glatfelter second-quarter earnings conference call. (Operator Instructions)

Thank you. Mr. John Jacunski, you may begin your conference.

Thank you, Britney. And good morning and welcome to Glatfelter's 2016 second-quarter earnings conference call. This is John Jacunski. I'm the Company's CFO and President of the specialty papers business unit.

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 2015 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.

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 2016 second-quarter results. As noted on slide 3 of the presentation, for the quarter, we reported adjusted earnings per share of $0.06, up $0.02 over the prior-year quarter and in line with our expectations. We continue to operate in a slow growth global environment that resulted in revenue for the quarter of $406 million, which was down approximately 1% in constant currency.

Each of our businesses saw improved demand in the quarter, resulting in shipments increasing 2.5%. And for the year, selling prices have been generally flat to improving as compared to 2015, when they declined in many of our markets.

For the composite fibers business, shipments increased 3% compared to last year and 10% compared to the first quarter. As mentioned during our last call, the Russia and Ukraine wallcover markets continue to show signs of stability, with some pockets of improvement, which led to a 12% increase in shipments. While the economic situation remains tenuous, we do expect near-term demand to remain at this higher level.

Our shipments of tea and coffee products improved from the first quarter and were generally in line with the second quarter of last year. We expect the inventory reduction efforts of some customers to continue into the third quarter, with shipments returning to normal growth patterns in the fourth quarter. Composite fibers operating profit for the second quarter was $15.3 million, down $1.4 million, primarily due to foreign currency.

In advanced airlaid materials, we had another strong quarter, with shipments up 8% and operating profit up 118% over the same quarter last year. Customer demand for our hygiene and wipes products continues to grow, with hygiene products up 5% and wipes up 2% year to date. Success with our continuous improvement program led to the second straight quarter of record production in our Canadian facility, allowing us to meet increasing demand and improve our cost structure.

For specialty papers, shipments were up 2% compared to last year, again outperforming the broader uncoated freesheet market. Selling prices were down on a year-over-year basis, but up from the first quarter on many of our white paper grades as we implemented recently announced increases.

During the second quarter, we successfully completed our annual maintenance outages at the Ohio and Pennsylvania facilities, in line with expectations. The decrease costs of this year's outages led to a $4 million reduction in specialty papers operating loss for the quarter.

This concludes my opening remarks. John will now provide a more in-depth review of our second-quarter results. Then I will offer some closing comments before taking your questions.

John?

Thank you, Dante. For the second quarter, we reported net income of $2 million or $0.04 per share. After excluding non-core business items, we reported net income of $2.8 million or $0.06 per share compared to $0.04 in 2015. Slide 4 shows a bridge of adjusted earnings per share from the second quarter of last year to this year.

Composite fibers results reduced earnings per share by $0.02, including a negative $0.02 impact from foreign currency. Advanced airlaid materials results increased earnings per share by $0.06, primarily driven by strong volume growth.

Specialty papers results increased earnings share by $0.07, driven by the lower costs of the annual maintenance outages. Higher corporate costs for professional services, incentive compensation, and the Fox River legal matter reduced earnings per share by $0.07. And income taxes reduced earnings per share by $0.03, driven by a tax benefit recorded in the second quarter of last year related to the release of reserves for the completion of tax audits during that quarter.

Slide 5 shows a summary of second-quarter results for the composite fibers business. Total revenue for this business was $136 million, a decrease of 3% on a constant currency basis compared to last year, with overall shipping volumes up 3%.

As a result of declining prices in 2015, selling prices negatively affected our operating profit by $1.6 million compared to the second quarter of last year. However, prices have been flat on a sequential-quarter basis for the last two quarters. Demand for tea and single-serve coffee products was down 1% compared to the year-ago quarter, but up 9% over Q1 of this year.

During the first half of the year, a few key customers have been reducing inventory levels. We expect this to extend into the third quarter, with shipments returning to more normal growth in the fourth quarter.

Shipments of wallcover products were up 12% this quarter, reflecting stable to improving demand in this market. While the economic situation in Russia and Ukraine remains difficult, we expect the improved demand to continue in the third quarter. And finally, we continue to see growth in our composite laminates products, with shipments up 4% compared to last year.

Overall, raw material and energy costs declined compared to the year-ago quarter. Continued tightness in the availability of abaca fiber has led to substantial increases in prices for this fiber. These increases have been more than offset by lower prices for purchase pulps and energy.

We continue to drive operational performance for our continuous improvement programs, but the impact was offset by higher depreciation expense and general cost inflation. Overall, operating profit decreased for the quarter to $15.3 million compared to $16.7 million a year ago, including a negative $1 million impact from foreign currency and related hedges.

For the third quarter when compared to the second quarter, we expect shipping volumes to be slightly higher. We expect selling prices and raw material and energy prices all to be in line with the second quarter. During the second half of the year, we will be taking some machine downtime to manage inventory levels. We expect the negative cost impact from this downtime in the third quarter to be offset by cost reduction initiatives.

Advanced airlaid materials results are summarized on slide 6. This business continues to perform very well, with strong growth in demand and operating income compared to the same quarter a year ago. This drove a significant improvement in EBITDA margins to 15% compared to 9.1% last year. On a year-to-date basis, EBITDA margins were 14.8%, the highest in our history.

Revenue during the quarter was $61 million, up 5% on a constant currency basis compared to last year, with shipments of 8%, driven by increased demand for hygiene products. The higher shipping volumes were partially offset by lower selling prices from customer contract provisions that require the pass-through of raw material cost changes.

Shipments of specialty wipes were down 1% during the quarter and up 2% year to date. We expect demand for specialty wipes to strengthen in the second half of the year compared to the first half of the year and prior year.

Operations for the airlaid business performed well, with less market and maintenance downtime than in 2015. Record airlaid production in our Canadian facility is supporting the growing demand in North America. As a result, operating income for this business increased to $6.8 million compared to $3.1 million last year.

For the third quarter, we expect shipping volumes to increase slightly compared to the second quarter. In addition, we expect average selling prices and raw material and energy prices to be in line with the second quarter.

Slide 7 provides a summary of the results for specialty papers. Shipments for specialty papers increased 2% when compared to the second quarter of last year. Growth in book publishing and envelope products more than offset the decline in carbonless products. Selling prices in the second quarter were below year-ago levels, resulting in a $3.7 million impact to operating profit.

During the second quarter, we began implementing the recently announced $60-per-ton price increase in a range of products. Based on current market support, we expect to realize about a third of the announced increase on most products.

During the second quarter, we successfully completed our annual maintenance outages at a total cost of $26.3 million compared to $33.4 million last year. The outages last year reflected a broader scope of work to address additional equipment maintenance.

Excluding the favorable impact of the outages, operations were unfavorably by lower pulp production rates compared to the record second quarter of last year and due to higher levels of incentive compensation. The net result was a $4.2 million improvement to operating results compared to the year-ago quarter.

For this business in the third quarter, we expect shipping volumes to be approximately 5% higher than the second quarter, with selling prices increasing slightly. Increases in raw material and energy prices are expected to slightly outpace selling price increases. We also expect maintenance spending to decrease by approximately $23 million, reflecting normal patterns of maintenance expense.

Slide 8 shows corporate costs and other financial items. During the quarter, corporate costs were $7.8 million compared to $3.9 million in 2015. The increase was driven by higher professional services, incentive compensation, and Fox River legal costs. We expect corporate costs to decline $1 million to $2 million in the third quarter compared to the second quarter.

Slide 9 shows our free cash flow. During the second quarter, on an adjusted free cash flow basis, we generated $15.7 compared to $5.7 million in the second quarter of last year. The improvement was primarily due to improved earnings from our businesses and lower routine capital spending.

Total capital expenditures have increased due to the airlaid capacity expansion project and specialty papers' boiler environmental compliance projects. We continue to expect total capital expenditures of $150 million to $170 million in 2016. Additional details on CapEx are provided on slide 14.

Spending on Fox River remediation in the first half of the year totaled $1.2 million. We continue to expect our total spending for 2016 to be less than $10 million.

Slide 10 shows some balance sheet and liquidity metrics. Our net debt at June 30 totaled $309 million, up $54 million from the end of 2015. The increase was driven by the $56 million spent in the first half of the year on our two major capital programs.

We finished the quarter with $59 million of cash and $258 million available under our revolving credit facility. Our balance sheet remains in good shape, with leverage on a net debt basis of 1.8 times. We believe this provides sufficient liquidity to meet our near-term investment needs and to continue to execute our growth strategies.

This concludes my comments. I will turn the call back to Dante.

Thanks, John. Following a year of significant macro-level headwinds in 2015, we have seen improvement in the first half of 2016, with adjusted earnings up 25%. For our composite fibers business, we are the global leader in markets like tea, single-serve coffee, and wallcover, with healthy long-term growth rates.

And we expect to continue working on building our positions in electrical products, dispersible wipes, and other technical specialties. The wallcover markets in Russia and Ukraine have stabilized and are now improving, and we expect this improvement to continue at least in the near term.

Prices for some of the key products in composite fibers declined in 2015 due to soft market conditions and increased capacity and competition. However in 2016, we have seen prices stabilize and in some cases improve.

Our specialty papers business continues to deliver on new product and new business development initiatives that are producing the 12th consecutive year of outperforming the broader uncoated freesheet market. We are seeing some benefit from price increases, albeit at a lower level than we would like. And we continue to make good progress in our environmental compliance projects in both facilities, which we expect to complete by the end of the year.

I'm very pleased with the first-half performance of our advanced airlaid materials business, with earnings up 59%. The stability of these markets and return to growth in our hygiene segment as well as the continued growth in specialty wipes is promising.

I'm equally encouraged by the Canadian operations team's ability to increase airlaid production to meet our customers' growing demand as we work to bridge the supply gap until our new capacity comes online.

The construction of our new airlaid facility in Fort Smith, Arkansas, is progressing as planned. This facility will add 22,000 tons of capacity to serve the growing demand for wipes and hygiene products in North America. We expect the facility to be operational in the fourth quarter of 2017, with commercial shipments beginning in the first quarter of 2018.

As we navigate through a slow-growth environment, Glatfelter will continue to leverage its capabilities and continuous improvement, cost management, and commercial excellence to bolster its leading market positions and maintain a competitive cost structure. This approach is focused on driving near-term results while preserving liquidity that can be utilized for targeted growth investments as we look to the future.

I will now open the call for your questions.

(Operator Instructions) Mark Wilde, BMO Capital Markets.

Dante, I wondered if we could maybe start in composite fibers. You could give us a little bit more color on this pickup that you are seeing in the wallcovering market. You sounded a little bit tentative in your comments about how durable that was going to be.

Sure. So as we said earlier, our volumes were up 10% in the quarter in that market environment, and currencies are more stable. It's still a recessionary environment, but if you compare it to 2015 when the Russian economy was down 4%, it's projected to be down 1.5% this year and maybe plus-1% next year.

So it's still tenuous and a bit volatile. So I want to be measured in my comments that we're pleased with the progress we are making. We are leveraging our leading market positions and the relationships that we have with all the major players.

We have expanded our product offerings to create greater optionality for our customers, and we remain positive about the longer-term growth prospects. And we expect the demand patterns that we've seen to continue in the near term. But it's difficult for us to be very specific about far out in the future based on what we see today.

Okay. Is it possible to get a sense of where that Dresden mill now is at right now in terms of either operating rates or margins? It was a very high-margin business when you acquired that several years ago.

I think margin-wise, it's certainly not at the level when we acquired it. But it compares favorably to the average margins we have for the business unit. So we have been able to manage the cost structure in a way that has continued pretty healthy margins, just not quite at the level where they were when we acquired.

From a capacity perspective, we are operating in the 80%-85% range of capacity utilization. So we still have a fair bit of open capacity.

Okay. And it sounded like over in food and beverage that this inventory issue that you talked about last quarter is carrying into the second half of the year. What would be a reasonable expectation, you think, for food and beverage when we think about the full-year for volumes?

So maybe I will add a few comments, and John, you can give some guidance. But the second quarter was actually a little bit better than we had expected. So the destocking in many ways just shifted a quarter, so that's kind of what we are seeing. And we do anticipate more normalized growth rates to resume in the fourth quarter.

From a year-over-year perspective, John, how would you like to guide?

We only provide guidance out for one quarter. So we've said that we expect overall shipping volumes for composite fibers to be up slightly in the third quarter. That would include some of this destocking in the food and beverage sector.

And as Dante said, we expect to get back to normal growth rates in the fourth quarter. And we typically are using 3% to 4% as the overall growth rate for the tea and coffee products.

Okay. All right, that's helpful. And then in airlaid, John, just kind of curious. Your volume was up almost 8% year on year. But if I look at your waterfall slide in that segment, actually all that volume had very little impact on EBIT. And that was a little puzzling to me.

Last year, we had some downtime in the second quarter, both because of some weaker volumes and also because we had a maintenance project on a winder. So we got a benefit from having more capacity utilization in the second quarter in the operation side, and we also had the record production in our Gatineau facility for the second consecutive quarter. So that helped.

So from the volume mix, the $700,000 is where we came out with the 8% growth. But we are able to take advantage of a better cost structure on the operating side.

Okay. And I wondered in that business, can you help us understand where the growth is coming from in hygiene versus wipes? And where that will shift, how that will shift once Fort Smith is up and running?

As I recall, when you first bought this business, it was primarily making absorbent core material. And it sounds like the mix has changed in the time that you've owned the business. And I just wondered what that looks like right now and what it's going to look like two years down the line.

Sure. So you are correct that when we bought the business, the vast majority was feminine hygiene and the vast majority of that category was the absorbent core that goes into the various femcare products. And in Q2, we had 8% year-over-year growth in our feminine hygiene business.

Our wipes are ramping up and we expect very strong demand in the second half as we manage the ramp-up process with our existing assets and bridge to the startup of Fort Smith. And for the year, we expect wipes growth to be above market levels, which are 5% to 6%.

So as Fort Smith becomes more operational and that adds 22,000 tons to our existing platform, it will be 120,000, 130,000 tons per year total of total capacity in the airlaid business, depending on basis weight, etc. But our modeling says we will push that closer to 130,000 tons, 129,000 tons.

So a big part of that growth and a big part of Fort Smith will be on the lower basis weight specialty wipes products. So you will see a higher contribution. And we're able to do this in a way that doesn't compromise our ability to meet the needs of our key femcare products customers today and into the future.

We will actually be able to establish Centers of Excellence and streamline our manufacturing processes and get greater production efficiencies as we allow certain machines to make products in certain basis weights that they are best designed to do. Not too dissimilar to what we did with CFBU as we built that business over time and added scale.

So we are optimistic about how we are going to manage the broader platform, how we will establish Centers of Excellence, how adding Fort Smith doesn't cost us a lot of additional money from a G&A point of view and why we think this will give us a nice lift in terms of the overall profit profile and cash flow profile of the airlaid business, once we get into 2018 and 2019, when Fort Smith is generating EBITDA and bring a little of additional balance to the portfolio, which I think is a good thing. And at the same time, sending a message to all of our customers that we are willing and able to continue to support their growth. So I think it's a good story.

All right. The last thing I wondered about is just price/cost in the specialty business in the third quarter. I think, John, you gave us part of the answer in your comments. You said you expected only about a third of that spring price hike to roll in, and I'm sure that doesn't roll in on all of your business.

So can you help us think about just the net effects on positive price in the third quarter? And then where are you really seeing the inflationary cost pressure on your inputs?

Sure. So on the $60-per-ton increase that was announced on the range of products earlier this year, and I think this has been well reported, we expect we will get about a third, so about $20. We began implementing that April 1. So it gets phased in over the quarter.

So just round numbers, we realized about half in Q2. We expect to realize the other half of the $20 in Q3. And so from a -- and that's on a limited amount of our volume, about 500,000 tons over an annual period.

From a info cost perspective, the largest driver here is wood costs. So we tend to start to purchase more wood in the third quarter, both because our annual maintenance outages are behind us and because we begin to build some inventory for the winter months, where it's harder to source wood during the cold weather periods.

And so we expect prices to move up a little bit on wood. And then softwood pulp prices increased as we went through Q2, and we expect they might be up a little bit, maybe flattish in Q3. But when we compare a full Q3 versus Q2, we expect it to be up a little bit. And so those are the two primary drivers of the cost increase.

Okay, that's great. Thanks, guys. I'll turn it over.

Debbie Jones, Deutsche Bank.

I wanted to talk about the comments you made about the downtime in composite fibers. I think you said this will be offset by cost reductions. And I just wanted to talk about how that's achievable, one.

And then, two, just given that you are calling for modest volume growth, the assumption, I think, is that you should see higher earnings sequentially in composite fibers in Q3. And I just wanted to make sure that that was what you are implying.

Sure. So yes, so we will take some downtime, and we've had a long track record of using our continuous improvement initiatives to help drive down overall costs. And so we will continue to do that. So this is a combination of some project-based work. It's also very closely managing other costs in the business.

And so as we take some downtime, which has a fixed-cost penalty, as we look through the third quarter, we expect that that cost penalty will be offset by those cost initiatives that, again, are part of our ongoing continuous improvement program.

As we get to Q4, that is -- our view there is still being developed. We will expect to take some downtime in Q4 as well and we are working towards how to offset that. So our guidance for composite fibers for Q3 was volumes up slightly and then raw material selling prices and raw material and energy prices overall to be in line with Q2. So that would imply slightly higher earnings in Q3 versus Q2.

Okay, thanks. That's helpful. And then looking at specialty papers, there's a lower pulp production impact and the higher incentive comp. I think it was a bit more of a headwind than I had expected. Could you just talk about how that fared relative to what you thought going into the quarter?

Sure. So the incentive comp, we are talking about a quarter-over-quarter view -- I'm sorry, a year-over-year view. So Q2 of this year versus Q2 of last year. You may call that we had a pretty difficult Q1 of a year ago and we had -- so we had the boiler issue in Pennsylvania. And so from a short-term incentive comp perspective, we were not forecasting to hit the internal targets.

The situation is different this year. We have talked about the improvement in overall profitability. So both Q1 and Q2 profits were up compared to a year ago. And we are projecting that we will achieve the incentive payout. So that is a cost that we didn't have a year ago because of lower profitability.

As far as pulp production, we had record pulp production in the second quarter of last year. We had some issues with water quality that affected the pulping operation after we started up from the annual outage in Ohio. And that took a couple bit of time to resolve. It has been resolved and production got back to normal levels in the second half of June. But it did impact the full quarter.

Certainly we are working hard to make sure that we produce as much pulp as we can. It's a significant driver of the overall profitability of the business. So we are looking to improve on that in Q3. But that's what impacted it from a Q2 perspective.

Okay, that's helpful. And then just last question. I was wondering if you can give us just maybe a time frame for even understanding how the Fox River spend could impact 2017. Because it sounds like the $10 million you are anticipating for this year is not changing. I'm just trying to get a sense of how this could then impact your cash flow next year. And if you don't know, when we might know.

So the remediation work is not planned for 2017 this point. There is only broad outlines of what the work will be. And so it's a little bit difficult to give real clear guidance. But based on our view of the situation and what we think is our responsibility at this point, we would expect 2017 to be similar to 2016.

We do have the trial coming up in March and there are a number of different legal issues that could have an impact on who pays for remediation in the near term. But based on what we see today, we expect 2017 will be a similar type view as 2016.

Okay. Thanks and I'll turn it over.

(Operator Instructions) Dan Jacome, Sidoti.

Just quickly on CapEx, I know your full-year guidance didn't change. But it looks like the part for the environmental compliance stepped up by about $5 million. Not to be nitpicky, but can you just elaborate on what drove that? And do you think there's any more risk that that could creep up, or you think you have it pretty much all baked in into what -- for your guidance?

Sure. So the total project costs estimate that we have has not changed. It's just a little bit of timing between 2016 and 2017. So in our last quarter, we had guided 2016 to be $40 million to $45 million and 2017 to be $7 million to $17 million. So we have essentially just shifted $5 million from 2017 into 2016 based on the timing of work. So that's all that's happening there.

Okay, got you. And then did you give us an update on the timberland? I think you still have about 8,000 acres in Delaware, if I'm not mistaken. Sorry if I missed it.

That's right; we have 8,000 acres in Delaware. We sold most of the rest of our land last year. There's not a whole lot of activity in Delaware. It's still pretty difficult market from a land perspective.

So we continue to stay close to the market and our understanding of what the pricing is and the opportunities. And if we are able to get what we think is a fair price, we will sell the land. But we just haven't gotten to that point in. So again, it's a little bit difficult market. And we intend to hold it until we get what we think is an appropriate price.

Okay, thanks a lot. Understood.

Mark Wilde, BMO Capital Markets.

Dante, I wondered -- just thoughts on any Brexit fallout for you guys? I know that you have two or three facilities in the UK in composite fibers.

Sure. Yes, we do have two facilities in the UK, one in England, one Wales. It's still very early and there's a lot of negotiation that's going to take place over the next couple of years. But we don't expect an impact on our business or our markets based on what we see and know today.

Okay. And the other thing I wondered about. Just any general view on where capacity is moving in the airlaid business. Just other capacity additions out there? I know this is a business which has encountered oversupply at points in the past.

Right. Yes, to my knowledge, there's no new announced capacity coming to the market. So our announcement of Fort Smith is the new capacity. So things remain pretty stable in the other regions of the world.

Okay. All right, that's helpful. Listen, good luck in the second half of the year, guys.

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

Okay. Well, thanks, everyone, for joining us on our call today. And we look forward to speaking with you next quarter. Have a good day.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.