Glatfelter Corporation (NYSE:GLT) Q2 2023 Earnings Call Transcript

Glatfelter Corporation (NYSE:GLT) Q2 2023 Earnings Call Transcript August 5, 2023

Operator: Please stand by, we’re about to begin. Good day, and welcome to the Glatfelter’s Q2 2023 earnings release conference call. Today’s conference is being recorded. At this time, I would like to hand the call over to Ramesh Shettigar. Please go ahead.

Ramesh Shettigar: Thank you, Allie. Good morning and welcome to Glatfelter’s 2023 second quarter earnings conference call. This is Ramesh Shettigar, Senior Vice President, Chief Financial Officer, and Treasurer. On the call to present our second 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 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 undertake 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 second quarter conference call for 2023. It’s a pleasure to be with you today. Throughout today’s call, I will take the opportunity to provide context on several key challenges the business faced during the second quarter as our results fell below expectations. More importantly, I will highlight the outcomes we delivered during the second quarter with our turnaround strategy to address these challenges. First, the prevailing market headwinds and overall macroeconomic environment in both Europe and North America, along with continued customer destocking, resulted in lower sales volume and negative earnings impact of approximately $7 million when combined with machine downtime to manage inventory levels.

Second, the team diligently worked to deliver approximately $7 million of earnings to our turnaround strategy with results attributed primarily to price increases and fixed cost reductions. We also experienced two fires, one in Fort Smith, Arkansas and another in our Asheville, North Carolina facility that resulted in an approximate $3 million loss of earnings during the second quarter. I’m thankful for the quick actions of our employees at each site that fortunately resulted in no personal injury or long-term damage to either facility. Glatfelter has benefited from top-quartile safety performance over many years of benchmarking and refinements to our global safety program, and we remain committed to incorporating even more stringent fire prevention measures in the months ahead.

In addition, we had another approximately 3 million negative impact resulting from foreign exchange FX, customer financing, and other items. Finally, as part of our portfolio review, we announced the closure of our Ober-Schmitten site in May, following a lengthy but unsuccessful sale process against the backdrop of poor site profitability, given the weak Classin [Ph] and electrical markets. Since that time, the team has been working to fulfill remaining orders while negotiating the balance of interest and social plan with the site’s economic committee and works council, all while preparing to decommission the site. Since announcing the closure, customers have been working to secure alternative suppliers, and we are experiencing high rates of employee absenteeism and turnover.

While we continue to manage the operations in this turbulent environment, we have incurred operating losses of approximately $4 million in the second quarter. As I reflect on our performance this quarter, including the positive results we delivered with the turnaround strategy, had it not been for the continued macroeconomic and operational challenges impacting our bottom line, our second quarter results would have been in line with the first quarter of 2023. The turnaround actions that we are taking are now setting the stage for improved profitability as sales volumes return. While our business fundamentals remain quite sound, we are lowering our annual guidance to $100 million to $110 million in light of the market weakness and accelerated deterioration of Ober-schmitten’s financial performance following the closure announcement.

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 second quarter results. Adjusted EBITDA was $17.3 million, or approximately $10 million lower compared to the second quarter of last year. As Thomas just described, the primary drivers were Ober-Schmitten underperformance and negative impact from the two fires. Airlaid material EBITDA was lowered by approximately $2 million, mainly related to the fire in Fort Smith that led to downtime and unexpected maintenance costs. Composite Fibers EBITDA was lowered by approximately $6 million, driven by the negative effect of Ober-Schmitten weaker demand and lower production to manage inventory levels. Spunlace demonstrated EBITDA improvement of approximately $1 million, despite the impact of the fire at Asheville.

Slide 5 shows a summary of second quarter results for the Airlaid material segment. Revenues were up 5% on a constant currency basis versus the same period last year, mainly driven by higher selling prices of approximately $12 million on lower volume. The higher prices from contractual costs passed through arrangements, as well as price increases and energy surcharges initiated for customers without such arrangements, fully offset the higher cost of raw materials and energy. Volume was lower by 4% year-over-year, primarily due to weaker shipments in the feminine hygiene category from customers’ inventory destocking, which was partly offset by improved shipments in tabletops, wipes, and home care. Operations were unfavorable by $2.1 million versus the prior year, primarily due to the fire at Fort Smith, leading to downtime and unexpected maintenance costs.

Foreign exchange and related currency hedging positively impacted earnings by $900,000, primarily from the strengthening of the euro. Slide 6 shows a summary of second quarter results for the composite fiber segment. Total revenues were up 1% on a constant currency basis due to higher selling prices of $5.5 million, as well as successfully implemented, as we successfully implemented multiple pricing actions and energy surcharges in 2022 to combat inflation. Volume was higher by 3% versus the same quarter last year, mixed was unfavorable, negatively impacting both revenue and margin. Demand was soft in almost all product categories, reflecting challenging market conditions and some negative reaction to our pricing action taken in late 2022. Higher prices for energy, key raw materials, and freight lowered earnings by $3.8 million versus the same quarter last year and were more than offset by the pricing action.

On a more positive note, inflation on raw materials and energy improved on a sequential basis, and we expect this trend to continue in the second half of 2023. Operations and other was unfavorable by $5.9 million, driven by lower production to manage inventory levels. Of the $5.8 million year over year EBITDA decline for the segment, $4.3 million was from Ober-Schmitten underperformance as this site is now slated for closure as previously announced in May. Foreign exchange was unfavorable by $500,000, driven by hedging gains from last year. Slide 7 shows a summary of second quarter results for the Spunlace segments. Revenues were down 19% on a constant currency basis driven by lower shipments of 22%, but partially offset by higher selling prices of approximately $2 million coming from actions taken to address inflation.

The volume decline was primarily in the critical cleaning and hygiene categories. Critical cleaning shipments were lower in Europe mainly due to market softness, while North America volume was more impacted by production constraints experienced on the converting side by our customers. In hygiene, most of the decline was in the European market where our customers have access to lower cost alternatives, as well as cheaper imports from Turkey and China. We are continually exploring options to improve our cost competitiveness and asset utilization in Europe as these are critical to the segment’s profitability. Raw material, energy, and other inflation were favorable $400,000, driven by lower energy. Operations, FX, and other items were net $300,000 favorable.

Actions taken as part of the turnaround strategy to improve operations and reduce headcount created a year-over-year benefit of approximately $4 million. These benefits were offset by the fire in Nashville and lower production to control inventory as a result of weaker demand. Slide 8 shows corporate costs and other financial items. For the second quarter, corporate costs were slightly lower versus the same period last year. Slide 9 shows our cash flow summary. In the second quarter of 2023, our adjusted free cash flow was lower by approximately $10 million versus the same period in 2022. Earnings were lower by approximately $10 million, and cash interest was higher by approximately $8 million. These unfavorable items were partially offset by lower cash taxes as well as from a one-time refund of about $7 million received in Q2 related to the COVID-19 ERC tax credit recovery program.

Slide 10 shows some balance sheet and liquidity metrics. Our bank covenant leverage ratio as calculated under the new credit agreement was 3.4 times as of June 30th and we had available liquidity of approximately $145 million at quarter-end. Slide 11 shows our 2023 year-to-date EBITDA run rate normalized for certain items outside our control with those that have been addressed through our turnaround strategy. When adjusting for Ober-Schmitten’s results and the two fires, our first-half performance for the year would have been better than as reported. As it relates to Ober-Schmitten, we are expecting operations to season third quarter and any shutdown costs to be excluded from adjusted earnings thereafter. The EBITDA impact from the fires in Fort Smith and Nashville was approximately $3 million in the second quarter, and we do not expect any cost to carry over into the third quarter.

Slide 12 is a summary of our EBITDA and cash flow guidance for 2023. Q2 EBITDA was below our expectations largely due to Ober-Schmitten’s accelerated underperformance that we did not anticipate earlier in the quarter. We were in the final stages of a several months long process to sell the site operations to a prospective buyer with an anticipated close at the end of May. However, all interested party negotiations stalled in mid-May due to market weakness, and we announced the site closure decision at the end of the month. As a result, the on-going operations to wind down Ober-Schmitten will have a continued negative financial impact when compared to our previously stated guidance. Therefore, we are lowering our EBITDA guidance to now be between $100 million and $110 million.

Regarding cash flow items, we expect the following. Cash interest of approximately $60 million, which includes the latest projection of interest expense from the refinancing completed in the first quarter. Capital expenditures to be between $30 million and $35 million or approximately $5 million lower than our prior guidance. We expect approximately $50 million of cash usage from working capital and turnaround strategy cash costs combined. This is approximately $20 million higher than our prior guidance and it’s driven by the expected severance costs related to the Ober-Schmitten shutdown and adverse accounts payable impact from shorter payment terms as a direct result of our credit rating downgrade last year. And finally, cash taxes are expected to be between $15 million and $20 million, or approximately $5 million lower than our prior guidance.

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

Thomas Fahnemann: Thank you, Ramesh. As we look forward to the remainder of the year, there are a few highlights that are important to shaping our overall performance in the five remaining months of 2023. First, I’m pleased to share that Boris Illetschko has officially joined the company on August 1st as Senior Vice President, Chief Operating Officer. We previously announced Boris’ decision to join Glatfelter in early April. And while he honoured his termination notice period with his prior employer, he was successful with accelerating the start of his employment with Glatfelter. Boris’ arrival is significant as this completes the establishment of our newly expanded senior executive team. With Boris, we will have an additional talented leader whose sole focus will be to further integrate our global supply chain, commercial, and innovation functions.

And he will strengthen our new product management function in its early formation to drive improved financial performance. Given Boris’s extensive background working globally in both operations and commercial functions and having personally worked with Boris in the past, I’m confident he will hit the ground running, and I look forward to his contributions. Second, we must remain focused on managing the on-going price cost gap and striking an effective balance between product price, mix, and volume as the challenging economic headwinds impacting our markets prevail. This is particularly important as we face growing competition, including regions in the world that may not value the same level of commitment that Glatfelter is making to achieve truly sustainable products while improving our overall operations.

Our single most important business imperative is to demonstrate an uncompromising partnership with our customers without forgoing profitable margins. This requires us to act with intensity when executing the six key initiatives of our turnaround strategy which the team continues to do exceptionally well. Then finally, but perhaps most importantly, as a leadership team, we are prepared to make any remaining difficult decisions that will improve the trajectory of our financial performance in the months ahead. Actions such as further curtailing operations were needed to balance inventory levels, driving out additional fixed costs, growing sales volume, achieving additional pricing actions that are imperative for us to reach sustainable margins for the long-term, and continuing to assess and shape our overall product portfolio and innovation pipeline with a greater level of financial rigor combined with real-time market insights.

As I approach my one-year anniversary with Glatfelter, I continue to believe the company’s full potential has not yet been realized. And I will remain very excited about the prospects of this business as our markets improve over time. Meanwhile, we must stay the course with a disciplined approach that comes with our 201 plan and adjust our real-time actions to confront the current realities of our markets and the industry we serve. My team and I remain committed to doing just this. I will now open the call for questions.

See also 15 Countries That Spend Most Time on Social Media and 15 U.S. Cities with the Highest Weed Consumption in 2023.

Q&A Session

Operator: [Operator instructions] We’ll go ahead and take our first question from Josh Wool with Carlson Capital. Please go ahead.

Josh Wool: Thomas, Ramesh, good morning. Thanks for taking my questions.

Ramesh Shettigar: Good morning.

Thomas Fahnemann: Good morning, Josh.

Josh Wool: I want to start with a few questions on volumes and the de-stocking headwinds, and then I have a few more questions around margins in the quarter, especially trying to flesh out the fundamental performance, excluding the impact of the fires and the Ober-Schmitten enclosure. But starting with volumes, how did your volume performance vary by month in Q2, or at least entering the period versus exiting it? And what picture is emerging of where inventories sit throughout the channel, both at your customers and if you have the visibility at the end retailers as well?

Thomas Fahnemann: Okay, yes. I think I have to go a little bit into detail because it really varies by segment. Maybe if I look at the destocking, the destocking is still going on in the feminine hygiene and the adult incontinence segment. So there, we’re still seeing destocking is going on. In the other areas, I would say it really has slowed down and it’s more demand issue. Now as I look at and go through the single segment, feminine hygiene the volumes month to month is pretty much flat. So if I look at April versus June, it’s pretty much the same. And here the weakness in Q2 was really a combination of destocking and also one of our biggest customer had his fiscal year end in June, so that’s always been a little bit of a weaker, weaker quarter.

Adult incontinence, it’s kind of the same picture. And if we look at the really yearly volume, we have one big customer. And there’s also still destocking going on. That was a big kind of when the product was launched back in — in 2018, 2019, huge volume and it’s going a little bit down, but there’s still some destocking going on. But also here, months over months, it’s pretty much flat. If I go back to the next segment, tabletop food services, I would say that if we look at the month-to-month volume development, it’s increasing, so from April to May, we saw an increase. From May to June, we saw an increase. And that’s kind of also a little bit of seasonality, which we have in this business, because with warmer temperature, it’s outdoor dining, barbecues, and then — and so we are seeing that now, and the volume is really increasing.

What we’re not seeing there is a lot of destocking. I think that’s done. I think we are probably in that area. This is what we are — the volume we are seeing right now is the real underlying demand. If I go to the wipes business, also the wipes volume month-to-month is relatively stable. And there’s no real ramp-up, I mean relatively flat. And if I go to the home care area here, we are seeing a little decline from month-to-month. And again, it’s very difficult now to predict what Q3 will bring. But if I look at July, I mean, it’s not substantial. But this business had substantial growth during COVID because a lot of people were more concerned and sensitive about hygiene and all this. So, and this business is really from a volume standpoint from 2020 to 2021.

And now if I look at 2023 is going down. Coffee, the coffee area, overall demand is the same. What we’re seeing is a little bit of a shift from pads to filter coffee because it’s cheaper. And then this is mainly happening in Europe. And I would also say for the coffee, the destocking effect I think should be done in Q2. We don’t expect anything there in Q3. But however, the pad production, it’s down because more filter coffee and people are more price sensitive and they’re moving more toward the filter coffee. Tea, if you look at the tea bags. Here, we really saw some major inventory build-up in 2022 because the concern of inflation, curtailment, energy. So here we are still in the middle of destocking activities. And so that’s probably still continuing on into Q3.

Then the composite laminate area. This is not an inventory issue this is really a demand issue. Consumers are just not spending a lot of money for home improvement as they did during the COVID. I mean, a lot of do-it-yourself projects and all this, and this market has really declined. Then to go to the next segment, wall covering. I mean, the only influence there is really the sanctions imposed on Russia. And Western European market is also I would say on a relatively low level right now and this is in line with our composite laminate area. I mean, there’s not a lot of renovation on new builds going on Then electrical and pasting paper, the thing here is also we don’t think there’s a lot of de-stocking going on. I think that’s already taken care of in Q1 and early Q2, so this is really the underlying demand that we’re seeing right now.