Magnera Corp (MAGN) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Glatfelter's Third Quarter Earnings Call.

(Operator Instructions)

Thank you.

I would now like to turn the conference over to Mr. John Jacunski.

Sir, you may begin your call.

Thank you, Paula.

Good morning, and welcome to Glatfelter's 2017 Third Quarter Earnings Conference Call.

This is John Jacunski.

I'm the company's CFO.

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 2016 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.

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 results.

As noted on Slide 3 of the presentation, we generated adjusted earnings per share of $0.50 for the quarter on revenues of $413 million.

The top line grew slightly over the same period last year on a constant currency basis, and although EPS was lower than prior year quarter, adjusted EBITDA increased just over 3%.

Composite Fibers and Advanced Airlaid Materials recorded strong revenue and profit growth during the quarter, while the Specialty Papers business continue to operate in a very challenging North American uncoated free sheet market.

When combined, our engineered materials businesses, which represent about half of our total revenue, delivered profit growth of 21% and supported our overall growth in adjusted EBITDA.

This illustrates the value of our robust engineered materials businesses providing the needed diversification to our portfolio as we seek to expand our growth platforms.

For Composite Fibers, shipments in the quarter were up 12% compared to last year, with operating profit increasing 17% and operating margins expanded significantly.

Strong demand in all core product segments was a key driver of this growth, and we believe wallcover has turned the corner given the economic stabilization in the primary end markets of Russia and Ukraine.

This business unit has clearly returned to growth in 2017 as expected after a couple of challenging years.

As food and beverage products continue to serve as the backbone of this business, providing stable volume growth at GDP levels, wallcover, technical specialties and composite laminates are growing at a faster pace.

For Advanced Airlaid Materials, we delivered our best quarter ever with operating profit at $8.2 million, an increase of 29% from prior year and a substantial operating margin expansion.

Shipments were up 4%, driven by wipes and hygiene products.

This business unit is about to launch its new Airlaid facility in Fort Smith, Arkansas and will be transitioning from the construction phase to the commissioning and product qualification phases of the project.

Commercial shipments remain on track for the first quarter of 2018.

For Specialty Papers, 2017 has been an especially challenging year, as you know.

Shipments in the quarter were flat compared to last year, with lower average selling prices that resulted in 4% lower revenues and 33% lower operating profit for the quarter.

With industry operating rates at 89% year-to-date, the excess capacity and pricing pressures were headwinds during the quarter.

We have been aggressive in pursuing cost improvements that included taking steps to address capacity through the shutdown of a paper machine in Ohio, coupled with a 15% salaried workforce reduction, both of which were executed during the third quarter.

At a consolidated level, operating cash flow was solid and our balance sheet continues to remain strong with relatively low leverage and ample liquidity.

This concludes my opening remarks.

John will now take you through a more in-depth review of our third quarter results, and then I'll be back to provide some closing comments before taking your questions.

John?

Thank you, Dante.

For the third quarter, we reported net income of $12.1 million or $0.27 per share.

After excluding noncore business items, we reported adjusted earnings of $21.9 million or $0.50 per share, compared with $24 million or $0.54 per share in the third quarter of 2016.

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

Composite Fibers results increased earnings per share by $0.05, driven by strong volume growth of 12%.

Advanced Airlaid Materials results improved earnings per share by $0.04, driven by volume growth of 4%.

Specialty Papers results in earnings per share -- reduced earnings per share by $0.12, while shipping volumes were essentially flat due to continued supply-demand imbalance in the uncoated free sheet markets put significant downward pressure on selling prices.

Corporate costs improved earnings per share by $0.03, driven by lower legal expenses for Fox River.

Pension and net interest expense reduced earnings per share by $0.01 each, and taxes reduced earnings per share by $0.02, with a slightly higher tax rate this quarter compared with the year-ago quarter.

However, the tax rate on adjusted earnings was much more favorable than our expectations during the quarter, primarily due to a tax loss carryback opportunity, as well as the release of U.S. tax reserves upon the expiration of the statute of limitations during the quarter.

As noted in the past, the estimated tax rate is also highly sensitive to levels of income from Specialty Papers and pension expense.

As a result, there could be some volatility in the tax rate, but we expect a rate of 35% in the fourth quarter in 2018.

Slide 5 shows a summary of third quarter results for the Composite Fibers business.

Total revenue for this business was $142 million, an increase of 8.1% or 5% on a constant currency basis when compared to the prior year.

Shipments were up 12.1%, driven primarily by wallcover products and growth in other key product lines such as tea, coffee and electrical papers.

As Dante mentioned in his opening remarks, our wallcover business has benefited from the economic stabilization in the market served, along with our innovation and flexibility to serve changing customer needs with lighter basis weight products.

Selling prices were negatively impacted by regional mix and the competitive situation in select markets, and as a result, revenues were affected by $2.3 million compared to prior year.

Rising abaca and wood pulp prices resulted in an increase in input cost, with a total impact of $2 million.

However, higher shipping volumes, solid operations and benefit realization from our cost optimization program more than offset the pricing and input cost headwinds.

We are on track to deliver $10 million in savings for 2017 from our cost optimization program announced earlier this year.

Overall, operating profit for the quarter increased 17%, with EBITDA margins expanding 70 basis points to 16.5%.

For the fourth quarter, shipments are expected to be approximately 10% lower than the third quarter, driven by normal seasonality.

But we expect the majority of the impact of lower shipments to be offset by a favorable product mix.

Selling prices, as well as raw material and energy prices, are expected to be in line with the third quarter.

Slide 6 shows a summary of third quarter results for the Advanced Airlaid Materials business.

Total revenue for this business was $68 million, a 9.6% increase versus prior year and a 6.6% improvement on a constant currency basis.

Overall, shipments rose 4.2% in the quarter versus last year, with very strong growth in the wipes segment of 18%.

We are highly encouraged by this level of wipes demand as it underscores our business case for bringing the new Airlaid capacity to North America and we expect to be well positioned to serve this growing market.

Hygiene product shipments also grew at a solid pace, up 3.4% in the quarter.

Although average selling prices were higher during the quarter, it was largely related to contractual cost pass-through arrangements with customers.

This business continues to operate well and generate consistent solid performance with record-setting profit this quarter.

Operating profit was up 29% with income of $8.2 million.

EBITDA margins also expanded by 170 basis points this quarter to 15.8%.

As Dante indicated, we are nearing completion of construction of our new Airlaid facility in Fort Smith, Arkansas that is slated to add 22,000 tons of capacity to the North American Airlaid market.

Product qualification is expected to begin next month, with commercial shipments commencing in the first quarter of 2018.

In addition, this business unit is going live on new manufacturing and business systems in North America during the fourth quarter, with implementation at our European site to follow in early 2018.

For the fourth quarter, we expect shipments to be approximately 3% lower than the third quarter due to normal seasonality.

Selling prices and raw material energy prices are expected to increase slightly.

With the start-up of the new Airlaid facility, we anticipate overall shipments for 2018 to be 10% to 15% higher than 2017 levels.

With shipment growth in the first quarter likely to be a bit below this range as we complete the product qualification process and ramp up the new line.

Slide 7 provides a summary of third quarter results for Specialty Papers.

Total revenue for the business was $203 million or 4% lower than last year.

Shipments were essentially flat for the quarter but fared better than the broader North American uncoated free sheet market, which was down 1.9%.

This has been an especially challenging year for Specialty Papers with the prolonged supply-demand imbalance.

Industry operating rates are below 90% on a year-to-date basis, with the results in pricing pressures impacting results.

Average selling prices were $43 per ton lower during the quarter compared to last year, resulting in a $6.5 million adverse impact to operating profit.

The business generated operating income of $12.5 million during the third quarter, 33% lower than last year.

We incurred cost penalties from micro-related downtime in the third quarter of $3.3 million, but this was completely offset by cost reductions and productivity improvements achieved during the quarter.

As you may recall, in the third quarter, we announced and shut down Paper Machine 24 at our Ohio facility, eliminating 80,000 tons of capacity, which equates to approximately 1% of the uncoated free sheet market.

In addition, we reduced the business units salaried workforce by 15%.

We expect to realize $9 million in annual cost savings from these measures and to be at the full run rate beginning in the fourth quarter.

Since the time of our announcement, there have been additional industry capacity reduction or conversion announcements, aggregating approximately 6% of market capacity.

This led to a $40 per ton price increase announcement on most uncoated free sheet grades in anticipation of rising utilization levels.

We are working to implement the increase, although it is too early to gauge realization rates.

For the fourth quarter, we expect shipments to be approximately 5% lower than the third quarter, reflecting normal seasonality.

Selling prices are expected to be in line with the third quarter, and raw material and energy prices are expected to increase.

We also project an additional $1 million in cost savings compared to the third quarter, as we achieve the full run rate on our cost savings initiatives.

Slide 8 shows corporate costs and other financial items.

During the third quarter and similar to prior quarters, we incurred costs related to the start-up of our new Airlaid facility in Fort Smith, Arkansas, expenses related to our cost optimization program and residual spend on the environmental compliance projects in Specialty Papers.

For the third quarter, the cost optimization actions included severance and other expenses for the Specialty Papers salaried workforce reduction and the paper machine shutdown announced in July.

These costs were excluded from adjusted earnings.

Corporate cost during the third quarter were down $1.5 million compared to last year due to lower Fox River legal costs.

We expect corporate costs in the fourth quarter to be in line with the third quarter.

Slide 9 shows our free cash flow.

During the third quarter, cash flow from operations was $24 million, $1.2 million better than a year ago and driven by a slightly higher EBITDA and lower cash usage from working capital.

Total capital expenditures for the quarter were $5.5 million lower compared to last year, reflecting lower spending on our major capital programs.

As communicated last quarter, we paid $9.5 million to Georgia-Pacific during the third quarter as part of the resolution of certain claims in the Fox River matter.

In addition, the NCR consent decree we reported earlier this year was approved by the court.

The NCR consent decree and the agreement with Georgia-Pacific clarified the division of responsibility for remediation and long-term monitoring maintenance in the River post-remediation.

This outcome was contemplating the reserves previously established, and no reserve adjustments were made during the third quarter.

Slide 10 provides additional detail on capital expenditures and related costs.

We expect our capital expenditures to be between $130 million and $135 million for 2017.

With the conclusion of the Fort Smith investment, we expect total capital expenditures to return to more normalized levels in 2018 in the range of $65 million to $70 million.

Slide 11 shows some balance sheet and liquidity metrics.

Our net debt at September 30 totaled $386 million, up $69 million from the end of 2016, primarily on account of the major capital programs and seasonal working capital use.

We finished the quarter with $84 million of cash on hand and $93 million available under our revolving credit facility.

Our leverage was at 2.4x at the end of September based on net debt and adjusted EBITDA.

Liquidity is so strong and ample for the pursuit of our growth initiatives.

This concludes my comments.

I will turn the call back to Dante.

Thanks, John.

As you can see, our third quarter results continued to demonstrate the ability of our engineered materials businesses to deliver meaningful growth.

These growth platforms serve as a vital component of the portfolio given the challenging dynamics of our Specialty Papers business.

Looking ahead, our fourth quarter is positioned for a solid finish to the year.

We expect that our engineered materials businesses will continue to perform well, while Specialty Papers focuses on reducing costs and optimizing its performance.

Our Composite Fibers business is expected to deliver volume and profitability that is consistent with normal year-end seasonality.

We're also on track to generate $10 million in savings from the cost-optimization initiatives undertaken earlier this year, thereby creating operating leverage as shipments continue to grow in 2018 and beyond.

With leading global market positions and strategic relationships with long-standing customers, this business is known for service excellence and consistent high-quality products with attractive long-term growth prospects.

Market conditions for this business have improved, with more predictable customer order patterns and a return to solid shipments in almost all product categories.

In Advanced Airlaid Materials, we expect a strong finish in 2017 with volume and profits adjusted for normal year-end seasonality.

Key focus here will be on starting production at our new 22,000-ton facility at Fort Smith, Arkansas, with commercial shipments beginning in the first quarter of 2018, contributing to our expectation of shipment growth for this business of 10% to 15% next year.

This expansion will add scale, enhance long-term growth prospects and improve the overall margin profile of the business.

This business unit will also be going live with new information systems late this year and early next year to fully integrate its 3 mills.

And Specialty Papers continues to operate in a challenging environment.

However, due to recent market announcements of paper machine shutdowns and conversions of about 6% of uncoated free sheet capacity, including our own paper machine in Ohio, we expect to see industry operating rates improve in the near term, offering support for the recently announced $40-a-ton price increase on most uncoated free sheet grades.

Additionally, the cost reduction actions that we took in the third quarter, along with the paper machine shutdown in Ohio, will yield additional benefits in the fourth quarter with annual run rate savings of $9 million.

From a capital perspective, the completion of the Fort Smith facility will conclude our major CapEx programs for the past few years, and when coupled with strong earnings growth from this investment, will significantly improve our cash flow profile in 2018.

Before I conclude my remarks, I'm pleased to share with you that our Advanced Airlaid Materials and Composite Fibers businesses have both received Supplier Recognition Awards from Rockline Industries, a key strategic customer and one of the world's largest private label manufacturers of wipes and beverage filtration products.

Advanced Airlaid Materials was recognized for exemplary core values and excellent service, while Composite Fibers was recognized for its outstanding new product development work in the area of dispersible wipes and for overall teamwork.

These awards reflect our commitment to innovation, customer service, ethical business practices through strong core values and our ability to develop long-term strategic partnerships with our customers.

The strong collaboration of our commercial and operations teams working together across business units to service an important customer made such recognition even more rewarding.

I'll now open the call for your questions.

(Operator Instructions) Your first question comes from Debbie Jones of Deutsche.

I wanted to start by talking about Composite Fibers.

Can you just discuss kind of how wallcover shipments fared versus your expectations?

What was really -- and I think, it's clear that there has been a return to growth, but is there anything abnormal about the number?

And then how -- what you're seeing right now is expressed in your Q4 guidance and your kind of longer-term outlook for growth in that segment?

Sure.

Let me give you a few comments on wallcover in Russia, Ukraine and -- more specifically.

Clearly, the market is more stable, and we're very pleased with the third quarter year-over-year growth of 30%.

And I think when you couple that with Q2 growth of 11% and Q1 growth of 5%, we clearly see a pattern that the markets have turned the corner.

And even when you look at our last 2 quarters, the volumes that we shift are really back to pre-crisis levels.

So I think that's all very encouraging.

The Russian economy and the ruble are relatively stable and have been for some period of time.

As we announced in previous calls, a smaller Scandinavian competitor exited the market, which created some opportunities for us.

And it's still in the same part of the world.

So there is geopolitical risk and it makes forecasting a bit more challenging and can lend itself to more uncertainty.

But with all this being said, we believe the markets turned the corner, we're very pleased and we like the trajectory of the business.

Okay, great.

The second question is, though your guidance is pretty favorable, when I look at the comments about the sequential raw material inflation could you just give us a sense of what you're seeing right now and how impactful you think that's going to be in some of it?

I think don't you really have a tremendous amount of hurricane-related expenditure, but what are you really seeing and should we expect this to kind of stay through 2018 as well, at least in the early part?

Sure, Debbie.

So I'd say that there's 2 primary areas where we're seeing the more significant cost inflation.

One is just pulp prices.

So as you know, pulp prices have moved up pretty significantly over the last year.

So that affects all 3 of our businesses, although we do have a cost pass-through arrangements for our Airlaid business.

But that is certainly impacting cost.

And then I would say, while we don't have any direct hurricane impact, wood cost for Specialty Papers, we're seeing some inflation there.

Some of it's just normal seasonality as we build wood inventories were going to the fourth quarter, but there's also been an increase in wood demand presumably as part of what would be a rebuilding effort.

So we're seeing a little bit more inflation there.

I would say, if you look at our guidance, Composite Fibers we expect overall raw material energy prices to be in line with our third quarter and the fourth quarter.

Specialty Papers, we should -- we expect to see some inflations as I talked about, and I think that pulp prices are up about $30 a ton, and that represents a ballpark $400,000 to $500,000 impact for us, and I would expect the sort of a similar magnitude on wood.

So I think that the raw material side could be $1 million to a little over $1 million [hurt] for the fourth quarter compared to the third quarter for Specialty Papers.

That's helpful.

And just last question.

Could you give us a sense of where you think your leverage might be at the end of the year and just how you think about that level going forward?

I think it will be very similar to where we're at today.

So typically, we get a pretty significant working capital benefit in the fourth quarter.

So I don't expect any significant change from the 2.4x level at the end of the year.

And certainly as we've talked about with CapEx coming down next year, we expect a very favorable cash flow, and that will serve to reduce our leverage as we build for 2018.

Your next question comes from Anojja Sha of BMO Capital Markets.

I wanted to ask about Composite Fibers also.

You did mention some pricing decline there even with really impressive volumes.

Can you just talk about that a bit?

Sure.

So pricing was impacted by varying levels of competition.

We also have some mix within product lines and across customer segments and geographies that all kind of play the role.

Obviously, competitive activity across certain segments is also a factor.

But as I said earlier, the markets continue to absorb this new inclined wire capacity that was brought into the market a few years ago, which is pushing up operating rates and could be helpful to us as we enter 2018.

So I think the teams are doing a very good job of managing its scale, its cost optimization, its leading market positions to find a correct balance for us to optimize the performance of the business, and we're -- we think we're well positioned as we roll into 2018.

Right.

Okay.

And then for 4Q, you noted a 10% volume decline sequentially.

And I know you've called it -- called out that it was seasonality, but which end markets in particular have that sort of seasonal cadence?

Yes.

The 2 markets that tend to be most subject to the seasonal fluctuations is wallcover and our metallized products.

So those will be the big drivers.

We do expect that most of the impact of that lower volume would get offset by an improved mix in the quarter.

We do expect some improvements in our food and beverage shipments.

But generally speaking, it's wallcover and metallized, which is -- this decline is consistent with what we saw last year.

So it is truly seasonal.

Right.

Okay.

And then final one for me.

Two coated free sheet producers shut down recently.

Should we expect any further benefit from that for you?

Or are there any implications for you?

I think making specific judgments about individual companies is very difficult.

I would just say, that bigger picture, whatever happens across industry players, coated and uncoated, to help printing and writing operating rates get into the low 90s and stay there for some period of time would be viewed from our vantage point as constructive.

And so we can only focus on the things we can control, and that's what we did with our PM24 in Ohio.

But I think it's constructive for producers to see that actions are being taken across the board that can provide more stability and can help prop up operating rates.

(Operator Instructions) Your next question comes from Kurt Yinger of D.A. Davidson.

A couple of quick questions.

Just trying to take your temperature on freesheet.

And obviously, RISI had shown some pricing momentum.

I'm curious if you can sort of refresh us on your volume type to those published prices and maybe your operating rates in the quarter with the machine closure?

Sure.

So as John said earlier, we're working with customers to implement the announced price increase, and to piggyback on the previous question.

All of the recently announced capacity closures and potential upcoming conversions, which are at least that's 6% of industry capacity are certainly constructive and supporting the environment to facilitate these discussions with customers.

It is a bit too early to assess the final realization levels.

We'll have a better view of that by the second quarter of 2018.

And John do you have any comments on operating rates for?

Yes.

We had a little bit of downtime in Q3, but it was around the 10,000-ton range.

So it's not a significant amount of our overall capacity.

It's about -- we were operating in the 96% range or so.

And I think the final part to your question, Kurt, as we used to say, roughly 500,000 tons or so of our SPBU portfolio would to track with the broader uncoated free sheet market.

Taking out 24, which was about 80,000 tons a year of production, you should estimate somewhere in the 400,000 to 425,000-ton level as where white paper pricing could roll through SPBU's P&L.

Great.

That's really helpful.

Just next, I don't want to get into the weeds too much, but it seems like on the consumer product space, some other producers have talked about sort of a highly competitive landscape and seeing as some of your end markets are similar in Airlaid, I was curious if you could talk about your confidence in demand outlet and how much of that is tied to some of the preliminary commitments to the volume out of Fort Smith?

Yes.

So I think as I can speak for our businesses that I think we have a very clear line of sight, and we said that from the very beginning, to support the Fort Smith investment.

And so I think that's what gave us confidence to give guidance for the Airlaid business to show 10% to 15% volume growth.

And as long as we continue to operate with our continuous improvement mantra, stay lean, be good innovators, stay close to customers and provide them compelling service propositions and product offerings that meet their needs, I think we'll continue to do just fine.

Okay.

And then if we sort of dig into that 10% to 15% volume growth, what kind of capacity utilization does that assume from Fort Smith?

I mean, I guess my back-of-the-envelope math, sort of gets to maybe 50%, I mean, is that a level where you think that can be sort of EBIT breakeven in 2018?

So, Kurt, I would look at our capacity in North America altogether versus just at Fort Smith.

As we talked about, we grew our wipes business pretty significantly in Q3 as we have been over the last year or so.

And so we will be transferring some volume from our Canadian facility down to Fort Smith.

So if we look at our North American capacity utilization, we're in that 10% to 15% growth level next year, we would be in the capacity utilization range of 75% to 85% range for North America.

So we still have some good growth that we can still generate in 2019 and 2020 from that capacity but the overall utilization would be 75% to 85%.

And I think there was one other piece of your question I may have missed?

Yes, I mean, just on sort of the EBIT breakeven and incorporating some of maybe the higher D&A going into next year.

I mean, how do you sort of look at that from a profitability standpoint sort of tackling on to 2017?

Yes.

Clearly, we will be -- it will generate EBIT.

It's a lean operation, so we're operating as another line from our Canadian facility.

As we talked before, we expect that margins from this facility will be higher than our current average, because we don't have to have a lot of overhead and there are some logistics benefits from being in the southeast part of the United States.

So I think using our existing profit margins even at these sort of lower operating levels is very reasonable.

Okay.

And then just final housekeeping.

Looking at the $2.6 million that was excluded associated with the Airlaid's start-up, as you get into, I guess, the qualification in the fourth quarter and start to ramp that up in the shipments in the first quarter of '18, I mean, will there be a profitability drag as you don't really have any revenues associated with the qualification runs?

Or how should we think about that going through the next 2 quarters?

No, I think we provided a little bit of guidance on that.

So if you look at Slide 10, we do expect to have some additional P&L costs hits that as we have been, we will carve out of adjusted earnings.

So that's about estimated about $3 million largely in Q1 of next year as we complete the qualification process and then begin to make the commercial shipments from that facility.

So no, I don't expect there on our adjusted earnings basis, we don't expect there to be a drag on earnings from those costs.

We will have a little bit of cost in 2018 but we will carve them out of earnings as we have been.

Okay.

So the costs associated with, I guess, the qualification runs will be carved out?

Is that the right way to think about it?

Yes.

At this time, we have no further questions.

I will now turn the floor back over to Dante for any additional or closing remarks.

All right.

Well, thank you all for joining us today.

We look forward to speaking with you next quarter.

Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes today's call.

You may now disconnect.