Magnera Corp (MAGN) 2018 Q1 法說會逐字稿

Good morning. My name is Amanda, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Glatfelter first quarter conference call. (Operator Instructions)

John Jacunski, you may begin your conference.

Thank you, Amanda. Good morning, and welcome to Glatfelter's first 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 2017 Form 10-K filed with the SEC and today's release, both of which are available on our website, disclose these 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 today to discuss our 2018 first quarter results.

Our engineered materials businesses delivered solid performance in terms of volume and profit growth despite a very challenging raw material inflation environment. As we have discussed on prior calls, our investments in these businesses have created a resilient, high-value portfolio containing strong platforms for longer-term growth.

We're also proud to report the successful start-up of our brand-new Airlaid facility in Fort Smith, Arkansas that produced and shipped commercial product in the first quarter. This is a major milestone for our Advanced Airlaid Materials business and for Glatfelter. The timely completion of this multiyear capital program, successful product and customer qualifications, high-quality levels and excellent machine performance were all made possible by the hard work and dedication of Glatfelter people. The team is really doing a great job.

Furthermore, as we strive to make Glatfelter a more focused growth-oriented company, we announced in February our decision to explore a range of potential strategic alternatives for the Specialty Papers business. We are still in the early stages of the process and have nothing new to report. There can be no assurance that the review of strategic alternatives will result in a particular outcome and we will not make any further comments on this topic during today's call.

Turning now to Slide 3 of the presentation. For the first quarter, we reported adjusted earnings per share of $0.19, down $0.20 compared to the prior year quarter, with nearly all of the earnings decline stemming from our Specialty Papers business, although the business units results were in line with our expectations. We are, however, quite optimistic about the positive impact the stronger pricing environment will have on future performance.

While total company revenues for the quarter were up 5%, higher shipments improved revenue in our engineered materials businesses by 14% or 2.4% on a constant currency basis. From an earnings perspective, a significant headwind from raw material price increases adversely impacted earnings per share by $0.14.

For Composite Fibers, first quarter shipments were up 3% with wallcover recording double-digit growth of 14% and technical specialties volume growing 8%. We also began to experience some success in raising prices on certain product segments. Favorable operations and foreign currency translation benefits mitigated substantial raw material and energy price increases. Overall, operating profit was up 6%.

For Advanced Airlaid Materials, first quarter shipments grew by 6% primarily due to a 19% increase in wipes volume. Other categories such as hygiene and home care also contributed to the strong growth. This business finished the quarter with operating profit of 2%. And with our new facility in Fort Smith operational and shipping commercial product, the catalyst for future growth is now in place.

For Specialty Papers, first quarter shipments were down 4.5%, reflecting the machine shut down in Ohio in the third quarter of last year. Operating profit was lower by $11.2 million, with half of this decline resulting from higher raw material prices. Profitability was also significantly affected by the transition costs of the machine shut down and the impacts of severe weather. However, during the course of the first quarter, the pricing environment was favorable with industry operating rates at 92%. This enabled us to achieve an average selling price increase of $33 per ton and volume growth of 1.3% when compared with the fourth quarter of 2017.

On a consolidated basis, operating cash flow was solid for the quarter and our balance sheet remains in good shape.

At this point, I'll turn it over to John, who will provide a more in-depth review of our first quarter results, then I will offer some closing comments for the quarter and forward look.

Thank you, Dante.

For the first quarter, we reported net income of $5.7 million or $0.13 per share compared with $11.6 million or $0.26 per share in the first quarter of 2017. After excluding noncore and nonrecurring business items, we reported adjusted earnings of $8.6 million or $0.19 per share compared with $17.2 million or $0.39 per share in the first quarter of 2017.

Slide 4 shows a bridge of adjusted earnings per share from the first quarter of last year to this year. Composite Fibers' results increased earnings per share by $0.01 driven by volume growth of 3%. Advanced Airlaid Materials' results were slightly higher. Specialty Papers' results reduced earnings per share by $0.18, with the primary drivers being higher raw material and energy prices, transition costs related to the paper machine shutdown in Ohio and the impact of severe weather during the first quarter. And net interest expense lowered earnings per share by $0.02 as a result of rising borrowing rates and higher debt levels.

Slide 5 shows a summary of first quarter results for the Composite Fibers business. Total revenue for this business was $142 million, an increase of 13% when compared to the prior year and flat on a constant currency basis.

Shipments were up 3% driven by strong growth in wallcover of 14% and technical specialties of 8%. Food and beverage volumes were up 1%. Growth in this market segment was limited as we transitioned a major customer to a new inventory management program. We expect healthy growth in this market segment as we move through the balance of the year.

Selling prices were up slightly from price increase initiatives as a result of rising input costs. We expect a more meaningful impact from these price initiatives in the second half of the year.

Results for the quarter were negatively impacted by higher raw material prices, primarily driven by purchased pulp. Industry benchmark prices for pulp are up about 23% compared to year ago and this drove a $3.5 million overall negative impact for the quarter from higher raw material prices.

Operations ran extremely well during the quarter to meet the healthy demand and contributed $2.2 million to the bottom line from production cost efficiencies. Operating profit for the quarter grew 6%, including a $1.3 million benefit from foreign currency translation. From a currency perspective, we continue to watch the recent fluctuation in the ruble as some of our Russian customers of wallcover and key products could be negatively impacted by a further weakening of this currency.

For the second quarter, shipments are expected to be 5% higher with an improved mix compared to the first quarter. Selling prices are expected to be in line with the first quarter, while raw material and energy prices are projected to increase moderately.

Slide 6 shows a summary of first quarter results for the Advanced Airlaid Materials business. Total revenue for the quarter was $70 million, a 16% increase versus the prior year quarter or an 8% improvement on a constant currency basis. Overall shipments rose 6% with wipes growing 19%, while hygiene product shipments were up 2%.

Our facility in Fort Smith, Arkansas produced and shipped its first commercial product during the quarter. And although the ramp-up of customer volume for this facility is a bit slower than planned, we expect to hit the targeted volume growth run rate in the third quarter. The new wipes capacity will help alleviate the tight supply-demand balance in our Canadian facility and address the growing demand for Airlaid products in North America.

Overall, profit for the quarter was up 2% compared to last year, with selling price and volume improvements being more than offset by higher input costs and other general cost inflation. Foreign currency translation lifted earnings and contributed $400,000 to the bottom line.

For the second quarter, we expect shipments to be approximately 3% higher than the first quarter while selling prices and raw material and energy prices are expected to increase slightly. In 2018, we expect our new capacity to drive a 10% to 12% improvement of overall shipping volume, with the majority of the growth coming in the second half of the year.

Slide 7 provides a summary of first quarter results for Specialty Papers. Total revenue for the quarter was $199 million or 3% lower than the same period last year. Shipments were down 4.5%, reflecting the impact of the paper machine shutdown in our Ohio facility in September of last year. While total volumes were down, we are working to improve the overall mix of products sold.

Engineered products continued to show signs of strength with volumes up 4.5% when compared to the year-ago quarter. Other segments within the portfolio that trended up were carbonless products, which grew 1%; and book publishing, which was up 5%.

Pricing dynamics for this business have improved significantly as industry operating rates have trended up to 92%. This has allowed price increases to gain traction, with additional increases announced over the last few weeks. While the impact of selling price changes was negative $700,000 in the first quarter when compared to last year, on a sequential quarter basis, prices were up $33 per ton.

Operating profit this quarter was affected by higher raw material prices, primarily wood pulp and energy inflation, with an aggregate impact of $5.6 million. In addition, profitability was pressured by continued transition costs related to the paper machine shutdown, severe weather and water quality issues during the quarter. We also continued to see elevated freight costs due to supply constraints in the trucking industry and depreciation was higher by $900,000, reflecting the impact of the environmental compliance projects completed last year. Finally, our workforce reduction efforts last year yielded savings of $4.3 million for the quarter, which provided some offset to these negative impacts.

For the second quarter, we expect shipments to be 5% lower compared to the first quarter as we enter our annual maintenance outage season. We expect this year's maintenance costs to be in the $26 million to $28 million range, elevated from last year due to a broader scope of work that includes cogent boiler and turbine generator maintenance which are on a more infrequent schedule. Average selling prices in the second quarter is expected to increase of $30 per ton from the first quarter. Raw material and energy prices are expected to increase slightly, but to be offset by seasonally lower energy consumption. Finally, operating costs incurred in the first quarter related to machine shutdown transition, severe weather and water quality issues totaling $5 million are not expected to continue into the second quarter.

Slide 8 shows corporate costs and other financial items. During the first quarter, we incurred onetime costs related to the start-up of our new Airlaid facility in Fort Smith and costs related to the exploration of strategic alternatives. We also received proceeds from some timberland sales and these items were excluded from adjusted earnings.

Corporate costs and pension expense during the first quarter were slightly lower than the first quarter of 2017. Looking ahead, we expect corporate costs in the second quarter to be in line with the first quarter.

Slide 9 shows our free cash flow. During the first quarter, although adjusted EBITDA was lower compared to last year, cash flow from operations was in line at $7.7 million, driven mainly by working capital improvements. Capital expenditures were also significantly lower in comparison with the completion of the environmental compliance projects last year. As a result, adjusted free cash flow was slightly better this quarter than the year-ago quarter. We expect 2018 cash flow to improve significantly with the major capital programs now behind us.

Slide 10 provides additional detail on capital expenditures and related costs. Our forts -- our facility in Fort Smith, Arkansas is largely complete with a total estimated capital spend of $90 million. Except for some residual start-up costs related to certain ancillary equipment and information systems, this now concludes our major capital programs over the last couple of years and we expect 2018 capital spending to be significantly lower in the range of $67 million to $72 million.

Slide 11 shows some balance sheet and liquidity metrics. Our net debt on March 31 totaled $389 million, up $23 million from the end of 2017, primarily driven by seasonal working capital use and the Airlaid capacity expansion project. We finished the quarter with $117 million of cash on hand and total available liquidity of $138 million. Our leverage was 2.6x at the end of the quarter based on net debt and adjusted EBITDA. Liquidity continues to remain strong and our balance sheet is in good shape to support our growth initiatives.

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

Thanks, John.

As I look ahead, I remain optimistic about the rest of the year for all 3 of our business units. Our engineered materials businesses are poised for longer-term growth with strong demand fundamentals, while Specialty Papers stands to benefit from favorable industry operating rates and improving pricing dynamics. Our Composite Fibers business continues to experience solid demand with a healthy long-term growth outlook for key product categories such as tea, coffee, wallcover and technical specialties.

In the near term, our efforts are focused on mitigating raw material price escalation through continuous improvement, pricing actions and volume growth. Over the long term, we remain committed to our strategy of developing innovative product solutions for strategic customers and being their supplier of choice.

Our Advanced Airlaid Materials business is poised for strong growth with the start-up of the new Airlaid facility in Fort Smith. As Airlaid demand remains robust, optimizing our facilities for the right product mix and geographic customer base will be an ongoing area of focus. Our near-term actions will be on continued successful execution of the Fort Smith facility to keep production and shipments on schedule while pursuing additional volume opportunities. We expect to see meaningful traction from these efforts in the second half of this year with total shipping volume for this business projected to grow at the lower half of our previous guidance.

For Specialty Papers, the favorable pricing environment, coupled with tightening capacity conditions, is encouraging and provides us the opportunity to be more selective with our mix as we strive to increase our exposure to more specialty grades, thereby improving the profit profile of this business. Our focus will also remain on our continuous improvement program to help offset the higher raw material inflation environment, which we are currently operating.

Finally, with the conclusion of our major capital programs, our cash flow profile is set to improve significantly after a couple of years of heavy capital investing. This cash generation will lower our leverage and provide the necessary liquidity to fund future growth initiatives.

I will now open the call for your questions.

(Operator Instructions) Your first question comes from the line of Mark Wilde from BMO Capital Markets.

First, Dante, I wondered if you could just give us a little more color on some of the drags in Specialty Paper in the first quarter, particularly things like these water quality issues?

Sure. So as John outlined, we did have higher freight costs and we had higher depreciation expense for the Boiler MACT conversion, which was a couple of million dollars.

And then, the other cost penalties are really from transitioning products and people related to the shutdown of PM24 in Chillicothe, which took place at the end of the third quarter, where we had more bumping and people moves than we had anticipated. And as we were moving products to different machines and getting the mill to rebalance, that had an impact on yield and uptime efficiency.

And then, the severe weather created issues with our water quality. So we had low water volumes; cold weather, which caused freezing. And so then we had low water levels that was much dirtier than typical and then the filtration systems get gummed up with extra solids in the water and so we had to curtail some of our steam generation and some of our pulp production. And so as we worked our way through this weather event, that had several knock-on events in the back of the mill. So that all totaled to around $5 million, which we would categorize as one-off and won't carry into the second quarter.

Okay. All right. And then, I wondered, just turning to Fort Smith, if you could quantify kind of how much of a drag on the Airlaid business Fort Smith might have been in the first quarter and then just help us cadence through as we move through the year and volume ramps up.

Yes. So Mark, the Fort Smith ramp-up, as we went through the start-up of the equipment, we carve those costs out of adjusted earnings. So you may see in the earnings reconciliation table, we had a few million dollars that were related to that. So in our actual operating profit for the Airlaid business, there's no negative impact from that start-up. The business actually had positive -- I mean, it was minor, but some positive earnings in the quarter from the beginning of commercial shipments in March.

And as we go forward, we would expect to see the facility ramp-up in the second quarter. We expect more activity. We expect to hit the sort of the planned levels of operation in the third quarter as we continue to see the customer deliveries ramp-up.

Okay. And did I hear Dante mention you thought that the -- you'd hit the kind of the low end of kind of prior guidance on volume this year for Fort Smith?

Right. So our prior guidance was that, for the business unit, we expected that our volume would grow 10% to 15% for the year. And we've reduced the top end of that guidance, we've left the bottom end intact. So we now expect 10% to 12% and that's really reflecting just a slightly slower ramp-up volumes with customers out of that facility.

Can you give us any more color on sort of are there customers you expected to get that you didn't get or just the customer pull is slower?

Yes. So I'm happy to address that, Mark. I'll reiterate that we're very excited about the start-up at Fort Smith and that the machine is running very well. So a lot of our internal metrics in terms of machine speed and quality levels are above targets already and the qualification of additional products is progressing well. So there are no fundamental issues with customers, technology, market at all.

As you can expect, it's complicated to synchronize all of the different moving parts of a multiyear greenfield capital build and coordinating with your customers and internal ramp-up rates. So as John said, while Q1 and Q2 shipments are bit lower than our original ramp-up estimates, we remain very optimistic about the near-term growth for the business. We still think it will help generate 10% to 12% or so volume growth for the Airlaid business unit as a whole during 2018. And we're excited that the catalyst for future growth is now in place and that the team did an outstanding job of getting it built correctly the first time. And we expect to be at full capacity in 2 to 3 years.

Okay. All right. That's good. And then, finally, just turning over to Composite Fibers. You mentioned that your beverage volume, your coffee volumes, you expected to kind of bounce back in the second quarter and through the balance of the year. I wondered if you could just give us food and beverage volume expectations for the full year? And I wondered if you're seeing anything right now in terms of the impact of the weaker ruble?

Yes. So for food and beverage, as John stated, we successfully installed a localized inventory program for a major customer during the first quarter and so that had an impact in the first quarter of invoiced volumes. So we expect to be above-market growth for the remainder of the year across tea and coffee and the fundamentals of these businesses still have very solid demand outlooks. And our positions with our key customers are very strong. We're going to...

Would you then put a growth number on the year?

I'm sorry?

Would you want to put a growth estimate out there for the full year?

I mean, I'll kick it over to John, but we typically don't put guidance on volume by segment, by year.

Yes, Mark. We say that the market for these food and beverage products is growing in the 3% to 4% range and, as Dante said, we would expect above-market growth rates as we go through the balance of the year. So it's -- that's somewhat dimensionalizing the expectation.

Yes. That's all I was looking for.

Okay. And then, regarding your question about the ruble and the Russian market environment, I would say that when we've seen currency volatility, it's had a more pronounced effect on wallcover versus tea products. I would say that I'd still categorize the market as stable. And we're pleased with our year-over-year growth. I mean, in the first quarter, wallcover was up 14% and that came off a very strong 2017 where we had 18% growth. The Russian economy is relatively stable. It's just we've seen a little uptick, about 10% weakening in the value of the ruble versus the euro. So we're kind of at that 76 level. And so that's an area where we start to pay closer attention.

And it's not just the translation value. It's the pace in which the exchange ratios move. And in this case, it's been a much slower and gradual move, which, as you might expect, is easier for businesspeople and markets to absorb as opposed to several years ago when we had a very volatile markets and substantially depreciating currency.

So it's just something we're paying attention to. The business environment remains steady. We expect solid demand to continue. And overall, I would say our wallcover volumes are around pre-crisis levels.

And yes, that's our current view of this market. And as we've said in the past, the geopolitical profile of the region makes forecasting a bit more challenging and can lend itself to a little more uncertainty, but our track record over the past several quarters now suggests that things are in much better position than they were a few years ago.

Your next question comes from the line of Debbie Jones from Deutsche Bank.

First question I wanted to ask is just on Composite Fibers. You've seen some decent inflationary costs like everybody else. What is the recourse here to really pass that through as the year progresses? And I'm wondering if this just means that you're kind of at peak margin here for the year in Q1? I'd like you to just clarify your guidance commentary. It seems that you're saying prices are in line, so I think that means flat and then costs continue to go up sequentially. Could you just clarify that for me?

Sure, Debbie. So as we mentioned, we have seen some price improvement, albeit it's been relatively minor. Oftentimes, price increases take a few quarters to be phased in and that's the situation we expect here. So we would expect that we will see better pricing in the second half of the year. We're not prepared to provide more specific guidance at this point on the pricing.

But we also mentioned that we expect pretty solid volume growth in the second quarter, up 5%, and we expect an improved mix. So as we've talked about, our tea and coffee volumes were up only 1% year-over-year and that was in part driven by this implementation -- this localized inventory program for one of our larger customers. And so we would expect the improvement in our tea and coffee volumes to also help improve our mix.

So we don't think by any stretch that we are at peak margin levels in the first quarter. As we look out for the balance of the year, we expect that the business has good opportunity to improve profitability as we go through this year.

Okay. That's helpful. My second question, just on the maintenance schedule. Was that some sort of accelerated maintenance that you were framing on? Or is this just like a typical tri-annual outage? If you could just explain a little bit more because I wasn't expecting that much of an uptick. I just modeled in what you had last year.

Sure. So this year's outages include some items that are done pretty infrequently. So on the cogen, we typically are taking an outage every 18 months and so it falls during this period this year. And then, some of the turbine generators, it's -- these can be 7- to 10-year cycles and, again, it falls this year. So it's a little bit of a heavier spend. So that's really the driver. It's primarily the maintenance dollars around those 2 items that we didn't have last year that fall into these same periods this year.

Okay. I guess, my last question then, just on the $5 million that you called out in Specialty Papers. I know you walked through it, but could you give us a sense of the magnitude here? I mean, I'm assuming the raw materials since you called them out, but was anything really contributing to more of it than the others?

No. I mean, I think the 3 items that we've highlighted are the real drivers. It was largely in the first half of the quarter, January, a little bit of February. So we feel pretty good that these items won't recur as we are in the second quarter.

Okay. Actually, can I just squeeze in here your -- how does your M&A pipeline look right now? Any kind of change over the last 6 months or so that is notable?

I mean, there's nothing specific to comment on, Debbie. As you might expect, it's an ongoing part of our work, but nothing specific to comment on.

(Operator Instructions) Your next question comes from the line of Steve Chercover from Davidson.

So first of all, how should we think about the run rate contribution from Fort Smith? What kind of EBITDA do you get in 2 or 3 years when it's fully ramped for $90 million spend?

So Steve, what we've commented on is that there's 22,000 short tons of capacity that comes on. From a selling price perspective, it's largely going to be in line with the broader Airlaid business. On the margin side, we would expect the EBITDA margins from this facility to be somewhat higher than our current average because we are -- we did not have to add much in the way of overhead. We get some production inefficiency benefits with a broader platform in North America. So we're not -- we don't -- we're not providing more specific guidance on that because of the nature of the situation, but certainly we expect margins to be somewhat stronger than what we currently have as an average.

Okay. And then, you indicated that, in Q1, higher pulp prices impacted by $3.5 million. Does the shutdown in Chillicothe help balance your pulp purchases? Or is this pulp being used elsewhere in your other businesses?

No. We had some -- the pulp really affected the price increases and pulp affected our Composite Fibers business as well as our Specialty Papers business. The shutdown of the machine in Chillicothe did help us to get to better pulp neutrality, not completely, but it put us closer to pulp neutrality. But as we talked, the -- some of the issues around the severe weather and water quality reduced pulp production in the first quarter and so we had to use purchased pulp in lieu of that own made pulp. And so we ended up with some additional cost inflation from the use of the purchased pulp. But as we go forward, we would expect that our Ohio facility is pretty close to pulp neutral, but not quite there.

Okay. And then, is your overall paper capacity actually going down? Will you be able to offset the lost capacity of that one machine by running the other remaining machines at higher operating rates?

We can do a little bit of that, but certainly we are not going to offset the full capacity. The full capacity of the machine was 80,000 tons on an annual basis. And so the amount we produced last year was at a run rate of about 60,000 tons. So I would say that 60,000 tons is largely not going to be replaced. There might be some incremental efficiency improvements that claw back a little bit of that, but certainly nowhere near the majority of it.

Your next question comes from the line of Howard Bryerman from PENN Capital.

Just a quick question regarding the balance sheet. Your 5.38% notes are coming due in a couple of years and they are currently callable. How are you looking at the refinancing of those notes?

So they're due in 2.5 years. We stay close to the market and understand where the market is at. As we mentioned in February and Dante commented on, we've announced our plan to look at strategic alternatives for our Specialty Papers business. So we will take all that into consideration as we consider when and what approach we'll take to refinancing those notes.

Your next question comes from the line of Dan Jacome from Sidoti.

Just a quick question on the specialty wipes. Obviously, some nice acceleration over the last quarter, but I'm assuming because of the Fort Smith. I was just wondering, was there any incremental demand creation for wipes that you guys have seen in last quarter or 2? Or was that 19% gain all coming from new capacity, et cetera?

Dan, I'm not sure I completely follow the question. We only ship a little bit of wipes out of our Fort Smith facility in the first quarter. So it was fairly small. So this wipes growth is largely being serviced through our Canadian facility, if that's what you were getting at.

Yes, that was terrific. Yes, that was my question. Because, I mean, it looks like it's just getting better every quarter, the shipment numbers that you put out for the wipes. Is the right -- am I reading it correctly?

Yes, you are. I mean, that's -- one of the primary drivers of the new capacity was aimed at the wipes market. And we've seen very solid growth over the last couple of years and that's expected to continue in 2018, particularly because of the Fort Smith facility.

Got it. Yes. Because I saw you did 11% in 4Q '17 and then you're now at 19%. So it's all coming from the legacy capacity and the market seems to be improving. All right. Okay. I just wanted to clarify that.

There are no further questions at this time.

I'll turn the call back to Dante for closing remarks.

Well, thank you for joining our call today and we look forward to speaking with you again next quarter. Enjoy the rest of your day.

This concludes today's conference call. You may now disconnect.