Glatfelter Q4 2023 Earnings Call Transcript

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February 22, 2024

There are 5 speakers on the call.

Operator

Ladies and gentlemen, good day and welcome to the Glatfelter's Q4 2023 Earnings Release Conference Call.

Operator

Today's conference is being recorded. At this time, I would like to turn the conference over to Ramesh Shettigar. Please go ahead, sir.

Speaker 1

Thank you, Lisa. Good morning, and welcome to Glatfelter's 2023 Q4 earnings conference call. This is Ramesh Shethikar, Senior Vice President, Chief Financial Officer and Treasurer. On the call to present our Q4 results is Thomas Farnaman, President and Chief Executive Officer of Blatfelter and myself. Before we begin our presentation, I have a few standard reminders.

Speaker 1

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 2022 Form 10 ks and our 2023 Form 10 Qs, all of which have been filed with the SEC and today's release 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, we are under no obligation to update them.

Speaker 1

I will now turn the call over to Thomas.

Speaker 2

Thank you, Ramesh. Hello, everyone, and welcome to Glatfelter's 4th quarter and full year 2023 investor call. I begin by sharing that our 4th quarter results were solid and as expected in light of continued industry wide market challenges. We achieved adjusted EBITDA of $25,100,000 for the quarter consistent with the 3rd quarter $93,000,000 for the full year in line with guidance. Also and most notably, on February 7, we announced a significant strategic milestone for the company and our shareholders with proposed plans to merge Glatfelter with Berry Global's HHNF business, which I'll speak to in more details towards the end of the call.

Speaker 2

Turning now to the highlights of Glatfelter's 4th quarter performance. The team achieved exceptional results during the Q4 in our Spamley segment by generating improved volume and profitability compared to the prior quarter, which contributed to approximately $9,000,000 improvement in adjusted EBITDA over a 12 months period. This outcome is a direct reflection of the expanded commercial focus for our Zontera branded products, operational improvements in each of our 4 spundley sites and careful cost discipline throughout the segment. In addition, we are pleased with the 4th quarter progress in our Composite Fiber segment as the underlying fundamentals are sustaining the gains made previously throughout the Q3 with EBITDA margins approaching 10% in the second half of the year. We are seeing the direct benefits from the turnaround actions we took throughout the year, largely attributed to addressing the price cost gap and improving our inclined wire production.

Speaker 2

In addition, the segment benefited from having divested the Oberschmitten, Germany facility earlier in the year. As a result of this momentum, we have increased our commercial efforts on restoring key volumes as we carefully balance inventories with fixed cost absorption to match demand in our major markets. In our Airlaid segment, we experienced pronounced competitive end market challenges with this segment's overall volumes down 5% compared to the Q4 of 2022, namely in our Feminine Hygiene and European Tabletop categories. In addition, we conducted an extensive plant maintenance shutdown in our Gatineau facility, which also negatively contributed to the segment's performance. As we enter 2023, we quickly realized that the market required us to take significant actions to maintain our Airlaid protect margins through pricing actions at the potential expense of volume, which we are now seeing play out as consumers have been slow to respond in this inflationary environment.

Speaker 2

Also, we are working to diversify our customer base and product portfolio to reduce customer concentration, while expanding our efforts in innovation and sustainability. We recognize this multifaceted approach will take time to deliver the intended results. I will now turn the call over to Ramesh.

Speaker 1

Thank you, Thomas. Slide 3 of the investor presentation provides a summary of

Speaker 2

our 4th quarter results. Adjusted

Speaker 1

EBITDA was $25,100,000 which was in line with our 3rd quarter results despite lower production typical in the 4th quarter to manage inventory levels. 2023 full year EBITDA was approximately $93,000,000 and within the guidance range provided last quarter. Airlaid Materials EBITDA was lower by approximately $6,000,000 versus a very strong quarter during the same period last year. Lower earnings were mainly driven by adverse price cost gap, lower shipments and planned maintenance downtime. Composite Fibers EBITDA improved by approximately $2,000,000 driven by higher inclined wire production and favorable price cost cap.

Speaker 1

Spun Lace EBITDA was higher by approximately $4,000,000 compared to the same quarter last year driven by favorable price cost gap as well as turn around actions related to headcount reductions and operational improvements. Slide 5 shows a summary of 4th quarter results for the Airlaid Materials segment. Revenues were down 19% on a constant currency basis versus the same period last year, mainly driven by lower shipments and lower selling prices of approximately $17,000,000 Selling prices were lower mainly due to cost pass throughs reflecting declines in raw material and energy costs in Europe and selective price concessions to non floating customers to preserve volume. On a net basis, the price cost gap was unfavorable to earnings by $1,700,000 Volume was lower by 5% year over year, primarily due to weaker shipments in the tabletop category. This was largely driven by market softness in Europe, coupled with ongoing competition from alternate substrates due to the high cost of fluff pulp.

Speaker 1

Operations were unfavorable by $2,000,000 versus prior year, primarily due to extended maintenance downtime in our Gatineau facility to improve operational efficiency. Also wage and other general inflation were higher compared to the same period last year. Foreign exchange and related currency hedging negatively impacted earnings by $900,000 primarily due to hedging gains from the prior year. Slide 6 shows a summary of 4th quarter results for the Composite Fiber segment. Total revenues were down 18% on a constant currency basis due to lower shipments and selling prices of $8,200,000 from floating contracts implemented with larger food and beverage customers.

Speaker 1

Excluding sales from the Oberschmidt operation that was divested in the Q3, year over year volume was lower by approximately 7%. The decline was primarily due to wallcover and food and beverage categories, but was partially offset by improvement in composite laminates and technical specialties. And favorably impacted year over year results by $1,200,000 Lower prices for key raw materials, energy and freight improved earnings by $9,500,000 versus the same quarter last year, reversing the negative price cost gap trend. Operations and other was favorable by $1,300,000 mainly driven by benefits from higher inclined wire production and foreign exchange was unfavorable by $1,500,000 driven by hedging gains from last year. Slide 7 shows a summary of 4th quarter results for the spunlace segment.

Speaker 1

Revenues were down 7% on a constant currency basis driven by lower selling prices of approximately 7,000,000 dollars coming from raw material, cost pass supervision, primarily in hygiene and wipes materials. Volume was higher by 3% driven by improved shipments in the consumer wipes and critical cleaning categories partially offset by lower shipments in the healthcare and hygiene categories. Raw material energy and other inflation were favorable by $9,000,000 resulting in positive price cost gap as we ended 2023. Operations, FX and other items were $1,900,000 favorable through intense focus on manufacturing efficiencies, headcount reductions and higher production. In the Q4, the spun less converting operation in Tennessee was impacted by a series of tornadoes that damaged a portion of the production and warehousing facilities.

Speaker 1

Production was subsequently resumed in an undamaged area within the facility. The cost of the repairs are expected to be fully covered by the company's insurance except for a $5,000,000 deductible, which was expensed in the 4th quarter and has been excluded from adjusted earnings. Slide 8 shows corporate costs and other financial items. Corporate costs were approximately $1,900,000 lower versus the Q4 of last year and on a full year basis 2023 corporate costs were in line with 2022. Slide 9 shows our cash flow summary.

Speaker 1

For full year of 2023, our adjusted free cash flow was approximately $30,000,000 higher versus the same period in 2022. Working capital cash usage was lower by approximately $32,000,000 driven by raw material price declines and working capital initiatives under our turnaround strategy. Cash interest was elevated by approximately $26,000,000 related to our refinancing and the higher interest rate environment. Cash taxes paid in 2023 were lower by $15,000,000 mainly driven by changes in jurisdictional income and timing of payments carried over into 2024. And CapEx was lower by $4,000,000 Slide 10 shows some balance sheet and liquidity metrics.

Speaker 1

Our leverage ratio as calculated under the bank credit agreement was 3.4 times as of December 31. And we had available liquidity of approximately $135,000,000 at year end. Slide 11 is a summary of our EBITDA and cash flow guidance for 2024. We're expecting 2024 EBITDA to be in the range of $110,000,000 $120,000,000 As it relates to cash flow items, we expect the following: cash interest of approximately 70,000,000 dollars capital expenditures to be between $35,000,000 $40,000,000 cash taxes estimated to be between $15,000,000 $20,000,000 working capital cash usage is projected to be favorable by approximately $10,000,000 and non operating cash costs related to merger integration planning, tornado insurance deductible, turnaround strategy and other one time items are expected to be approximately 25,000,000 dollars This concludes my prepared remarks. I will now turn the call back to Thomas.

Speaker 2

Thank you, Ramesh. As I mentioned at the start of the call, I'm really excited about the recently announced plans for merger with Berry Global's HHNF business, which is anticipated to close in the second half of twenty twenty four. The proposed combination of Berry merging a majority of its global nonwovens and films business with Glatfelter will create a leading publicly traded company in the specialty materials industry. The proposed transaction values the combined company at pro form a revenue of approximately 3.6 $1,000,000,000 and pro form a adjusted EBITDA of approximately $455,000,000 including expected synergies. For our shareholders, this transaction provides a strong foundation for growth by addressing Glatfelter's current subscale size within the Capital Markets and Rating Agencies and with customers and suppliers.

Speaker 2

Also, the combined company creates greater balance sheet capacity for future strategic acquisitions and this transaction also improves Glatfelter's leverage profile to a pro form a net leverage of 4 times. We are excited about the prospect of joining forces to leverage our combined talent, technologies, scale and footprint to deliver a range of complementary products and solutions for our customers. We anticipate Glatfelter will benefit in areas where Berry is stronger, such as the Asia Pacific and Latin American markets, and the converting capacity of the 2 business will create opportunities for Glatfelter's Sontara brand. We will work diligently to establish a successful start for the new business with meaningful innovation and a platform for long term growth. Finally, I'm confident the 2 organizations share similar culture and set of values that will serve stakeholders very well.

Speaker 2

Between now and the time we close on the proposed transaction, the Glatfelter team will remain tenacious and focused on delivering strong performance in 2024. We will continue to further execute on our turnaround strategy as we prepare for a successful integration once the proposed transaction is completed. Given the outstanding work the Club Fel Debt team has completed in 2023, I believe in our ability to deliver full year EBITDA in the range of $110,000,000 to $120,000,000 for 2024. This guidance reflects anticipated continued headwinds and limited market visibility along with macroeconomic volatility, particularly in Europe. Despite these ongoing challenges, our business fundamentals remain strong and we eagerly anticipate shaping the new organization along with our Berry colleagues.

Speaker 2

And finally, we look forward to providing updates on our progress in the months ahead. I will now open the call for questions.

Operator

Thank you, Mr. And our first question today comes from Mark Roger Spitz with Bank of America. Please go ahead sir. Your line is open.

Speaker 3

Hi, good morning. This is actually Olivia on for Roger. Thanks for taking our questions.

Speaker 1

Hi Olivia. Good morning.

Speaker 3

So what are the market shares of Berry, HHNF and Glatfelter and other main players in the key business where, Glatfelter and HHNF overlap?

Speaker 2

Okay. Even though we have product in the same end categories like health, hygiene, we are really very complementary. So we don't really compete product on product, but it's we just compete in the same segment. So this is really one of the really very positive things about this proposed merger that we will have some synergies, but we are really not competing product by product. It's just in the same segments with different products.

Speaker 3

Got it. And what percentage of the global market to fiber based nonwovens directly compete with polypropylene based nonwovens?

Speaker 2

I mean, this is a very difficult question to come up really with a percentage. But I can say is that there's many different end users where people can make a choice between the different products and it always varies based on the performance characteristics. I mean, auto, building or construction are using different products than the health care section. And in certain applications, you can even go either way. You can go more on the polymer side or you can go more on the fiber side.

Speaker 2

But again, as I mentioned before, the product portfolios of Berry's business and ours are really complementary and there are not a lot of products which are the same. So but again, there's some flexibility for customers to switch depending on the application.

Speaker 3

Okay, got it. Thank you. And then how much CapEx does HHNF spend?

Speaker 1

Yes, Olivia, historically, they've spent anywhere between 3% 6% of sales. But looking forward, I would say probably for the next 2 to 3 years, I think it's fair to project probably 2% to 3% of sales and then longer term probably more along the lines of 4% to 5%.

Speaker 3

Okay. Thank you. That's very helpful. And I guess, what is the maintenance CapEx and normalized CapEx of the NewCo?

Speaker 1

Yes. Devya, that's it's a bit too early for us to comment on that. As these two companies come together, as we look at the asset portfolio, as we look at the scheduling of what is maintenance, what is growth, that will probably take some time before we can provide a finer point of view on that.

Speaker 3

Okay. That's fair. Thank And then I guess, will the Glatfelter bonds benefit from guarantees of the mature entities that will be providing guarantees to the NewCo credit facilities?

Speaker 1

Yes. The Glatfelter bonds are expected to be guaranteed by all of the domestic entities that will guarantee NewCo's credit facilities. And to the extent that those credit facilities include foreign borrowers or guarantors, those foreign entities will not be expected to guarantee our Glatfelter bonds.

Speaker 3

Okay. Thank you. And then how much debt will be transferred from HHNF and will be repaid with the NewCo credit facilities?

Speaker 1

Yes. So I would say about $1,500,000,000 will be the debt that will be raised that will be coming from SpinCo into the merger, of which about $1,000,000,000 will be used to dividend up to Berry, about call it $400,000,000 to retire all of the existing Glatfelter debt between the revolver and the Angelo Gordon term loan. And then the rest will be for transaction costs. But at closing, the new company, NewCo, will essentially start with an undrawn revolver.

Speaker 3

Okay. Thank you. That's very helpful. And then our last question, How does NewCo plan to report on HHNF in the segment?

Speaker 2

Olivier, this is really too early right now. I know we have 2 weeks announcement. And as I mentioned before, we'll provide information along the line to closing, but this is too early right now to tell.

Speaker 3

Okay. Thank you so much. That's all for us.

Speaker 1

Okay. Thanks,

Operator

And our next question comes from Mike Jennings of Angelo Gordon. Please go ahead sir. Your line is open.

Speaker 4

Good morning, Thomas and Remini.

Speaker 1

Mike, good morning. How are you? Good morning.

Speaker 4

Excellent. Let's talk about spunlace for a minute. Obviously, kind of a standout performance and kind of nice trajectory over the course of the year.

Speaker 2

Can you

Speaker 4

give us a little bit more color, think about how much of this is sustainable? How much it's one time in nature? And generally kind of how you're thinking about that business for 2024?

Speaker 2

Sure. Again, we are very pleased with the and this is a real turnaround result and story if you think about it where we started. So we work very diligently, if I look at our two sides for the hygiene wipe segment on Asheville and Soles, we dramatically improved our operational performance, whether it's waste, downtime, line availability and quality. So this helped tremendously to improve the performance. And on the other side, our Sontara business, where we are now, and I think we reported a year ago, it takes a little time to get into new segments and all that.

Speaker 2

And we are focusing on the critical cleaning area where we see a real unique opportunity for us. And this is coming now and that's paying off. So to answer your question is, if you look at Q4 performance, this is definitely, I mean, we're very pleased with that. And we see that we were able to do the turnaround. Can you take Q4 times 4?

Speaker 2

That's probably still a little bit too early and we still need to see. But we are very excited about the Spandex business, mainly about Sontara because we are seeing growth now and further growth will come from the SunTara side. And so I think, yes, we made a huge step forward. And I would characterize it right now, Mike. This business is now on a good foundation.

Speaker 2

We stabilized it. I mean, we're not losing money. We're making money, stabilizing it. We are around about at a 7% EBITDA margin. And I think we know where to go, and we are very optimistic.

Speaker 4

Congrats. I know that's been a big focus. And then on the Airlaid side, can you help us understand a little bit more seeing some of the commentary mostly around Europe being some of the softness. Can you help maybe give a little bit more visibility into sort of what you're seeing in the U. S.

Speaker 4

Versus what you're seeing in Europe, whether that be kind of volume or margin or sort of however you think is best to lay that out for us?

Speaker 2

I mean, if you look at our Airlaid business, we have again, still a lot of headwinds, and there was still also some destocking going on in 2023. The main critical areas as far as volume are concerned is feminine hygiene, which was under pressure and specifically the European Tabletop segment, where we were really, to be honest, disappointed in the I mean, they like the product. It's high quality. But based on inflation and the overall economic situation, mainly in Europe, I mean, a lot of customers kind of move to, let me say, cheaper solutions, okay. Now the other one, which we're doing is we are looking at the Airlaid product for also here finding different actually segments where our product could really add value to customers.

Speaker 2

And that work is ongoing, takes a little bit time. And that's also if I look into 2024, the second half of twenty twenty four and Airlaid will be better than the first half. We already have projects and all that and it's coming, but it takes a little bit of time. And at the same time, we are also, as mentioned before, we had a very high concentration on big customers, which actually represented a big portion of our Airlaid business. And again, if the market is in a more or less balanced situation or even sold out, this is fine.

Speaker 2

But we realized this end of 2022, early 2023. And we said when the market is turning, we need to be more robust in our customer portfolio. We are doing that as well. So we lost consciously some volume, and we are replacing this volume with what I would call B and unfortunately, phenomena that if I look at the fluff pulp pricing, everything went down, but fluff pulp was much slower to come down. And now it's even going up again.

Speaker 2

So that's another issue which we have to tackle, and it's a challenge in our Airlaid business. Yes, so all that combined made a little more complicated, but we have a clear strategy. So we are executing that strategy and you will see that the second half will be better than the first half and we'll get back to where what we used to have.

Speaker 4

Excellent. Thank you guys very much. Congrats again on the quarter.

Speaker 2

Thank you.

Operator

And ladies and gentlemen, there are no further questions. And this does conclude today's Bratzelter's Q4 2023 earnings release conference call. Thank you for your participation. You may now disconnect.

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Glatfelter Q4 2023
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