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Glatfelter (GLT) Q1 2019 Earnings Call Transcript

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Glatfelter  (NYSE: GLT)
Q1 2019 Earnings Call
April 30, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Shelly and I will be your conference operator today. At this time, I would like to welcome everyone to the Glatfelter's First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Ramesh Shettigar, you may begin the conference.

Ramesh Shettigar -- Vice President and Treasurer

Thank you Shelly. Good morning and welcome to Glatfelter's 2019 First Quarter Earnings Conference Call. This is Ramesh Shettigar and I'm the Company's Vice President and Treasurer. On the call today to present our first quarter results, we have 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 be making forward-looking statements that are subject to risks and uncertainties. Our 2018 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.

Dante C. Parrini -- Chairman and Chief Executive Officer

Thank you Ramesh. Good morning and thank you for joining us today. I'm pleased to report that we're off to a solid start in 2019. In the first quarter, we delivered $229 million of revenue, nearly $26 million of EBITDA and adjusted earnings per share of $0.16, a significant improvement over the first quarter of 2018 by all three measures.

The key drivers were strong performance in our Airlaid business and corporate cost reduction initiatives. At an individual business unit level, Advanced Airlaid Materials delivered its first $10 million operating profit quarter with revenue growth of 49% on a constant currency basis including Steinfurt and organic sales growth of 19%. EBITDA margins expanded 90 basis points driven by higher asset utilization as successful customer qualifications from last year were converted into increased shipments this year.

In Composite Fibers, although results improved on a sequential quarter basis, the year-over-year metrics for the first quarter were challenged by weak shipments as overall volumes declined 13% driven by lower demand in non-woven wallcover and metallized paper. Food and beverage products posted growth of 4.5% in the year over year quarter following a relatively flat 2018. And while meaningful cost reduction actions were taken to mitigate the impact of lower demand it was overshadowed by higher raw material and energy prices.

Outside of the business unit performance, we lowered corporate costs by almost $5 million compared to last year, placing us well on track to achieving our reduction target of $14 million to $16 million by the end of 2020. And we finalized the legal settlement related to the Fox River environmental matter, ending years of litigation as the court approved the consent decree in March.

At this point, I'll turn the call over to Sam Hillard to provide a more in-depth review of our first quarter results. Then, I will offer some closing comments before opening it up for questions. Sam.

Samuel L. Hillard -- Senior Vice President and Chief Financial Officer

Thank you Dante. I'm looking forward to walking through our first quarter results in more detail as well as providing some color on what we're seeing in our markets of both businesses and updating you on our progress on the corporate side of the equation as well. First quarter operating profit improved when compared to the year ago quarter, driven by increased Airlaid shipments, the Steinfurt acquisition and significantly lower corporate costs. However, Composite Fibers results were down on weak wallcover and metallized demand as well as higher raw material and energy prices.

Slide 4 shows the bridge of adjusted earnings per share of $0.09 from the first quarter of last year to this year's $0.16. Composite Fibers results reduced earnings per share by $0.05, driven primarily by lower shipments and elevated raw material and energy prices. Advanced Airlaid Materials results increased earnings per share by $0.04 driven by strong legacy volume growth and the addition of the Steinfurt acquisition. Corporate costs improved results by $0.06 driven by focused efforts toward cost reduction and headcount rationalization following the divestiture of Specialty Papers and taxes improved results by $0.02.

Side 5, shows a summary of the first quarter results for the Composite Fibers business. Total revenues were 3% lower compared to last year on a constant currency basis due to volume declines across the various segments, apart from our food and beverage category. Following a flat 2018, food and beverage posted meaningful volume growth this quarter of 4.5% driven mainly by single serve coffee. Wallcover shipments decreased to 27% primarily due to further deterioration in the Russia-Ukraine relationship and overall subdued consumer demand.

Metallized product shipments were down 22% reflecting industry overcapacity, however we were successful in securing meaningful new volume from a large wet glue label customer with qualifications occurring in Q2 and shipments slated to begin later this year. We are experiencing modest success in our price increase initiatives with first quarter results reflecting just under $1 million of benefit. Considering the market dynamics of wallcover, we now expect the full year benefit from price increases at the lower end of the previously communicated range of $7 million to $9 million. Operating income for the quarter declined by $4 million primarily as a result of higher raw material and energy prices, machine downtime and the impact of lower demand on shipments.

On the raw materials side, wood pulp prices remained high compared to the first quarter of 2018. However forecasts are showing signs of downward trends. The cost of Abaca fibers, synthetic fibers and energy all negatively impacted results. Availability of Viscous fibers continues to be a challenge as one of our key suppliers is still in the process of bringing their facility back online to full scale following a fire last October. We experienced a significant increase in fiber sourcing costs of approximately $1 million compared to last year. At this time, we don't anticipate a material improvement in this situation until the latter part of this year. We achieved a meaningful $2.3 million benefit from rigorous cost reduction actions, which helped offset the $1.5 million impact from market related downtime and lower depreciation contributed an additional $700,000 to operating profit.

Furthermore, the impact of foreign exchange on our results was a favorable $1 million due to timing of hedging activity. For the second quarter, shipments are expected to be 5% higher compared to the first quarter. However as wallcover volumes continue to be impacted by macroeconomic and geopolitical factors, we are revising our full year volume guidance for composite fibers to be flat versus the prior year. Food and beverage as well as technical specialties products are expected to provide meaningful growth as well as better mix to help mitigate wallcover and metallized volume declines. Selling prices are expected to be slightly higher compared to the first quarter. And while raw material prices are expected to come down, we expect them to be offset by energy price increases. We expect the impact of machine downtime in Q2 will be similar to the first quarter as we continue to manage inventory levels.

Slide 6 shows a summary of the first quarter results for the Advanced Airlaid Materials business. Including Steinfurt, total revenues for the first quarter set a new record crossing $100 million for the first time. For the legacy business, net sales increased 19% on constant currency basis with shipment growth of 13%. The business posted yet another strong quarter led by wipes volume growth of 56% and tabletop shipments doubled compared to the first quarter of last year. Hygiene products also posted attractive growth of 6%. As seen in our results the Fort Smith Facility and the addition of Steinfurt are serving as strong growth catalyst for the business. Raw material and energy price increases were mostly neutralized by selling price increases through the contractual pass-through arrangement with customers. Operating profit grew by $2.8 million and was largely driven by the addition of Steinfurt to the portfolio and growth in our legacy volumes.

Depreciation expense was $900,000 higher as a result of the Fort Smith investment and EBTIDA margins expanded 90 basis points with better fixed costs utilization of the related capacity. For the second quarter, we anticipate total shipments to increase 5% compared to the first quarte. Selling prices and raw material prices are expected to decline slightly, while energy prices are expected to increase slightly. We now expect total annual shipment growth in the legacy business to be at the higher end of the previously, communicated range of 8% to 10%. And operating profit guidance for Steinfurt remains in the $7 million to $9 million range.

Slide 7 shows corporate costs and other financial items. Following the divestiture of Specialty Papers and its results being recognized as discontinued operations in our consolidated financials, corporate costs have been adjusted accordingly for all periods shown to include corporate shared service costs that were previously allocated to Specialty Papers. We have made meaningful progress toward delivering on the corporate cost reduction target of $14 million to $16 million by the end of 2020. As corporate costs declined $4.8 million in the first quarter of this year. This was achieved through a combination of headcount right sizing initiatives and tight control on spending including professional services. In Q1, we also recorded a reversal of $2.5 million from our Fox River reserves, given court approval of the consent decree and an updated assessment of our remaining obligations. This one time benefit has been excluded from adjusted earnings. We expect second quarter corporate costs to be in-line with the first quarter.

Finally consistent with the corporate cost actions we initiated late last year to adjust to our new scale, we have decided to freeze and terminate our qualified pension plan, although our traditional pension plan has been closed to new entrants since 2007, the plan continued to accrue benefits with pension liabilities growing with increased exposure to market volatility, thereby creating greater risk for the Company. And while we have an over funded qualified pension plan with adequate pension assets to fund these plan obligations, we reduce this exposure with the sale of Specialty Papers and believe this next step is an important one to further de-risk our balance sheet.

Our goal is to reduce the risks associated with a defined pension by terminating the qualified pension plan, settling the liabilities with an insurance company and using the excess assets from the qualified plan for other benefits such as funding the 401(k) replacement plans for the next several years. We intend to freeze the qualified plan at the end of May and anticipate settling all qualified plan liabilities and distributing assets before the end of 2019. For 2019, we expect no net impact to our adjusted earnings from these actions. However we will incur a one time non-cash charge toward the end of this year for the final settlement of the pension liabilities. This amount will be finalized later this year.

Slide 8 shows our free cash flow. During the first quarter, adjusted free cash flow was negative $30 million, which was lower than first quarter of last year by $14 million, primarily driven by the payment of the Fox River liability settlements. Excluding the Fox River payment free cash flow was favorable compared to last year on account of improved earnings and the lower CapEx. We expect total capital expenditures to be in the range of $23 million to $28 million for 2019. Depreciation and amortization expense is projected to be $52 million for the year. We expect significant improvement in our cash flow profile going forward as earnings grow and all major capital projects are now behind us.

Slide 9 shows some balance sheet and liquidity metrics. Our net debt on March 31st was $314 million reflecting the recent refinancing of our debt capital structure. We renewed our five-year revolving credit facility and redeemed our 5.375% notes on February 28th through the use of a euro-denominated term loan resulting in significant interest expense savings going forward.

Our leverage at quarter end was 3.5 times and we had available liquidity of about $94 million. The temporary uptick in leverage compared to year end was driven by the $20.5 million Fox River payment in January and higher working capital use typically seen in the first quarter including some additional build related to precautionary Brexit planning. We expect our liquidity and leverage to improve by the end of 2019 as earnings and cash flow increase.

Slide 10 provides a summary of our projected tax rate. We now expect 2019 full year tax rate to be approximately 38% on adjusted earnings. The first quarter's tax rate of 24% benefited from onetime discrete items such as prior year audits that have now closed and certain tax return true ups. However, as we project out the rest of the year for changes in the mix of pre-tax income between the U.S. and foreign jurisdictions, we believe a 38% tax rate is appropriate for 2019. As a reminder with the continued utilization and eventual exit from the use of NOLs, we expect the effective tax rate will gradually step down, ultimately getting to 30% by 2021.

This concludes my comments and I will now turn the call back to Dante.

Dante C. Parrini -- Chairman and Chief Executive Officer

Thanks Sam. With a solid start to the year, we're encouraged that our transformation efforts are gaining traction. The actions taken last year to redefine Glatfelter's portfolio are enabling us to pivot to a leaner, more focused Engineered Materials Company with a path for profitable growth and value creation.

As discussed last quarter, we are focused on the few things that matter most for advancing our strategy in 2019, which are outlined on Slide 11. For our Airlaid business after a strong start to the year, we expect the legacy business to deliver volume growth of approximately 10% for the full year, driven primarily by the Fort Smith investment. And for Steinfurt, we expect to meet the operating profit target by capturing synergies, improving our sales mix and producing more efficiently across the entire portfolio of Airlaid assets.

For Composite Fibers managing the commercial risks in wallcover and metallized products continues to be a key focus area. For a metallized business, we were successful in securing substantial volumes from a large customer with qualifications expected to be completed during the second quarter of this year and shipments to commence in the second half of the year. In wallcover, volumes remain volatile in Russia given the geopolitical backdrop for this large market. We will continue to work closely with our customers to mitigate some of these risks.

The Food and Beverage segment continues to provide growth opportunities with single serve coffee expected to post strong growth in 2019. And while we continue to pursue our cost increase initiatives to help offset rising input costs, our cost reduction actions are expected to deliver meaningful benefits like we saw in the first quarter. Our corporate shared service cost reduction actions are on track as demonstrated by the first quarter results and we remain committed to delivering on the savings targets previously communicated. As you just heard we successfully completed our debt refinancing in February, substantially reducing our interest expense.

Finally as communicated in our March 1st, press release we're in the process of migrating to a functional operating model as a Company. This will allow us to become a leaner, more agile and efficient Company, while adjusting to our new scale. We expect to provide additional information about this migration this summer. I'll now open a call for your questions.

Questions and Answers:

Dante C. Parrini -- Chairman and Chief Executive Officer

(Operator Instruction). Your first question comes from one is Steve Chercover from Davidson. Your line is now open.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Thank you. Good morning everyone. Two quick questions. First of all, can you elaborate a little more on what's going on in the metallized products. I mean, it generally -- we think of beer and wine label as the end market, but is the market shrinking or is jostling with market share?

Dante C. Parrini -- Chairman and Chief Executive Officer

Yes. So you broke up a little bit Steve on your question, but I believe you want some clarity on what's going on in the metallized market and underlying demand. So I would say that the demand across the three different categories of wet glue label, self adhesive labels and inner liner are in the 2% to 3 % growth range. We have experienced a little bit more competitive intensity from some Chinese suppliers at the lower end of the market. And so this is what's introduced a little bit of inconsistency in demand patterns over the last several quarters.

So as we looked at marrying up our value proposition and our selling price strategy for volumes, we have had some customer transition and this is what precipitated us landing a rather large piece of business that we made reference to during our Q4 call, that is now in the qualification process and is expected to have a rather substantial impact on our overall volume performance for metallized in the second half of this year and should get us much better on track in terms of expected levels of performance.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Okay. And sticking I guess in Europe, I mean what will it take for Ukraine and Russia to resume as growth markets -- dissipation of the typical discord or --

Dante C. Parrini -- Chairman and Chief Executive Officer

I'm sorry. You're breaking up.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

I don't know why, I'm breaking up. But no, I'm just wondering like if they had somehow harmony in Eastern Europe, would that address it or is it more of an economic issue?

Dante C. Parrini -- Chairman and Chief Executive Officer

Well, I think there are a few important factors, but certainly more harmony, at least as it pertains to trade between Russia and Ukraine would have, I think a materially beneficial impact on our overall business. So at the consumer level, consumers are still preferring and using non-woven wallcover. Clearly, there's some currency sensitivity, but right now, the euro-ruble relationship is at a very manageable level at just over 72 to 1.

So, it's really in December of 2018, when the Russian Federation placed the ban on several imported goods from the Ukraine that included wallpaper that created this near-term challenge. I would say that the demand pattern that we saw from our Ukraine and Russian customers was very weak in Q1 as evidenced by the year over year decline. We are seeing some improvement in Q2, but it's not at normalized levels. So, we'll continue to be aggressive at managing our cost profile. We'll continue to work collaboratively with our customers. In some cases we're able to modify recipes and change basis weights and we still have the leading share position in these markets. So I would say that we have the best purview as to what's going on in this particular area.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Okay thanks. And my last question is on the migration to the functional model. I know it's early days, but is there anything that you've seen that encourages you or otherwise?

Dante C. Parrini -- Chairman and Chief Executive Officer

Yes, I would say that the work is progressing according to plan, I'm encouraged by what I'm seeing. There's a lot of energy and engagement among our broader leadership team, as we continue to put more definition and specificity into role mandates and how we're going to operate in this functional model. But really I think we're all seeing the benefits of creating a wider and flatter organization that's built for greater speed and efficiency.

And so, we're going to complete the process of consolidating roles and positions and increasing spans and reducing layers and I think we'll build a much more integrated and synergistic Company, that is a better fit for the new scale and the strategic focus of being a more stable performing Engineered Materials Company.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Thank you.

Operator

(Operator Instructions) And our next question comes from the line of Debbie Jones from Deutsche Bank. Your line is now open.

Deborah Jones -- Deutsche Bank -- Analyst

Hi, good morning.

Samuel L. Hillard -- Senior Vice President and Chief Financial Officer

Hi Debbie.

Dante C. Parrini -- Chairman and Chief Executive Officer

Hi Debbie.

Deborah Jones -- Deutsche Bank -- Analyst

I also wanted to ask you questions on volume, it does sound like Airlaid is tracking at the high end of the range, you just talked about some of the composite fibers headwinds. You mentioned that you took some downtime in the quarter and I'm just curious, it looks like annualized that would be something like $6 million if you were to do it for the full year. I'm just trying to think through, one, how long do you continue to kind of wait to see if things improve? And then two, if you could just tell us a little bit more about where the downtime is being taken. I didn't actually catch it, this is kind of across different platforms, we're just one line or something like that?

Samuel L. Hillard -- Senior Vice President and Chief Financial Officer

Yes sure, Debbie. So you're right that the downtime impact in Q1 was $1.5 million and we guided that impact would be similar in Q2. So kind of $3 million for the first half. If you were to annualize it, yes, it would be a $6 million impact. I think that's coming across a variety of lines, but largely on the wallcover metallized products where you saw the largest decrease in the volumes and we'll continue to monitor that situation.

Deborah Jones -- Deutsche Bank -- Analyst

Okay. My other question is kind of looking at your guidance. The sequential improvement in Airlaid actually seems like your typical seasonal, but maybe a couple of -- a bit of a benefit from the ramp up. Can you just confirm that? And then again on the volume side of things for Airlaids, can you just talk us through how much of your expectation for the full year again is related to the ramp up in customer qualification and how much of it is just kind of like the underlying growth that you're seeing in those markets?

Dante C. Parrini -- Chairman and Chief Executive Officer

Sure Debbie, I'm happy to answer those questions. So the continuation of the successful qualifications and ramp up of the new products and customers that we saw in Q4, continue to build momentum in Q1 and we're expecting that for the remainder of the year, which is why we're confident guiding to the high end of the range for our legacy business, 10% or so. I would say that we're making very good progress with Fort Smith in general and in getting that facility up its learning curve and getting more efficient at moving between grades and doing this in a way that has less waste and less downtime through changeovers and things that are pretty typical when you're starting up a new facility and getting crews used to the nuances and specifics of different products that we make.

I would also say that the integration of our colleagues from Steinfurt has also been additive because they have been experts in things like tabletop for many many years and so now we have an even larger collection of assets know-how engineering and technical prowess that we can redeploy to all parts of our business to help us more proactively and pre-emptively improve. So, I would say that overall the investment in Fort Smith, contributions from our broader team across the Airlaid business are all contributing to this growth markets that we're serving, growing in the 46% range. And some of the relationships that we were able to foster to get support for the overall investment in Fort Smith are also holding up their end of the bargain in terms of entrusting us with greater volumes.

Deborah Jones -- Deutsche Bank -- Analyst

Okay. Is (inaudible) final clarification question with Steinfurt $2.1 million benefit, is that showing up in volume mix in the bridge Advanced Airlaid?

Samuel L. Hillard -- Senior Vice President and Chief Financial Officer

Yes.

Deborah Jones -- Deutsche Bank -- Analyst

Okay, And then when we think about FX, because I think that it was a little bit better than we had modeled. You mentioned some hedging. Is there a benefit at current rates that would continue in Q2 or should we just start going back to looking at your currency exposure as we look at our model?

Ramesh Shettigar -- Vice President and Treasurer

Yes. So just to clarify the benefit was noted in CFB. It was about a $1 million benefit on a year over year quarter basis. So basically that was driven by about a $0.5 million hurt in Q1 of '18, compared to $0.5 million gain in Q1 of '19. And that's driven largely from the timing of some of the buying forward of the euro. So, it's not $1 million that you're going to continue on, but as you know the rates have moved down.

Deborah Jones -- Deutsche Bank -- Analyst

All right, thanks. I'll pass it over.

Operator

There appears to be no further questions at this time. I would now like to turn the call back over John.

Dante C. Parrini -- Chairman and Chief Executive Officer

Okay. Well thank you for joining us on our call today and we look forward to speaking with you again next quarter. Have a great day.

Operator

This concludes today's conference call you may now disconnect.

Duration: 28 minutes

Call participants:

Ramesh Shettigar -- Vice President and Treasurer

Dante C. Parrini -- Chairman and Chief Executive Officer

Samuel L. Hillard -- Senior Vice President and Chief Financial Officer

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Deborah Jones -- Deutsche Bank -- Analyst

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