Image source: The Motley Fool.
Glatfelter (GLT 0.68%)
Q4Â 2019 Earnings Call
Feb 6, 2020, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Glatfelter's Fourth Quarter 2019 Earnings Call. I will now turn the call over to Mr. Ramesh Shettigar. Sir, please go ahead.
Ramesh Shettigar -- Vice President, Investor Relations and Corporate Treasurer
Thank you, Joanna. Good morning, and welcome to Glatfelter's 2019 fourth quarter and full year earnings conference call. This is Ramesh Shettigar, Vice President, Investor Relations and Corporate Treasurer. On the call today to present our fourth quarter results, are 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 make forward looking statements today 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's earnings call marks the conclusion of a very successful and productive year for Glatfelter. We made significant strides in accomplishing the goals outlined at the beginning of 2019 to transform Glatfelter into a more growth-oriented and higher-margin engineered materials company.
Slide 3 highlights our numerous achievements. Airlaid Materials posted record EBITDA of $62 million and EBITDA margins of 15.3%, a 90-basis point increase over last year. Earnings strength was fueled by above-target shipment growth of 11% from the legacy business and Steinfurt delivering operating income at the high end of our guidance. The Fort Smith facility was a critical driver for the legacy volume growth and the successful integration of Steinfurt has been a catalyst for production mix optimization in Europe and the sharing of manufacturing best practices across the entire Airlaid platform.
Composite Fibers showed a marked improvement in the fourth quarter as it operated with a vigorous and rigorous focus on cost control and process improvement to counterbalance the challenging commercial and economic environment seen in many of its markets throughout the year. The segment ultimately managed to expand EBITDA margins by 40 basis points compared to 2018 finishing the year at 14.2%. The volume headwinds in the Metalized portfolio drove us to restructure operations within our Gernsbach Germany facility. We are eliminating approximately 100 full-time positions shutting down the Metalized operation at this facility and consolidating all Metalized production at our Caerphilly, UK facility.
In January, we also announced our intent to reduce one shift at the Dresden, Germany wallcover facility to better balance production with demand. While these decisions are difficult on our people, they are necessary to ensure the long-term success of our businesses. We remain committed to aggressively managing costs and improving operating efficiencies. As we continue to execute our business transformation strategy. With the sale of the Specialty Papers business in late 2018, we committed to realign our corporate cost structure with the new Glatfelter footprint and embarked on a path to reduce corporate cost by $14 million to $16 million by the end of 2020.
I'm pleased to report that we achieved our cost reduction goal ahead of schedule. While also successfully completing the transition services associated with the sale of the Specialty Papers business. Earlier in 2019, we terminated our defined benefit pension plan and in December successfully settled our qualified US pension liabilities creating the pathway to revert approximately $32 million of unrestricted surplus cash to the company. This event, coupled with the refinancing of our debt and strong earnings enabled us to significantly reduce our financial leverage and as we announced in our press release earlier today Glatfelter will be relocating its corporate headquarters from York, Pennsylvania to Charlotte, North Carolina.
Moving our headquarters to a larger metropolitan area is another important step in our ongoing transformation. Charlotte provides enhanced access to a larger pool of critical resources and diverse talent for future growth. And the Carolinas are a leading hub for the broader nonwovens industry. Additionally, being there a premier International Airport allows for easier and more efficient business travel. The transition to our new headquarters will occur in a phased approach, starting in mid-2020 and we will operate a satellite office in New York, until the transition to Charlotte is complete. We value the long and rich history the Glatfelter has built in York County and wish to thank everyone in the community for the tremendous support and partnerships over the year.
At this point, I'll turn the call over to Sam to provide a more in-depth review of the fourth quarter results. I'll then offer a few closing remarks, before opening the call for questions. Sam?
Samuel L. Hillard -- Senior Vice President, Chief Financial Officer
Thank you, Dante. Fourth quarter adjusted income from continuing operations was $7.7 million or $0.17 per share. The approximate $6 million improvement from the fourth quarter of the prior year was driven by earnings improvement in Composite Fibers, lower corporate spending and a favorable tax rate, slightly offset by Airlaid Materials operations.
Slide 6 shows a bridge of adjusted earnings per share from the fourth quarter of last year of $0.03 to this year's fourth quarter of $0.17. Composite Fibers results improved earnings by $0.05 as inflationary pressures on wood pulp abated driving lower input costs and Airlaid Materials results decreased earnings per share by $0.01 driven by unfavorable operating performance with a slight offset from improved shipments and foreign exchange.
Corporate costs improved results by $0.03 as we continue our relentless effort to align corporate overhead, with the new operating footprint. Net interest expense improved earnings by $0.03 from lower borrowing costs through our debt refinancing. Earlier in the year and taxes and other items improved results by $0.04, driven mostly by a significant improvement in the tax rate from one-time items.
Slide 7 shows a summary of fourth quarter results for the Composite Fibers segment. Total revenues were 3% higher on a constant currency basis compared to last year, driven by overall volume increase of 2% and nominal selling price improvement. The increase in shipments was driven by technical specialties products such as battery pacing papers, disbursal wipes and color catcher with the technical specialties category being up 20% overall.
Food and beverage products continue to provide growth, up 1% while wallcover shipments were down 7%. Raw material pricing was favorable by $4 million, primarily driven by the decline in wood pulp prices. Operations were negatively impacted by $1.7 million, primarily due to higher labor rates. The net effect of foreign exchange in FX hedging in the quarter relative to the same period last year was favorable to the P&L by $1.1 million. Looking ahead for the first quarter of 2020, shipments are expected to be 2% higher, while selling prices and input costs are expected to be in line with the fourth quarter.
Slide 8 shows a summary of fourth quarter results for the Airlaid Materials segment. The comparison to the prior year is inclusive of Steinfurt results in both periods. Revenues were up 2% versus the prior year quarter on a constant currency basis, driven by volume improvement of 6%, most notably adult incontinence, tabletop and wipes products. Selling prices declined by $4.3 million, due to contractual pass-through arrangements with customers that are tied to underlying raw material prices, which saw equal and offsetting improvement.
Operations negatively impacted profitability by $1.5 million, primarily due to unfavorable production mix and overall manufacturing performance at our Fulton Hogan, Germany facility. For the first quarter of 2020. We anticipate total shipments to increase by 2% sequentially. Selling prices and raw material prices are expected to decline slightly and we expect operating margins to return to the 10% to 11% range as seen in the first three quarters of 2019. And this will contribute approximately $1 million of incremental profit sequentially. Please note that our guidance for the Airlaid segment going forward will reflect a consolidated view of the legacy business and the Steinfurt acquisition. We will no longer be commenting on the two units separately.
Slide 9 shows corporate costs and other financial items. For the fourth quarter, corporate costs were favorable by $2.5 million. For the full year Glatfelter achieved $15 million of corporate cost reduction when compared to 2018. Through receipts for transition services and rigorous cost control and rightsizing, bringing us within the previously announced target range earlier than planned. We continue to expect 2020 corporate costs to be in the range of $28 million to $30 million with a relatively stable quarterly profile.
We also terminated our US qualified pension plan settled the plan liabilities and replaced it with an enhanced defined contribution plan for our employees. This event allowed us to monetize approximately $53 million of surplus cash after settling the plan obligations and in 2020 as part of the process to formerly revert the pension surplus to the company. We plan to use approximately $13 million of the surplus to fund it 401(k) suspense account that will be used to satisfy 401(k) [Technical Issues] and years and by establishing the suspense account, we can reduce the excise tax on the cash to be reverted to the company from 50% down 20% paying approximately $8 million in tax. As a result, the company will revert approximately $32 million of unrestricted cash for general corporate purposes. Interest expense and other income and expense are projected to be approximately $2 million lower in 2020 compared to 2019 or about $11 million.
Slide 10 provide some highlights of the announced relocation of our corporate headquarters to Charlotte, North Carolina. As Dante touched upon his opening remarks, this move as part of our continued transformation to a global engineered materials company. Under this relocation, we expect to spend approximately $6 million over the next two to three years in one-time costs related to the build-out of the office space and employee relocation in a phased approach beginning in mid-2020. Concurrently, we will be substantially reducing our office footprint in York, Pennsylvania, where we will maintain a satellite office. This phased approach will help us better manage the transition in terms of talent retention and upfront relocation costs and effectively reduces operational risk associated with the relocation.
Slide 11 shows our cash flow summary. During the fourth quarter operating cash flow was $76.9 million higher compared to the fourth quarter of last year, driven primarily by $53.4 million of cash from the qualified pension plan settlement in December 2019. On a full year basis, free cash flow was $75.1 million reflecting the Fox River liability settlement paid in the first quarter and the pension plan termination and settlement in the fourth quarter.
Capital spending was $27.8 million for the year, in line with our previous guidance and lower than 2018 by $14.3 million. We concluded 2019 with a tax rate on adjusted earnings of 30.4% benefiting from onetime discrete items such as the release of reserves associated with the conclusion of tax audits and certain state valuation allowance releases. We now expect a tax rate of 38% to 40% for 2020 given our latest forecast, largely reflecting a shift in our international pre-tax earnings mix between low and high tax jurisdictions. We expect capital expenditures to be between $30 million and $35 million in 2020 and depreciation and amortization expense of approximately $51 million for the year.
Slide 12 shows some balance sheet and liquidity metrics. Through the combination of our debt refinancing, stronger earnings and the cash from the settlement of the pension plan. We achieved a significant reduction in net leverage finishing the fourth quarter at 2.2 times with available liquidity of $200 million. We expect liquidity to further improve in 2020 as we continue to drive earnings growth from our operating segments.
This concludes my prepared remarks, I will now turn the call back to Dante.
Dante C. Parrini -- Chairman and Chief Executive Officer
Thanks, Sam. First, I'd like to start by saying, I'm very proud of the significant progress made by Glatfelter people in 2019 and to let you know that we're looking forward to another promising year in 2020 as we continue building the new Glatfelter. Our transformation toward becoming a more profitable higher growth engineered materials company continues to generate positive momentum and enthusiasm among all stakeholders. And the results of our team's hard work are clearly reflected in our financial performance.
Our new operating model is enabling us to sharpen our focus on commercial excellence, greater supply chain efficiencies, more collaborative innovation and rigorous cost optimization. We intend to build on these capabilities to accelerate the pace of earnings growth and cash generation, as we execute our growth and specialization strategies.
I'll now open the call for your questions.
Questions and Answers:
Dante C. Parrini -- Chairman and Chief Executive Officer
[Operator Instructions] Your first question comes from Mark Wilde of BMO Capital Markets. Mark, your line is open.
Jesse Barone -- BMO Capital Markets -- Analyst
Hey, this is Jesse Barone on for Mark Wilde. Good morning, guys. Just to start just with the HQ move. Could you guys just kind of discuss any cultural change you're looking from this and about how many people are you looking to have in the new location?
Dante C. Parrini -- Chairman and Chief Executive Officer
Sure. So, maybe to provide some context, since we divested Specialty Papers in 2018, our local workforce dropped from about 800 to 70 and so, we felt that moving the headquarters to a larger metropolitan area would be another important step as we build the new Glatfelter and really enhancing our access to a larger pool of critical resources to build the future growth of the company and a larger and more diverse talent pool. So again, as we build our new company and want to be a more progressive more growth oriented, more innovative organization. I think this is a logical next step among many others with all due respect to your county and how wonderful they've been to us. But the pragmatic perspective tells me that this is the right time and this is the right place and we're very excited about it.
Jesse Barone -- BMO Capital Markets -- Analyst
That's helpful. And then just a couple other questions from my side. Can you just kind of flush out a little bit more about the pension obligations $32 million that you're going to receive. Is it just kind of from residual costs there? Or residual assets? Sorry.
Dante C. Parrini -- Chairman and Chief Executive Officer
Yes. So, when we settle out the liabilities in Q4, we had a surplus of $53 million. So, we have that now. It is ours -- we have full access to it. It's in our pension trust account and then what we'll do there is, instead of paying a 50% excise tax on that by setting up the suspense account. We put 25% into the suspense account, which will fund our 401(k) contributions for the next seven years, so then the leftover is only subject to 20% excise tax. And that leaves $32 million of unrestricted cash that we can do whatever we want with plus we've got the additional $13 million that we set aside for 401(k) contributions.
Jesse Barone -- BMO Capital Markets -- Analyst
Very helpful. And then just kind of a follow-up with your leverage coming down quite a bit over the last year. Can you just kind of talk about capital allocation M&A plans going forward. Any specific areas of interest there?
Dante C. Parrini -- Chairman and Chief Executive Officer
Sure. So one of the things we want to do is in a smart fashion, continue to build the new Glatfelter and add scale to our new platform, which is in my opinion, a much more stable, higher margin and more cash generative platform and now we're looking at opportunities to make investments that have the right return profile to help us add scale. So, I would see combination of organic and inorganic investments on the horizon as we look at building the new Glatfelter.
Jesse Barone -- BMO Capital Markets -- Analyst
And then lastly from my side, are you seeing any more attention being paid a cellulose-based nonwoven compared to a polymer-based nonwoven product?
Dante C. Parrini -- Chairman and Chief Executive Officer
Yes, is the short answer. And we think that's advantageous to Glatfelter because the vast majority of the feedstocks, we used to produce our engineered materials are plant-based.
Jesse Barone -- BMO Capital Markets -- Analyst
Okay, that's all from my side. I'll turn it over. Thanks.
Operator
[Operator Instructions] Your next question comes from the line of Steve Chercover of D.A. Davidson. Your line is open.
Steve Chercover -- D.A. Davidson -- Analyst
So, first of all the moves that you're taking to consolidate Metalized production carefully. If I said that, right. Can you put some financial metrics on that, you're taking out 100 jobs, presumably some of that will be offset by higher freight, but can you tell us with the financial impact will be, what it's all said and done?
Dante C. Parrini -- Chairman and Chief Executive Officer
Sure, I'll start and I'll give Sam, the opportunity to provide any additional comments he may choose. So, of course, the restructuring is tied to shutting down the metallized operation at the Gernsbach, Germany facility. We'll consolidate all remaining Metalized business into the Caerphilly, UK facility. So, we will operate one discrete facility that does only metalizing, which we think is a better overall structure for the future. And then the 100 FTE reduction is really designed to offset unallocated fixed costs, solidify the overall cost profile in Gernsbach and read out the lower profit or non-profit product lines from that particular portfolio.
Samuel L. Hillard -- Senior Vice President, Chief Financial Officer
And I would say the one thing to add is given we're in active negotiations with the works council right now, we're not in a position where we can give guidance on the estimated severance, Steve.
Steve Chercover -- D.A. Davidson -- Analyst
Got you. Okay. Well, in due course. And then the improved volumes in Composite Fibers, which was nice to see. Excuse me. And the expectation that you will have more growth. Has that business made a turn that you expect to be sustainable?
Dante C. Parrini -- Chairman and Chief Executive Officer
So, we agree that we were pleased to see the volume recovery in Q4. I do attribute part of this to great effort by our new commercial and innovation team. So, this is a reflection of the new operating model we've put in place which has brought new energy and new intensity and new skills and perspectives to that part of the business. Many of the markets that we serve are still growing. Steve, there may be growing more like GDP-ish rates, but nonetheless they are growing. And so, when we look at Q4 by way of example and technical specialties being up 20% and that's a combination from some of the consumer-oriented products that we produce like dispersal wipes, so the moist toilet tissue color catcher which goes into the close washing machine, our electrical products that go into [Technical Issues] battery manufacturing and super capacitors. We've spoken about food and beverage being a very solid and cash generative segment and coffee continues single serve coffee continues to be a strong performer. So, and I think it's obvious, we're taking steps to address the underperforming parts of the Composite Fibers portfolio like reducing our exposure in Metalizing and getting everything under one roof. We should have a cost advantage there. And we can focus on EBITDA optimization and it will be less distracting to the overall business and then also, we took a shift. We plan on taking a shift out of the Dresden Germany wallcover facility to better match demand with production. So overall, I think these are very consistent moves with reshaping our portfolio in a very practical and measured fashion, so that we can execute well we can capture and sustain the benefits and we avoid driving unnecessary J curves into the near-term performance of the business.
Steve Chercover -- D.A. Davidson -- Analyst
Great. Just a couple of other quickies. What accounts for the step up in capex this year and is the office build out incorporated in that number?
Samuel L. Hillard -- Senior Vice President, Chief Financial Officer
Yes. So, we finished last year at around $28 million of capex, we're guiding to $30 million to $35 million this year. I would say, two factors for the step up. One, as you pointed out, there is going to be some capex associated with the new HQ costs. So that number $30 million to $35 million is inclusive of the capital we intend to spend on the move, and then also Fort Smith is now going to be in its third year of the facility. So, for the first two years, it was a pretty nominal capex type asset. But we want to continue to invest to ensure maximum efficiencies and capacity utilization as well.
Steve Chercover -- D.A. Davidson -- Analyst
Okay. Which actually is a good segue into my last one, you kind of touched on this, the previous question. But with the balance sheet back at target levels. There is potential for expansion at Fort Smith, is that required yet or what do you think the timeframe might be where you'd be constrained on capacity?
Dante C. Parrini -- Chairman and Chief Executive Officer
Sure. So, our capacity utilization for the broader Airlaid platform, I would describe as kind of mid '90s and based on our plans for continuous improvement targeted capex to debottleneck our centers of excellence. We believe we have capacity for a couple of more years and as we've said previously, as a leader in this particular space and seeing a long runway for continued growth. We're prepared to continue investing in this segment.
Steve Chercover -- D.A. Davidson -- Analyst
Okay, thanks, Dante. That's all I had.
Operator
[Operator Instructions] Speakers, there are no further questions at this time. You may continue.
Dante C. Parrini -- Chairman and Chief Executive Officer
Okay. Well, thank you for joining our call today and we look forward to speaking with you again next quarter. Have a good day.
Operator
[Operator Closing Remarks]
Duration: 25 minutes
Call participants:
Ramesh Shettigar -- Vice President, Investor Relations and Corporate Treasurer
Dante C. Parrini -- Chairman and Chief Executive Officer
Samuel L. Hillard -- Senior Vice President, Chief Financial Officer
Jesse Barone -- BMO Capital Markets -- Analyst
Steve Chercover -- D.A. Davidson -- Analyst
