Magnera Corp (MAGN) 2021 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Glatfelter's Fourth Quarter Earnings Conference Call. (Operator Instructions)

Please be advised today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Ramesh Shettigar from Glatfelter. Thank you. Please go ahead.

Thank you, Abigail. Good morning, and welcome to Glatfelter's 2021 Fourth Quarter Earnings Conference Call. This is Ramesh Shettigar, Vice President of ESG, Investor Relations and Corporate Treasurer.

On the call today, to present our fourth quarter results, are Dante Parrini, Glatfelter's Chairman and Chief Executive Officer; and Sam Hillard, Senior Vice President and Chief Financial Officer. 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 2020 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.

Thank you, Ramesh. Good morning, and thank you for joining us. Today's earnings call marks the conclusion of a very pivotal year in Glatfelter's transformation as we successfully delivered on our commitment to scale up the company through 2 sizable acquisitions of leading engineered materials businesses. At the same time, 2021 was also a very challenging year as we continue to navigate a pandemic that included severe macroeconomic headwinds. In the first half of the year, our Airlaid segment was negatively impacted by customers' destocking. While the second half ended with unprecedented energy inflation in Europe, and significant raw material price increases that adversely impacted all 3 segments.

As we closed out the fourth quarter, continued escalation in energy prices in Europe, raw material inflation, supply chain disruptions, and pockets of pandemic-driven labor constraints negatively affected our financial results. The intensity with which these inflation factors unfolded was not fully anticipated nor reflected in our previous guidance, and the timing of these events has handicapped the Jacob Holm acquisition from having the quick and positive start we had expected.

Despite the significant impact of these external factors, we remain confident in the strategic rationale of our 2 acquisitions. Mount Holly is in line with our near-term expectations and has the capability to overachieve our original goals. And our new spunlace segment provides scale and further expands our product and technology portfolio, which positions us favorably for the longer term. Ultimately, our leading positions in the broader nonwoven sector will facilitate our ability to deliver meaningful value to our shareholders and customers. While it is too soon to project when these extraordinary external pressures will dissipate, we are taking swift and aggressive steps to manage through this period of volatility. I will speak more about this later.

If you go to Slide 3 in the investor deck, provides the key highlights for the fourth quarter. We've reported adjusted earnings per share of $0.04 and adjusted EBITDA of $26 million. Airlaid Materials performance was generally in line with expectations as contractual cost pass-through arrangements protected margins from raw material inflation, although energy cost escalation in Europe was a drag on earnings. This segment had a very good year-over-year profit growth driven by the addition of Mount Holly and a strong recovery in the table tops category. Composite Fibers results were much lower than expectations, driven by the unprecedented rise in energy costs in Europe, and higher raw material inflation.

Energy prices further spiked to record levels in the fourth quarter, negatively impacting earnings by approximately $4 million versus our prior guidance, which had already reflected about $1.5 million of energy inflation. To combat this spike in costs, we introduced an energy surcharge in November for customers in all 3 segments to specifically target the recovery of mounting energy costs.

Volumes were also lower as some price-sensitive customers, predominantly in the wallcover category, altered their buying patterns in response to the additional pricing actions we implemented. In our spunlace segment, results were lower than expectations, driven by higher raw material and energy costs and a production delay at one of our manufacturing sites caused by a key raw material shortage that impacted shipments.

This is our first reporting quarter for the spunlace segment since the October 29 acquisition date. The integration work is well underway as we continue to focus on aligning processes, technologies, and commercial strategies, while addressing the external factors impacting near-term results. I will elaborate more on spunlace integration in my closing remarks.

I'll turn the call over to Sam now to provide more details on the quarter.

Thank you, Dante. Fourth quarter adjusted earnings from continuing operations was $1.6 million or $0.04 per share, a decrease of $0.18 versus the same period last year. This was primarily driven by an unprecedented increase in European energy prices and from higher interest expense related to the bond issuance completed in October to finance the spunlace and Mount Holly acquisitions.

Slide 4, shows a bridge of adjusted earnings per share of $0.22 from the fourth quarter of last year to this year's fourth quarter of $0.04. Composite Fibers results lowered earnings by $0.15, driven primarily by significant inflationary pressures experienced in energy, raw materials and logistics. Airlaid Materials results increased earnings by $0.04, primarily due to strong volume recovery in the table top products category as well as from the addition of Mount Holly results compared to the prior year. Spunlace lowered earnings by $0.02 driven by inflationary headwinds experienced in energy and raw materials and unfavorable operations. Corporate costs were in line to the same quarter last year. Interest expense lowered earnings by $0.07, driven by the issuance of the new bond to finance the 2 acquisitions. Taxes and other items were $0.02 favorable due to a lower tax rate this quarter from a valuation allowance release of approximately $3 million.

Slide 5, shows a summary of fourth quarter results for the Composite Fibers segment. Total revenues for the quarter were 1.3% higher on a constant currency basis, mainly driven by higher selling prices of approximately $9 million. This was a result of multiple pricing actions taken in 2021, and an energy surcharge in late November. However, this was not enough to mitigate the extreme prices for energy in Europe during the fourth quarter, and the relentless inflationary pressures in raw materials and logistics.

Shipments were down 11% or nearly 3,900 metric tons with wallcover accounting for more than 75% of the decline. Shipments for wallcover in Q4 2020 were very strong as the supply chain recovered from the shutdown during the pandemic, creating a difficult comparison this quarter. In addition, our pricing actions in wallcover to recoup the sharp rise in key raw materials such as wood pulp, and the cost of energy, be it altered buying patterns of some price-sensitive customers. Prices of energy, wood pulp, and freight continue to escalate in the fourth quarter and negatively impacted results by $16.6 million versus the same quarter last year. Sequentially from Q3 of 2021, this impact was $5.4 million, primarily driven by rising energy prices in Europe, which escalated even further during the quarter, despite the savings provided by our existing energy hedging program. This was the single largest factor in missing our guidance for Composite Fibers in the fourth quarter.

We expect input costs, particularly energy prices, to remain relatively high in the near term. In addition to our ongoing focused on managing costs and operational efficiencies, we are also assessing a variety of mitigating contractual actions with our customers, which Dante will cover in more detail. Operations were slightly unfavorable by $200,000 and currency and related hedging activity unfavorably impacted results by $900,000.

Looking ahead to the first quarter of 2022, higher selling prices are expected to be fully offset by raw materials and energy prices. We expect lower volume and market-related downtime to have a cost penalty of approximately $2 million.

Slide 6, shows a summary of fourth quarter results for Airlaid Materials. Revenues were up 48% versus the same prior year period on a constant currency basis, supported by the addition of Mount Holly and strong recovery in the table top category. Shipments of table top almost doubled while wipes were 74% higher when compared to the fourth quarter of last year. Additionally, demand for home care and hygiene products were lower by 2% and 3%, respectively, reflecting changes in buying patterns at year-end.

Selling prices increased meaningfully from contractual cost pass-throughs as well as from price increases, including the 10% price increase action implemented in the third quarter for customers without cost pass-through arrangements. We also implemented an energy surcharge on all customers served from Europe to offset rising energy costs. While these actions together helped the segment to offset the higher raw material prices, they fell short of recovering the higher-than-anticipated energy price increases, unfavorably impacting results by a net $1.2 million.

Operations were lower by $1.7 million compared to the prior year, mainly due to higher spending and inflationary pressures. And foreign exchange was unfavorable by $1.2 million, mainly driven by the lower euro rate. For the first quarter of 2022, we expect shipments to be 3% higher on a sequential basis with favorable mix, thereby improving operating profit by $1 million. Selling prices are expected to be higher, but fully offset by higher raw material prices. And we expect energy prices to be fully offset by the energy surcharge, assuming energy does not continue to spike further.

Slide 7, shows a summary of fourth quarter results for the spunlace segment from October 29 acquisition date until the end of the year. Revenue for the segment was approximately $58 million in the quarter. Shipments for the quarter were approximately 12,500 metric tons, which were slightly below our expectation of 13,000 metric tons. Lower shipments were mainly driven by softer demand in the wipes category due to year-end inventory management by a large customer and from a production delay at one of our manufacturing sites due to raw material and labor availability. The lower shipments coupled with unfavorable mix negatively impacted results by $700,000. This segment also experienced higher-than-anticipated raw material inflation, particularly on synthetic fibers as well as higher energy costs at its European sites, lowering profits by approximately $1.5 million.

Operations were unfavorable from lower production, higher-than-anticipated waste rate and COVID related labor challenges, the preliminary purchase price allocation resulted in depreciation and amortization of approximately $1.7 million after including the acquisition step-up to fixed and intangible assets.

For the first quarter of 2022, we expect shipments per month to improve in Q1, slightly outpacing the 2-month run rate of ownership in 2021. We expect higher raw material and energy costs on a sequential basis to outpace price increases and energy surcharges, and we expect improved operations. However, due to inflationary pressures, we expect a loss for the first full quarter at a similar run rate as the first 2 months of ownership, equaling approximately $2 million for the first full quarter. Clearly, this projected loss outlook is being addressed, and Dante will cover several key actions we're taking going forward.

Slide 8, shows corporate costs and other financial items. For the fourth quarter, corporate costs were mostly in line with the same period last year. Our corporate costs for full year 2021 of $22.4 million were approximately $4.9 million lower than prior year and mostly in line with our guidance from last quarter. Costs related to strategic initiatives for the full year were $31 million, mainly pertaining to our 2 acquisitions and the associated financing.

Interest and other income and expense for the full year was $15 million and in line with our previous guidance. For 2022, we expect corporate costs to be approximately $27 million higher than 2021, where we had lower overall spending due to COVID, but in line with 2020 costs. Our tax rate for the full year was 32% lower than our previous guidance of 38% to 40%. This was largely driven by the release of a valuation allowance of $3 million, reflecting a change in the recovery of deferred tax assets, primarily due to changes resulting from completing the recent Jacob Holm acquisition.

Given the unusual level of volatility in our tax rate components, which is highly dependent upon how much income we generate from within each of our respective jurisdictions, we are limiting our tax guidance to Q1 only rather than providing a full year tax rate projection at this time. We expect our Q1 2022 tax rate to be between 48% and 50% on adjusted earnings and full year interest and other financing costs to be approximately $35 million, reflecting the recent bond issuance.

Slide 9, shows our cash flow summary. 2021 adjusted free cash flow was lower by approximately $10 million, driven mainly by lower cash earnings and capital expenditures. We expect capital expenditures for 2022, including spunlace and Mount Holly, to be between $45 million and $50 million, $7 million to $8 million of which pertains to spunlace systems integration costs, which we previously announced as costs associated with generating our targeted synergies. Depreciation and amortization expense is projected to be approximately $74 million, reflecting a full year of ownership from Mount Holly and Jacob Holm.

Slide 10, shows some balance sheet and liquidity metrics. Our leverage ratio increased to 4.6x as of December 31, 2021 versus year-end 2020 of 1.7x, mainly driven by the Mount Holly acquisition for $175 million, and Jacob Holm acquisition for $302 million. We successfully executed our previously mentioned $500 million bond offering in October 2021, and we still have ample available liquidity of approximately $260 million. Our near-term focus will be to successfully integrate Jacob Holm, realize the $20 million of expected annual synergies and actively delever the balance sheet.

This concludes my prepared remarks. I will now turn the call back to Dante.

Thanks, Sam. Looking ahead, 2022 will be a very important year for Glatfelter as we continue our integration efforts and navigate the challenging macroeconomic environment to optimize profitability and cash flow. We're directing our focus on a short list of imperatives. Our top priority is to restore spunlace profitability and drive the overall financial performance of the segment to levels more consistent with our legacy business. Given its criticality, I have asked our Chief Commercial Officer and 12-year Glatfelter Executive, Chris Astley, to take full responsibility for the spunlace P&L, and all integration activities, including synergy delivery.

Chris' former experience as Business Unit President of the Airlaid Materials segment, where his leadership significantly drove growth, accelerated innovation, and boosted profitability, will be invaluable as we integrate this new business into Glatfelter. Chris and his team will focus on driving with greater speed and urgency to achieve more consistent topline growth and asset utilization, cost reduction and margin expansion.

Secondly, we're taking actions to reduce the volatility in the Composite Fibers segment by implementing raw material and energy cost pass-through mechanisms like we have within our Airlaid business. This construct is necessary for us to continue to supply high-quality engineered materials to our customers while maintaining stable margins. Our objective is to move as many customers as possible to a dynamic pricing model with the goal of migrating approximately 50% of the revenue base to this new structure in '22.

While it is likely energy prices will remain elevated in the first half of the year, we will continue to closely monitor price trends and work with our customers to implement additional pricing actions as warranted. At the same time, we'll step up our cost reduction activities, focus on energy efficiency, and reduction and continue to monitor the effectiveness of our energy hedging program during this period of dramatic price volatility.

Additionally, we're fully committed to achieving the synergies we announced for the 2 acquisitions, and we'll continue to progress this work throughout the year. The foundation is set for us to accelerate the profitability in the respective segments and mitigate the challenges of inflation.

In summary, I want to reiterate that we strongly believe in the strategic benefits of expanding and enhancing the Glatfelter portfolio with our recent acquisitions. As a leading global nonwovens company, we have the most attractive set of manufacturing assets, technologies, and talent, to support our customers' needs, to bring new innovative and sustainable engineered materials to market and to deliver meaningful value to shareholders. While 2021 was a challenging year, it was also a constructive year as we advanced our growth and transformation objectives. As we look ahead at '22, we're redoubling our efforts to address the impacts of inflation, integrate our new acquisitions, and optimize profitability and cash flows.

This concludes my closing remarks. I'll now open the call for questions.

(Operator Instructions) Our first question comes from the line of Anojja Shah with BMO Capital Markets.

I just wanted to go back to that news you just gave about pass-throughs in Composite Fibers. Did I hear correctly that energy will be included in the pass-through there -- material and energy?

Yes.

Okay. That's great, actually. And can you talk about -- I don't know if it's too preliminary, but any sort of reception that you've gotten so far with customers on this?

Well, I would say, Anojja, it is preliminary because the discussions have been ongoing, but I will say that the speed and the magnitude of input cost inflation, whether it's across raw materials, shipping and logistics, energy, labor, is affecting all businesses, not just Glatfelter. And so it's impacting our customers, our suppliers, and the order of magnitude and speed is, I think, creating a bit of a platform for us to sit down and have very pragmatic strategic conversations with our customers, so that we can find mutual interest, which is more predictable and consistent cost and profitability, and to reduce volatility and uncertainty across our businesses.

And so I believe we're aligned in those aspirations, and we are actively engaged in working through the details of how we structure the mechanism of these pass-through arrangements in a way that is fair, and equitable, and reflective of where we might be in the cycle.

Great. And then given that, so looking at your bridge on Slide 4, it looks like you're entering 2022 with a $0.12 per share price cost headwind, which is probably even a bit higher because you only owned Jacob Holm for 2 months.

Given all that in this news today, can you talk about the price cost headwind going into 2022? And then how much you think you might be able to recover this year given the energy surcharge and all these pricing actions, et cetera? And maybe some help on how you think it might cadence out through the quarters.

Yes. I think it really depends, Anojja, on exactly how quickly we can get some of these contracts underway. Let's stick with Composite Fibers first. I think your point is correct about the price cap on a full year run rate being a little bit bigger given the shorter time frame for spunlace. But as Dante said, we're in active negotiations with these, but to be able to sort of capture where we think it's going to play out and how it runs out over the year, it's probably too early. But we're also excited about putting Chris in charge of the spunlace segment and going after similar types of actions with key customers. But at this point, I don't think we can give more specifics to what we've given for one quarter at a time here.

That's fair. Okay. Switching over to spunlace. You talked about customer year-end inventory management, was that a surprise for you? And then also on the bridge on Slide 7. price itself -- not price cost, but price is actually slightly negative. I think the tune of $300,000. Can you just give a little more detail on what happened there?

And then finally on spunlace, you noticed -- you noted higher-than-anticipated waste rates. Was that sort of a learning curve issue as you get to know the business? Or just maybe a little more detail on what happened there.

Sure. I'll start on price. So I think we gave expected guidance in Q4 based on what we had learned from just sort of taking over the business. And the Jacob Holm business had announced a price increase publicly just before we took ownership of the company, and I would say that they had less success in gaining traction with that price increase than we expected when we gave that guidance out. So that's the first part.

As far as waste, yes, I do think that is a big opportunity for us, and it was something we identified when we did our due diligence and is a big part of our synergies is reducing that waste, and it was a little bit higher than we expected for the quarter. But we're, again, very excited about putting some strong leadership in there, and being able to bring those numbers down into more respectable levels, and that will be a big driver of the improvement. And I think I missed one of your other -- you have 3 questions. I think I got 2.

Yes. The inventory management, the year-end customer inventory management, was that a surprise?

A little bit, yes.

So Anojja, we're -- it's 60 days' worth of ownership. So we don't have our new colleagues fully immersed in our sales and operations planning process, and synchronizing how we look at unconstrained demand and constrained demand forecast, and how that rolls through operations. So another reason why we wanted to put on seasoned Glatfelter executive in charge of the entire spunlace segment so that we can move with greater speed and intensity, and address these issues more quickly.

Okay, fair. Switching over to wallcover. Can you talk about the instability in Russia and the Ukraine, and whether that's having an impact on your ability to raise prices? And second, I think some years ago, you introduced a lower-priced wallcover product. Is that still being offered? And did that help with some of this price sensitivity?

Sure. Your comments -- I'm not a political scientist, but clearly, when they're geopolitical tensions with Russia, Ukraine, that the whole world is paying attention to, that level of uncertainty is never a positive in the short term. So can that be impacting consumer psyche and our customers' thought process around risk and currency and sanctions, certainly.

We have modified our product portfolio and our offering over time so that we were able to recalibrate our offering to fit the needs and expectations from a performance, and a price, and value delivery to our customers, so that's reducing basis weights and looking at recipes to reduce expensive raw materials, et cetera. And so we still have those products in our portfolio. And I would say that this part of the business in this jurisdiction has always been a bit more volatile over time. I think it's also -- if history is any indication of the future, it shows that it bounces back much faster than almost any other part of our portfolio in any other jurisdiction where we operate.

So I think we have a history now of 8 years of operating in the region and working through the dynamics and the ebbs and flows of what may or may not be happening from an economic standpoint and a geopolitical standpoint. And I think our scale and leading share position will certainly be helpful to us, but the short answer is, nobody likes uncertainty. And so we'll have to manage this much more carefully and actively as we have in previous instances in the region.

Okay. And then just got a few more for me. Can you talk about the contribution from Mount Holly in the quarter in Airlaid? Maybe...

I think their operating profit was around $2 million for the fourth quarter, but I'd have to double check that. Is that what you're asking?

Yes, exactly.

Yes. And keep in mind, we're going to be breaking out less and less of that detail on Mount Holly going forward just because of the way we're integrating it into our portfolio. Within the U.S. now, particularly going forward, we'll be able to -- and that was part of the strategic rationale for the acquisition was to be able to optimize centers of excellence, make longer production runs, minimize waste and downtime.

So we have one organization that is selling products to the same customers that can be made either at Fort Smith or at Mount Holly or up in Canada. So the specific performance will be a little less meaningful because you can't necessarily isolate it.

Okay. And then last one for me. Can we get an update on the food and beverage part of Composite Fibers? Looks like volumes were flat in the quarter. Was that a surprise? Or was there a tough comparison going in? And then what are you expecting for 2022?

Yes. So I would say that if you look at comparatively speaking across the Composite Fibers portfolio, our food and beverage business, which is about half of that segment performed the best and as flat. So I would say that big picture, that's still a very important part of the portfolio and is less volatile.

In terms of '22, I think we don't give guidance for full year across categories, but we have spoken in the past about the outlook for demand for tea and for coffee, notwithstanding perhaps the immediate market environment, which is a bit harder to predict. But we say that tea will be 2% or so, 2% to 3%. Let's say, 2%, and that single-serve coffee is in the 5%, 6% range -- 4, 5, 6, it certainly depends period to period. And we don't see that changing at all from a mid- to long-term perspective, but we could see a little bit more variation period to period just because of what's going on in the world.

And it was flat on a year-over-year basis, but in terms of sequentially from Q3 to Q4, food and beverage was actually up a little bit versus we had guided to be flat. So I would say net-net, it was a positive.

And there are no further questions at this time. I'll now turn the call back over to Mr. Dante Parrini.

Okay. Well, thank you for joining our call today. We look forward to speaking with you again next quarter. Have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.