Glatfelter Corporation (NYSE:GLT) Q4 2023 Earnings Call Transcript

Glatfelter Corporation (NYSE:GLT) Q4 2023 Earnings Call Transcript February 22, 2024

Glatfelter Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, good day, and welcome to the Glatfelter’s Q4 2023 Earnings Release Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ramesh Shettigar. Please go ahead, sir.

Ramesh Shettigar: Thank you, Lisa. Good morning, and welcome to Glatfelter’s 2023 fourth quarter earnings conference call. This is Ramesh Shettigar, Senior Vice President, Chief Financial Officer and Treasurer. On the call to present our fourth quarter results is Thomas Fahnemann, President and Chief Executive Officer of Glatfelter and myself. 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 2022 Form 10-K 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, and we are under no obligation to update them. I will now turn the call over to Thomas.

Thomas Fahnemann: Thank you, Ramesh. Hello, everyone, and welcome to Glatfelter’s fourth quarter and full year 2023 investor call. I begin by sharing that our fourth quarter results were solid and as expected, in light of continued industry-wide market challenges. We achieved adjusted EBITDA of $25.1 million for the quarter, consistent with the third quarter and $93 million 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 detail towards the end of the call. Turning now to the highlights of Glatfelter’s fourth quarter performance.

The team achieved exceptional results during the fourth quarter in our Spunlace segment by generating improved volume and profitability compared to the prior quarter, which contributed to approximately $9 million improvement in adjusted EBITDA over 12-month period. This outcome is a direct reflection of the expanded commercial focus for our Sontara branded products, operational improvements in each of our four Spunlace sites and careful cost discipline throughout the segment. In addition, we are pleased with the fourth quarter progress in our Composite Fibers segment as the underlying fundamentals are sustaining the gains made previously throughout the third quarter 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 GAAP and improving our in-client wire production.

In addition, the segment benefited from having divested the Ober-Schmitten, 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 fourth quarter of 2022, namely in our feminine hygiene and European tabletop categories. In addition, we conducted an extensive planned maintenance shutdown in our Gatineau facility, which also negatively contributed to the segment’s performance. As we entered 2023, we quickly realized that the market required us to take significant actions to maintain our Airlaid profitability and diversify our customer base.

As a result, we consciously made the decision to 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. 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.

Ramesh Shettigar: Thank you, Thomas. Slide 3 of the investor presentation provides a summary of our fourth quarter results. Adjusted EBITDA was $25.1 million, which was in line with our third quarter results, despite lower production, typical in the fourth quarter to manage inventory levels. 2023 full year EBITDA was approximately $93 million and within the guidance range provided last quarter. Airlaid Materials EBITDA was lower by approximately $6 million 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 million, driven by higher incline wire production and favorable price cost gap.

. Spunlace EBITDA was higher by approximately $4 million compared to the same quarter last year, driven by favorable price cost gap as well as turnaround actions related to headcount reductions and operational improvements. Slide 5 shows a summary of fourth 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 million. 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 $1.7 million.

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. Operations were unfavorable by $2 million versus the 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 fourth quarter results for the Composite Fibers segment. Total revenues were down 18% on a constant currency basis due to lower shipments and selling prices of $8.2 million from floating contracts implemented with larger food and beverage customers.

Excluding sales from the Ober-Schmitten operation that was divested in the third quarter, 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. Also, the fourth quarter was the first full quarter since the divestiture of our Ober-Schmitten site, eliminating any further ongoing losses and favorably impacted year-over-year results by $1.2 million. Lower prices for key raw materials, energy and freight improved earnings by $9.5 million versus the same quarter last year, reversing the negative price-cost gap trend. Operations and other was favorable by $1.3 million, mainly driven by benefits from higher inclined wire production.

And foreign exchange was unfavorable by $1.5 million, driven by hedging gains from last year. Slide 7 shows a summary of fourth quarter results for the Spunlace segment. Revenues were down 7% on a constant currency basis, driven by lower selling prices of approximately $7 million coming from raw material cost pass-through provisions 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 health care and hygiene categories. Raw material, energy and other inflation were favorable by $9 million, resulting in positive price-cost gap as we ended 2023. Operations, FX and other items were $1.9 million favorable through intense focus on manufacturing efficiencies, headcount reductions and higher production.

In the fourth quarter, the Spunlace converting operation in Tennessee was impacted by a series of tornadoes that damaged a portion of the production and warehousing facilities. 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 million deductible, which was expensed in the fourth quarter and has been excluded from adjusted earnings. Slide 8 shows corporate costs and other financial items. Corporate costs were approximately $1.9 million lower versus the fourth quarter of last year and on a full year basis, 2023 corporate costs were in line with 2022. Slide 9 shows our cash flow summary. For full year of 2023, our adjusted free cash flow was approximately $30 million higher versus the same period in 2022.

Working capital cash usage was lower by approximately $32 million driven by raw material price declines and working capital initiatives under our turnaround strategy. Cash interest was elevated by approximately $26 million related to our refinancing and the higher interest rate environment. Cash taxes paid in 2023 were lower by $15 million, mainly driven by changes in jurisdictional income and timing of payments carried over into 2024. And CapEx was lower by $4 million. Slide 10 shows some balance sheet and liquidity metrics. 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 million at year-end. Slide 11 is a summary of our EBITDA and cash flow guidance for 2024.

We are expecting 2024 EBITDA to be in the range of $110 million and $120 million. As it relates to cash flow items, we expect the following: cash interest of approximately $70 million; capital expenditures to be between $35 million and $40 million; cash tax is estimated to be between $15 million and $20 million; working capital cash usage is projected to be favorable by approximately $10 million; 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 million. This concludes my prepared remarks. I will now turn the call back to Thomas.

Thomas Fahnemann: Thank you, Ramesh. As I mentioned at the start of the call, I’m really excited about the recently announced plans for a merger with Berry Global’s HHNF business, which is anticipated to close in the second half of 2024. 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 forma revenue of approximately $3.6 billion and pro forma adjusted EBITDA of approximately $455 million, 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.

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 forma net leverage of 4x. We are excited about the prospects 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 two 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 two organizations share similar culture and set of values that will serve stakeholders very well. 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 Glatfelter team has completed in 2023, I believe in our ability to deliver full year EBITDA in the range of $110 million to $120 million 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. And finally, we look forward to providing updates on our progress in the months ahead. I will now open the call for questions.

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Q&A Session

Operator: Thank you, Mr. Fahnemann. [Operator Instructions] And our first question today comes from Roger Spitz with Bank of America. Please go ahead, sir. Your line is open.

Unidentified Analyst: Hi. Good morning. This is actually Olivia on for Roger. Thanks for taking our questions.

Thomas Fahnemann: Hi, Olivia.

Unidentified Analyst: Hi. Good morning. So, what are the market shares of Berry HHNF and Glatfelter and other main players in the key business where Glatfelter and HHNF overlap?

Thomas Fahnemann: Okay. Even though we have products in the same end categories, like health, hygiene, we are really very complementary. So we don’t really compete product on product, but we’re just competing 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.

Unidentified Analyst: Got it. And what percentage of the global market do fiber-based nonwovens directly compete with polypropylene based nonwovens?

Thomas Fahnemann: I mean, this is a very difficult question to come up, really with a percentage. But what I can say is that there’s many different end users where people can make a choice between the different products. And this always varies based on the performance characteristics. I mean, auto, building or constructions are using different products than the healthcare section. 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. But again, as I mentioned before, the product portfolios of various business and ours are really complementary and there are not a lot of products which are the same. But again, there is some flexibility for customers to switch depending on the application.

Unidentified Analyst: Okay. Got it, thank you. And then how much CapEx does HH&S spend?

Ramesh Shettigar: Yes, Olivia [ph], historically, they have spent anywhere between 3% and 6% of sales. But looking forward, I would say probably for the next two to three 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%.

Unidentified Analyst: Okay, thank you. That’s very helpful. And I guess, what is the maintenance CapEx and normalized CapEx of the NewCo?

Ramesh Shettigar: Yes, Olivia [ph], that’s – it’s a bit too early for us to comment on that.

Unidentified Analyst: Okay.

Ramesh Shettigar: 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 final point of view on that?

Unidentified Analyst: Okay, that’s fair. Thank you. And then I guess will the Glatfelter bonds benefit from guarantees of the mature entities that will be providing guarantees through the NewCo credit facilities?

Ramesh Shettigar: 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.

Unidentified Analyst: Okay, thank you. And then how much debt will be transferred from HHNF and will be repaid with the NewCo credit facilities?

Ramesh Shettigar: Yes. So, I would say about $1.5 billion will be the debt that will be raised that will be coming from Spinco into the merger, of which about $1 billion will be used to dividend up to Berry, about, call it, $400 million 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.

Unidentified Analyst: Okay, thank you. That’s very helpful. And then our last question, how does NewCo plan to report on HHNF in the segment?

Thomas Fahnemann: Olivia, this is really too early right now.

Unidentified Analyst: Okay.

Thomas Fahnemann: We have two 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.

Unidentified Analyst: Okay, thank you so much. That’s all for us.

Ramesh Shettigar: Okay, thank you.

Thomas Fahnemann: Thank you, Olivia [ph].

Operator: [Operator Instructions] And our next question comes from Mike Ginnings of Angelo Gordon. Please go ahead sir, your line is open.

Mike Ginnings: Good morning Thomas and Ramesh.

Thomas Fahnemann: Mike, good morning. How are you?

Mike Ginnings: Excellent. Let’s talk about spunlace for a minute. Obviously, kind of a standout performance and kind of a nice trajectory over the course of the year, can you give us a little bit more color, I think about how much of this is sustainable, how much it’s onetime in nature and generally kind of how you’re thinking about that business for 2024.

Thomas Fahnemann: 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 worked very diligently if I look at our two sites for the hygiene wipe segment on Asheville and [indiscernible], we dramatically improved our operational performance, whether it’s waste, downtime, line availability and end 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, 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.