Q4 2023 Glatfelter Corp Earnings Call
Participants
Ramesh Shettigar; SVP, CFO and Treasurer; Glatfelter Corp
Thomas Fahnemann; President, CEO; Glatfelter Corp
Mike Ginnings; Analyst; Angelo Gordon and Co LP
Presentation
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 as 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-Q's, 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'd 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 seventh, we announced a significant strategic milestone for the Company and our shareholders was proposed plans to merge Glatfelter with Berry Global's HH and F business, which I'll speak to in more details 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 family segment, generating improved volume and profitability compared to the prior quarter, which contributed to approximately $9 million improvement in adjusted EBITDA over a 12 months period. This outcome is a direct reflection of the expanded commercial focus for our Sunterra branded products, operation improvements in each of our force bundling sites and careful cost discipline throughout the segments.
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 gap and improving our inclined wire production.
In addition, the segment benefited from having divested the Orbio Schmidt in 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 the 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 plant maintenance shutdown in our ethanol 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 airline 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 displayed 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. Spontaneous 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 improvement.
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 oil 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 investment and operation that was divested in the third quarter, Europe beer 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 & Technical Specialties.
Also, the fourth quarter was the first full quarter since the divestiture of our investment in 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 incline wire production and foreign exchange was unfavorable by $1.5 million, driven by hedging gains from last year.
Slide 7 shows a summary of Q4 results for the specialty segment revenues were down 7% on an 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 enter 2023. Operations to Fx and other items were $1.9 million favorable through intense focus on manufacturing efficiencies, headcount reductions and higher production in the fourth quarter to fund this 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 and 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 a higher interest rate impact. 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 31st, 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're 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 taxes 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 merger with Berry Global's HH. and F. business, which is anticipated to close in the second half of 2024. For the proposed combination of Berry, merging a majority of its global non-wovens 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 four 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 Barry stronger, such as the Asia Pacific and Latin American markets and the converting capacity of the two business will create opportunities for Glatfelter SunPower 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 closed 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.
Question and Answer Session
Operator
(Operator Instructions)
Mark for Roger Spitz, Bank of America.
Hey, good morning. This is actually Olivia on for Roger. Thanks for taking our questions.
Thomas Fahnemann
Hi Olivia.
Hi, good morning. And so what are the market shares of various ages and Glatfelter and other main players in the key business were on Glatfelter and aged and overlap?
Thomas Fahnemann
Okay. And even though we have product in the same and 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 segments. 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 just in the same segments with different products.
Got it. And what percentage of the global market to fiber-based nonwoven directly compete with poly coupling base?
Thomas Fahnemann
I mean, this is a very difficult question to come up really with a percentage. But I can what I can say is that there's many different end uses 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 and the health care section in certain applications, you can even go either way you can go more on the polymer side, we 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 product, which are the same. So but again, there's still some flexibility for customers to switch depending on the application.
Okay. Got it. Thank you. And then how much CapEx does HHNF spend?
Thomas Fahnemann
Olivia, historically, they've 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%.
Okay. Thank you. That's very helpful. And I guess what is the mix, maintenance CapEx and normalized CapEx of the NewCo?
Thomas Fahnemann
Yes,Olivia, that's a it's a bit too early for us to comment on that. You know, 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.
Okay, that's fair. Thank you. And then I guess on one of the Glatfelter bonds benefit from guarantees of all the mature entities that will be providing guarantees to the new coal credit facility?
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 guaranty or Glatfelter.
Okay, thank you. And then how much debt will be transferred from HHNF and will be repaid with new coal credit facility?
Thomas Fahnemann
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 Barry, 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.
Okay. Thank you. That's very helpful. And then our last question on how does new coal plants to report on HHNF in the and Olivia, this is this is really too early right now?
Thomas Fahnemann
I had two weeks the announcement and as I mentioned before, will also provide information along the line to closing, but this is too early right now to tell.
Thank you so much. That's all for us.
Thomas Fahnemann
Thanks, Olivia.
Operator
Mike Ginnings, Angelo Gordon.
Mike Ginnings
Morning, Thomas, Ramesh.
Thomas Fahnemann
Mike, good morning. How are you?
Ramesh Shettigar
Good morning.
Mike Ginnings
Excellent. So let's talk about spun lace for a minute. Obviously kind of a standout performance and kind of nice trajectory over the course of the year. Can you give us a little more color 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 '24?
Thomas Fahnemann
Sure. Thing again, we are very pleased with the and this is a real turnaround strategy. A result and story, if you if you think about it where we started. And so we worked very diligently to look at our two sites for the hygiene wide a segment on national and so we dramatically improved our operational performance, whether it's way down time line availability and quality.
So that's helped tremendously to improve the performance. And on the other side, our Santera 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. 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 four? That's probably still a little bit too early, and we still need to see. But we are very excited about the span this business many about SunPower because we are seeing growth now and further growth will come from the SunPower side. And so I think here we made a huge step forward, and I would characterize it right now, Mike, this business is now and on a good foundation. We stabilized that and they are not losing money. We're making money stabilizing it. We are roundabout at a 7% EBITDA margin. And I think we know where to go and we are very optimistic.
Mike Ginnings
Congrats. I know that's been a big focus in then on the on the airlaid side, can you help us understand a little bit more interesting some of the commentary, mostly around Europe being some of the softness. Can you maybe give a little bit more visibility into sort of what you're seeing in the US versus what you're seeing in Europe, whether that be kind of volume or margin or sort of how do you think is best to lay that out for us?
Thomas Fahnemann
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, disappointing the market, I mean the volumes are really down there and what because customers also look for cheaper alternatives. I mean, they like the product is 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 are doing is we are looking at the LA port a product for also here finding different actually segments where our product could really add value to customers. And that work is ongoing, takes a little bit time. And that's also if I look into 2020 for the second half of 2024 and a late Airlaid would be better than the first half. We already have projects and all that.
And that'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. But we realized this and end of 2022, early 2023. And we said when the market is turning, we need to be more robust in our customer portfolio. And 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 C customers. But also that takes a little bit of time. And last but not least in LA. There's ones, 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 as of even going up again.
So that's another issue which we which we have to tackle. And it's a challenge in our Airlaid business from yes, to all that combine 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, it would be better than the first half and we'll get back to Will, but we used to have.
Mike Ginnings
Excellent. Thank you, guys, very much. Congrats again on the quarter.
Thomas Fahnemann
Thank you.
Operator
(Operator Instructions) And ladies and gentlemen, there are no further question, and this does conclude today's Glatfelter's Q4 2023 earnings release conference call. Thank you for your participation. You may now disconnect.
