Magnera Corp (MAGN) 2018 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Glatfelter Second Quarter Conference Call.

(Operator Instructions) Thank you.

John Jacunski, you may begin your conference.

Thank you, Stephanie.

Good morning, and welcome to Glatfelter's 2018 Second 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 factors that could cause our actual results to differ materially from these forward-looking statements.

These statements speak only as of today, and we undertake no obligation to update them.

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

Thank you, John.

Good morning, and thank you for joining us to discuss our 2018 second quarter results.

As shown on Slide 3, this was a challenging quarter for Glatfelter with a loss per share of $0.10, including an $0.08 benefit from a favorable tax rate.

Revenue for the quarter was $406 million, up 2% on a constant currency basis.

Our engineered materials businesses continued to grow with a top line of 5% on a constant currency basis, but shipping volumes for Composite Fibers were below expectations.

The most significant challenge during the quarter was raw material cost inflation, in large part driven by significantly higher wood pulp prices.

Elevated raw material prices reduced earnings during the quarter by $0.18 per share.

Selling prices rose on all 3 of our businesses but significantly lagged raw material inflation.

Although the Advanced Airlaid Materials business has customer raw material pass-through arrangements that helped to maintain more stable margins, this isn't the case with Specialty Papers and Composite Fibers.

In addition, higher costs associated with Specialty Papers' annual maintenance outages this quarter significantly impacted profitability.

This year's outage costs were $29 million compared to $23 million last year due to a broader scope of work completed and a slower-than-expected restart.

This reduced earnings per share by $0.09 compared to last year.

Our new Fort Smith facility is running quite well and meeting our expectations.

We reached full staffing levels during the second quarter and ramped up production.

As a result, we are well positioned to capitalize on the strength of the North America wipes market.

However, we have reduced Advanced Airlaid Materials growth expectations for this year because of delays filling open capacity in Gatineau, Canada.

The delays are transition-related issues due to an extended product qualification process with certain customers and the open capacity is a result of moving some wipes production to Fort Smith, Arkansas.

We expect shipments will accelerate in the fourth quarter and continue to grow in 2019.

To supplement our existing airlaid business, we announced in June the signing of a definitive agreement to purchase Georgia-Pacific's European nonwovens business.

This business produces high-quality airlaid products for the table-top, wipes, hygiene, food pad and other nonwoven materials markets.

This acquisition also provides attractive synergy opportunities and a good return on investment, and we expect it to be immediately accretive to earnings.

We anticipate closing on this transaction by the end of the year after regulatory approval.

At this point, I'll turn it over to John, who will provide a more in-depth review of our second quarter results, then I will offer some closing comments along with a look ahead.

John?

Thank you, Dante.

For the second quarter, after excluding noncore and nonrecurring business items, we reported an adjusted loss of $4.3 million or $0.10 per share compared with an adjusted loss of $2.6 million or $0.06 per share in the second quarter of 2017.

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, driven primarily by significant escalation in wood pulp prices.

Advanced Airlaid Materials' EBITDA increased 12%, but operating profit was flat with volume growth of 6%, offset by higher depreciation expense from our new Fort Smith, Arkansas facility.

Specialty Papers' results reduced earnings per share by $0.11, with the primary drivers being the higher costs for the annual maintenance outages and higher raw material prices.

And lower taxes increased earnings per share by $0.08 from the recording of an investment tax credit related to energy efficiency improvements.

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

Total revenues grew 7% to $143 million when compared to the prior year or 1.5% on a constant currency basis.

Shipments were down 3%, driven largely by a 17% decline in metallized products and a 3% decline in wallcover.

Shipments of metallized products were impacted by industry overcapacity and product substitution.

We expect shipments in this market to remain at the lower levels seen in the second quarter.

Food and beverage volumes were up 2%, and technical specialties were up 18%.

We have seen good traction in our consumer products, particularly dispersible wipes, and we expect improved shipments of tea and coffee products as we enter the seasonally strong period.

Selling prices increased $1.5 million as we looked to address the sharp increase in wood pulp prices.

However, the competitive environment limited our ability to realize price increases necessary to fully offset input cost inflation.

Higher raw material prices negatively impacted operating profit by $4.3 million during the quarter.

Operations ran efficiently, delivering another strong quarter on the production side with disciplined cost control, improving earnings by $1.2 million.

For the third quarter, shipments are expected to be 8% higher than the second quarter.

Selling prices and raw material and energy prices are expected to be slightly higher.

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

Total revenue for the quarter was $73 million, a 16% increase versus the prior year quarter or 11% on a constant currency basis.

Overall, shipments rose 6%, with wipes growing 27% and hygiene products up 3%.

The increase in revenue also reflects the contractual pass-through of raw material inflation as fluff pulp prices continue to rise.

EBITDA for the quarter grew at a healthy pace of 12% year-over-year on the heels of strong growth.

However, operating profit was flat due to depreciation expense increasing $1.2 million with the Fort Smith facility now operational.

As Dante indicated in his opening remarks, the extended product qualification process with new customers targeted for Gatineau has slowed the pace of volume growth as we relocated wipes production to Fort Smith.

As a result, we now expect shipping volume to grow 6% to 8% for 2018.

For the third quarter, we expect shipments to be in line with the second quarter, while selling prices and raw material and energy prices are expected to increase slightly.

We also expect to take downtime in the third quarter to balance supply with demand with an adverse impact to operating profit of about $1 million.

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

Total revenue for the quarter of $190 million was 1% lower than the same period last year.

Shipments were down 6%, reflecting the impact of the paper machine shutdown at our Ohio facility completed in the third quarter of last year.

Previously announced price increases late last year and earlier this year led to average selling prices rising $39 per ton when compared to the first quarter and $58 per ton compared to the second quarter of last year.

Mix and selling price improvements helped to offset the impact from the lower volume.

Although overall volumes were lower in book publishing, envelope and forms, engineered products and carbonless performed very well with year-over-year growth of 8% and 9%, respectively.

Overall, the price impact was $4.2 million favorable in the second quarter when compared to last year.

This, however, was not sufficient to offset the higher raw material and energy prices, which amounted to a $6.1 million impact to operating profit -- I'm sorry, $6 million impact to operating profit.

During the second quarter, our mills completed their annual maintenance outages at a total cost of $29 million, up $6.1 million over last year and slightly higher than we guided.

The scope of work this year included maintenance on a cogen boiler, a turbine generator, which occur on a less frequent schedule.

In addition, cost penalties from a slower-than-expected restart of production negatively impacted results.

For the third quarter, we expect shipments to be 8% higher compared to the second quarter.

Selling prices are expected to increase $20 per ton, and raw material and energy prices are expected to increase slightly.

This volume guidance reflects the impact of a recent paper machine breakdown at our Ohio facility in the month of July as a press roll failed, causing a temporary halt in paper production on the machine.

The negative impact to operating profit in the third quarter from this disruption is expected to be in line with the cost of the operational events that we encountered in the second quarter.

Slide 8 shows corporate costs and other financial items.

Similar to the first quarter, we incurred onetime costs related to the startup of a new airlaid facility in Fort Smith and expenses related to strategic initiatives.

We also received proceeds from the sale of timberlands.

These items were excluded from adjusted earnings.

Corporate costs during the second quarter were below prior year due to lower Fox River legal expenses and lower incentive compensation expense.

Looking ahead, we expect corporate costs in the third quarter to be approximately $1 million higher.

Slide 9 shows our free cash flow.

During the second quarter, cash flow from operations was lower than last year due to reduced earnings and higher usage of working capital.

Capital expenditures continued to decline as we have now completed all major capital programs.

As a result, cash flow in the second half of the year is expected to improve significantly.

Slide 10 provides details on capital expenditures and related costs.

With our facility in Fort Smith fully operational, total spend for the project was $90 million.

Except for some residual startup costs related to certain ancillary equipment and information system, this concludes our major capital programs of the last couple of years.

We continue to expect capital spending to be significantly lower than the last several years and in the range of $60 million to $62 million.

Slide 11 shows some balance sheet and liquidity metrics.

Our net debt on June 30 totaled $414 million, up $49 million from the end of 2017, primarily driven by seasonal working capital use and cash outlay for the airlaid capacity expansion project.

We finished the quarter with $107 million of cash on hand and total available liquidity of $90 million.

Our leverage was 2.8x at quarter end based on net debt and adjusted EBITDA.

Liquidity is expected to improve by the end of 2018, and we continue to have the financial flexibility to pursue growth initiatives.

This concludes my comments.

I will turn the call back to Dante.

Thanks, John.

Although the second quarter results were below expectations, our engineered materials businesses continue to remain a robust component of the Glatfelter portfolio.

The recent challenges do not undermine the long-term prospects of this growth platform as the underlying fundamentals of the markets we serve remain healthy.

Composite Fibers is focused on leveraging its scale, deep customer relations and leading positions in high-value markets to drive long-term profitability.

Over the short haul, the business is expected to deliver improved shipment volumes as we enter the seasonally strong period for tea and coffee products.

Advanced Airlaid Materials is poised for strong long-term growth and will be further enhanced by the addition of Georgia-Pacific's European nonwovens business once the acquisition closes.

In the near term, the top priority for the business is qualifying products and customers to backfill the open capacity in Gatineau, Canada, while continuing to ramp up production at Fort Smith to serve the growing wipes market.

Specialty Papers resolved the operational issues with PM10 in Ohio and has resumed paper production on this machine over the last few days.

And with industry operating rates in the mid-90s, the market tightness is providing opportunities to keep our machines running full, optimize product mix and maintain higher selling prices.

Finally, regarding the review of strategic alternatives for our Specialty Papers business, that process is ongoing, and we expect to provide an update with our third quarter results.

I'll now open the call for your questions.

(Operator Instructions) And your first question is from the line of Debbie Jones with Deutsche Bank.

I'm just going to ask one question on each segment here.

The first is in Composite Fibers.

Can you give us a little bit more color on the wallcover demand decline?

And then just -- I'd like to understand the comments around, I think, a shift to substituted products and metallized products.

Is that just one customer or there's something more going on there?

Sure.

So regarding wallcover, year-to-date through the first half of 2018, our volumes were up 5%.

And as you may recall, in 2019, our year-over-year volume improvements were 19%.

2017.

2017, yes.

So what we're doing is we're settling into a more GDP level of growth, which is what we expect for nonwoven wallcover.

As you know, we have a fair amount of exposure in Russia and Ukraine.

And those market areas tend to be a little bit more uncertain and volatile and a bit more challenging to forecast.

We made reference to the relationship between the euro and the ruble in past calls.

I would say that that's backed off a little bit and stabilized.

And so I think we're settling into more what I would refer to as normal growth rates for nonwoven wallcover, which is GDP-ish type levels.

Regarding metallized, I think John made reference to this on more than one occasion over the last few quarters, and it was a particular product line that a major customer switched internally for packaging materials that created some volume decline for us.

And there is excess capacity in the converting business.

As you may call, this is not a major profit driver for our Composite Fibers business as it's typically a lower-margin converting business.

And during the quarter, we took a more aggressive posture on pricing to help mitigate some of the higher input prices, and that especially impacted our metallized business and our composite laminates business, which were the key contributors to overall volume miss.

Okay.

That's helpful.

And on specialized papers, the shipments down 6% year-over-year.

It's a little more than what we had modeled.

I'm curious if it's all related to the machine shutdown or if there's something more that drove it a little bit worse than expected.

Yes, Debbie, the machine shutdown that we referred to was in July, if you're referring to that press roll failure I spoke of, so that didn't affect the second quarter results.

The results, the shipments were a little bit lower really just with the extended outage and the start-up issues we had, that reduced paper production, and some of our other machines weren't quite as productive as we had forecast.

Inventories for this business are in reasonable shape, but we don't have a lot of excess inventory to make up for production shortfall.

So that resulted in [Advanced] being a little bit lower in the second quarter than what we had forecast.

Okay.

I just the [deck didn't] reflect the machine shutdown in September 2017, so a little confused about that.

Okay.

And then...

Oh, I'm sorry.

I'm sorry, Debbie, you're talking about the machine shutdown in Ohio in the third quarter of last year?

Yes.

Yes.

That is a driver of why year-over-year we're down 6%.

I was -- I thought you were speaking to why we were slightly lower than what our guidance was.

Then I can follow up with you afterward.

[I believe it] accounted for that, but I think I just need to dig a little bit more.

Okay.

And then just lastly, on Airlaid, again, the qualification process, does that involve a number of customers?

Or is there one in particular that is causing this delay?

Not that you can call that out, but just some color on exactly what needs to get done so that you can get that up and running from that perspective.

Yes, it's a small number of customers.

So I think the important messages here, there are no changes in the markets and no changes with technology.

And as you might appreciate, qualifying new grades and customers is a pretty dynamic process and one that we don't completely control.

So we view these delays more as transitory and expect the volumes to accelerate in Q4 and grow further in 2019.

And as we've said repeatedly, this business has a very long runway for growth.

And then as we look to the future of integrating GP's European nonwovens business after regulatory approval, we're very excited about the prospects for the business overall.

Your next question is from the line of Mark Wilde with Bank of Montreal.

I wondered, just to kind of start off, both in the slide deck and in your comments, you talked, John, about kind of the balance sheet allowing you to look at strategic growth even beyond kind of GP's European business.

Would you want to put a little color on sort of what areas you might be focusing on?

Mark, I'll take that one.

So as we've said in the past, we have an aspiration and a vision of becoming a leading global engineered materials company.

And we're in the midst of an ongoing business transformation, which you're well aware of.

And we are focusing on platforms that we think are best fit for our style of competition and where we have a proven track record of success.

And so in the broader nonwovens category, in hygiene and consumer products, those are areas that are attractive platforms.

The filtration area is another area that has attractive fit for us and adjacency.

We've talked before about the electrical space and the emergence of more battery-powered equipment and the role for cellulose and nanofibers as battery separators and things of that nature.

And then we've also talked about thermal and acoustic materials that could also be adjacent fits.

So those are the most likely platforms.

And of course, the better the fit and tuck in, the more highly synergistic and more accretive the particular acquisitions would be.

Okay.

And Dante, just sort on a related line, I mean, we had an announcement of a pretty large deal last week in the sort of Specialty Papers engineered materials business with Ahlstrom-Munksjö and Expera.

Any thoughts around the -- just sort of this ongoing process of consolidation in the space?

Well, I think that many senior management teams and Boards of Directors are looking at ways to further enhance shareholder value and to create a more sustainable business model that can generate better returns and stronger, more predictable cash flows.

And clearly, a level of consolidation and building scale economies into business platforms in large part makes sense.

The devil is always in the detail.

I would say that it's an encouraging data set that is also helpful to us as we think about our strategic reviews, Specialty Papers and how we want to invest and grow in our business.

But I do think that there will be continuing acquisition and consolidation activity.

And we stated that acquisitions will be an important part of our strategy as we look to the future as well.

Okay.

Then I noted -- your carbonless volumes I think you said were up 9% year-on-year.

That business has been in structural decline, so I'm just curious on what drove that kind of volume growth in the quarter.

We've had several wins in the market, and so -- and this took place over the last few quarters.

And so as we've picked up new pieces of business or new customers, and the transition has been taking place through the first half of the year, you're starting to see those higher volumes of carbonless roll through Specialty Papers' P&L.

Okay.

And then finally, just thoughts on your ability to be a little more aggressive on pricing in some of these markets where you have large market share, just given all of the cost pressure, not only from pulp but from freight and other issues.

Right.

So I'll take you business unit by business unit.

So for the Airlaid business, as you know, the vast majority, 90-plus percent of our customer arrangements have raw material pass-through provisions.

So that creates more stability and less volatility in margins period-to-period, especially in a market of transitioning input costs.

If you look at Specialty Papers, the operating rates are in the mid-90s.

You know or may have heard that another white paper price increase announcement just happened within the last couple of days.

So that's going to give our Specialty Papers business even more wind behind the sales and the opportunity to manage any cost price gap.

And so I think that's very encouraging for the Specialty Papers business.

And then for our Composite Fibers business, I made reference to the fact that we've taken a more aggressive posture in a number of our markets and segments and geographies around the world to test just how much of the input cost inflation we can offset.

As you know, it was a rather significant year-over-year impact for Composite Fibers, around $3.8 million.

And there are different operating rates in different product lines.

And so we've had some success as witnessed by about $1.5 million better pricing in Q2, but it wasn't enough to offset the rapid increase in pulp prices.

As we've given guidance, we expect pulp prices to flatten out.

And we'll see how the market starts to settle and digest, and we'll focus on optimizing our asset utilization through volume growth, our continued application of our continuous improvement and cost reduction initiatives and continue to assert ourselves as market leaders in a thoughtful way to just determine just how much of these input costs we can pass through to the market without doing any damage to the franchise.

(Operator Instructions) Your next question from the line of Steve Chercover with D.A. Davidson.

Just a couple of quick questions.

First of all, the most recent price hike announcement on freesheet that you just mentioned, is that incorporated in your $20 per ton benefit that's embedded in your Q3 guidance?

Or is that over and above?

Steve, no, that's not embedded in our guidance.

Those -- the announcement yesterday we saw is effective end of August and likely be -- will have little impact on Q3.

So to the extent it's successful, we'd expect it to start to impact Q4 and then more fully in Q1.

So the $20 per ton that we referenced is related to prior announcements.

Okay.

And I know that you're not immune to what happens in the more commodity freesheet arena, but you call it -- your division, Specialty Papers, so you'd think that there'd be perhaps a little bit more pricing power within the various specialty products that you make.

Is that not the case now?

So I would say that we have seen a rather substantial improvement in selling price in SPBU over the last several quarters.

It's been -- the view to that has been occluded by some of the -- one-off operational issues and the extended scope of our maintenance outage in Q2.

But we expect that the business is well positioned to see rather material improvement in Q3 in the second half of the year.

And with, again, operating rates in the mid-90s, we make reference to the fact that we can run our assets full, we can push to optimize our mix.

If you look at our engineered products volume growth, it was up 8%, a little over 8% in Q2.

It's up pretty strong year-to-date.

And so things like high-speed inkjet papers are doing quite well.

And as we have the opportunity to more aggressively explore growing those parts of the portfolio, we'll continue to do that.

Okay.

And then an unrelated question.

I saw a headline recently on Fox River, and I think it was something to the effect that NCR was no longer accepting the settlement or something to that effect.

Can you just, I guess, give us an update on what's going on with Fox River, the status, your reserves and whether you're re-examining the whole issue?

Sure, Steve.

There were a few developments for us in the -- since the first quarter, not necessarily related to what you've mentioned, but there was a District Court decision in February that was -- supported our position on the government's claim for past oversight cost.

And then in July, the court denied the government's motion for a reconsideration on this issue.

So we believe that the position that we've outlined regarding over-recovery on NRD and how it impacts the government's claims is positive for us.

And then secondarily, there was a bankruptcy court approval for the assignment of an escrow account to Glatfelter to our control for payment of ongoing costs related to Fox River.

And so this is related to a company that had made prior contributions to remediation and the monitoring and maintenance of the remedy that went into bankruptcy.

So during the quarter, this added $4.7 million to our assets on our balance sheet and we increased our accrual by $4.7 million, so just grossed up the balance sheet a little bit.

So our total reserve at the end of June was $45.2 million.

And so at this point, we are continuing to try to work with the government to resolve the final issues around past and future oversight costs, and that's really the one significant issue that's hanging out there for us.

Okay.

So just to put it all in plain English, nothing has really changed, or at least nothing materially, but it's just an ongoing issue?

Right.

I mean, I think that we've been given more clarity over the last 2 years or so on what our responsibilities are.

There is one real significant issue remaining for us that's kind of boxed in, and that's the past and future government oversight costs.

We think our accruals -- as you know, we have significantly reduced what the upside risk potential is for this matter, and we think the $45 million is certainly adequate to cover our exposure.

Your next question is from the line of Frank Duplak with Prudential.

Just curious if you can run me through how you're thinking about the financing for the GP acquisition now.

I think, on Chart 11, looked like you had available liquidity of about $90 million now.

As we think about kind of the second half of the year cash flow and what might be the source of how you sort of deal with that -- with paying that -- for that acquisition as we get into fourth quarter.

Sure.

So our expectation is we will use about $100 million of cash that we have on the balance sheet, which is largely in Europe.

And we will finance the rest on our revolving credit facility, where we have adequate liquidity to do so.

And as you mentioned, we expect our liquidity will improve as we move through the balance of 2018.

So it will be a combination of cash and availability under our revolving credit facility.

As I -- so help me understand how there's $107 million of cash and then only $90 million of liquidity.

We get some credit under our covenant calculations for cash we have on hand.

So when we spend $1 of cash, it reduces the overall availability under our revolving credit facility.

So there's a little bit of a mismatch there.

That's all.

So you think you'll -- it sounds like $80 million of revolver capacity between now and the end of the year.

Is that the way to kind of think about it?

Well, the other aspect is that our covenant under our revolver will move from 3.5 to 4 when we do an acquisition.

So we will pick up half a turn of liquidity when we complete the acquisition.

And it looks like we have no further questions at this time.

I'll turn the call back over to Dante.

Okay.

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

Have a good day.

Thank you.

This does conclude today's conference call.

You may now disconnect.