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Glatfelter (NYSE:GLT)
Q1 2020 Earnings Call
May 5, 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 2020 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions].

I would now like to hand the conference over to your speaker today Mr. Ramesh Shettigar. Thank you. Please go ahead, sir.

Ramesh Shettigar -- Vice President, Investor Relations and Corporate Treasurer

Thank you, Rachel. Good morning and welcome to Glatfelter's 2020 first quarter earnings conference call. This is Ramesh Shettigar, Vice President, Investor Relations and Corporate Treasurer. On the call today to present our first 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 slide.

We will also make forward looking statements today that are subject to risks and uncertainties. Our 2019 Form 10-K and Q1 2020 Form 10-Q filed with the SEC and today's release, all three 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. We're pleased to report that our business performed extremely well during first quarter of 2020, delivering adjusted earnings per share of $0.24 and adjusted EBITDA of $32 million. Not only was this a significant improvement over prior year, these results also exceeded quarterly expectations.

Our transformation efforts over the last two years, especially the reshaping of our portfolio toward more stable product categories, have gained from traction and are delivering meaningful results.

Airlaid Materials posted record EBITDA of $17.5 million and EBITDA margins of 17.7%, a 250 basis point increase over the same quarter last year. Our Airlaid assets and the materials we produce to enhance everyday life are playing a critical role in accelerating Glatfelter's growth and earnings profile.

Composite Fibers had a very strong shipment growth of 14% and operating profit improvement of 33% in the first quarter, building on the favorable performance delivered in the fourth quarter of 2019. Year-over-year shipments were up in all product categories, driving the segment to expand EBITDA margins by 230 basis points to 16.3%.

Before Sam goes into the details of the first quarter results, I wanted to share some perspectives on how we have been operating the company as we address COVID-19. Our top priority is the safety and health of our employees and their families. We instituted several new safety, hygiene, and communication protocols throughout our facilities and implemented work-from-home arrangements where practical.

Our business, including the vast majority of the products we produce, is classified as essential to everyday life, and we're proud to play our part in supporting global response efforts to the pandemic. We are diligently assessing and mitigating risks to ensure the constant supply of engineered materials to enable our customers to produce a variety of critical consumer staples during this challenging time. Given these efforts, all Glatfelter production facilities remain operational.

At this point, I'll turn the call over to Sam to provide an in-depth review of our first quarter results. I will then offer closing remarks before opening the call for questions. Sam?

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

Thank you, Dante. First quarter adjusted earnings from continuing operations was $10.8 million, or $0.24 per share, an increase of $0.08 versus the first quarter of last year. The $3.5 million improvement in income was attributed to exceptional performance in both Composite Fibers and Airlaid Materials segment, as well as lower corporate cost.

Slide four shows a bridge of adjusted earnings per share from $0.16 in the first quarter of last year to $0.24 in this year's first quarter. Composite Fibers results improved earnings by $0.06 driven by higher shipments across all product categories, higher production to support that demand, solid operation, and lower pulp prices. Airlaid Materials results improved earnings by $0.03 driven by strong demand for wipes, home care, and tabletop products, and highly efficient asset utilization. Corporate costs improved results by $0.01 from lower spending. Net interest expense improved earnings by $0.03 from lower borrowing costs achieved through our debt refinancing in early 2019. And taxes and other items unfavorably impacted results by $0.05 driven by higher tax rate relative to 2019 but in line with guidance.

Slide five shows a summary of first quarter results for the Composite Fibers segment. Total revenues were 5.5% higher on a constant currency basis compared to last year driven by volume growth of 14% as shipments were higher in all product categories. Food and beverage was up 2% with growth in both tea and coffee product categories given continued strong demand for single-serve beverages. Composite laminates shipments were up 30%, while technical specialties grew 13%, reflecting customer demand changes driven by the pandemic and success of newer products like moist disposable wipes. Wallcover recorded meaningful improvement in volume of 18% and metallized products rose 27% relative to milder first quarter shipments in 2019. Selling prices decreased by $2.6 million but were more than offset by lower raw material and energy prices of $4 million, primarily related to wood pulp. Operations were favorable by $1 million driven by efficient operations and elevated production to meet strong demand. The net effect of foreign exchange and hedging in the quarter relative to the same period last year was slightly favorable by $200,000.

Looking ahead to support the second quarter, shipments for overall for the overall segment are expected to be approximately 25% lower relative to the first quarter, driven almost entirely by wallcover and metallized. The volume decline in wallcover is projected to be between 60% and 65% and is directly related to the effects of the COVID-19 pandemic on global wallcover end market, including the related decline in oil prices, which is severely impacting the Russian economy, our largest region in terms of demand for these materials.

As a result, we will be taking downtime in our Dresden facility to adjust production with anticipated shipments. Metallized volume is projected to be lower approximately 5% to 10% sequentially, driven by the consolidation of the metallized business in our Caerphilly UK facility. We estimate the combined impact of lower wallcover and metallized shipment and downtime in Dresden to negatively impact sequential quarterly results by $5.5 million to $6 million. We expect demand for all other product categories to be flat to slightly down to the first quarter shipment levels. Selling prices and raw material prices are expected to be in line with the first quarter, and we expect all production facilities to remain operational in the second quarter.

Slide six shows a summary of first quarter results for Airlaid Materials. This segment posted a record quarter with operating profit of $12 million and operating margin of 12%, exceeding our previous margin guidance for Q1 of 10% to 11%. EBITDA margins of 17.7% was another quarterly record set by Airlaid Materials, underscoring strong asset utilization, demand profile, and cost structure.

Revenues were flat versus the prior year quarter on a constant currency basis, driven by lower selling prices of $4.8 million from contractual cost pass-through arrangements with customers. However, this was more than offset by lower raw material and energy prices of $5.4 million. Shipments grew a solid 6% coming primarily from wipes, tabletop, and home care product. Our commercial team continues to cultivate deep customer relationships to leverage production quality and the proprietary characteristics of our products as key differentiators to the competition, contributing positively to ongoing growth.

Operations favorably impacted profitability by $400,000 given higher production to meet elevated customer demand, including the COVID pandemic-driven lift in buying patterns. For the second quarter, we anticipate total shipments to increase by 3% sequentially; selling prices and raw material prices are expected to be in line; and we anticipate all Airlaid facilities to remain operational.

Slide 7 shows corporate costs and other financial items. For the first quarter, corporate costs were favorable by $600,000. With Glatfelter fully transitioned to the functional operating model, we are seeing the benefits come through in our results. We expect 2020 corporate costs to be in the range of $28 million to $30 million, consistent with the previous guidance.

In April, we completed the closure of our metallized production in Gernsbach, Germany, with all metallized production now consolidated into our Caerphilly, UK facility. This has resulted in a restructuring charge of $6 million, which we booked in the first quarter, and we expect another $4 million to $5 million to be booked over the second quarter. We have so far recorded $3.5 million for employee severance related costs and $2.5 million to accelerate the depreciation of equipment idled. We have also implemented cost optimization initiatives in other European locations during the quarter to further improve our cost structure. Interest and other income and expense are projected to be approximately $2 million lower in 2020 compared to 2019, or about $11 million in total for this year.

Slide eight shows our cash flow summary. During the first quarter operating cash flow was negative $5.6 million, favorable to the same period last year by $18.5 million. This improvement was driven primarily by stronger earnings and lower cash interest payment. Also in Q1 2019, we successfully settled the litigation related to the Fox River matter with a payment of approximately $21 million. Correspondingly, in the first quarter of 2020, we made higher incentive compensation and cost optimization-related payments of $7 million. Our tax rate for 2020 is estimated to be between 38% and 40%, consistent with prior guidance. Also in line with prior guidance, we expect capital expenditures for the year to be between $30 million and $35 million, while depreciation and amortization expense is projected to be $51 million.

Slide nine shows some balance sheet and liquidity metrics. Overall, we are very well positioned from a liquidity and leverage perspective following the successful cost optimization initiatives and debt refinancing completed in 2019. Our net debt on March 31st was $246 million and our leverage was 2.2 times, with available liquidity of about $212 million. We expect our liquidity and net leverage to further improve in 2020 as earnings and cash flow increase. And finally, I would also like to note that both Moody's and S&P have recently reaffirmed their respective ratings for Glatfelter as well as their stable outlook for the company.

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

Dante C. Parrini -- Chairman and Chief Executive Officer

Thanks, Sam. As part of Glatfelter's broader purpose, we're proud to produce innovative materials that are essential for everyday life. As you can see on slide 10, approximately 85% of Glatfelter's revenues are tied to consumer staples. Whether it's hygiene and personal care products to maintain a healthy lifestyle, food and beverage products enjoyed on a daily basis, or solutions that keep customers and their surroundings clean and safe, our customers can rely on us to fulfill this essential role.

And this is made possible with the dedication and resolve of all Glatfelter people around the world. I'm very proud of what our employees have accomplished in the first quarter by staying focused and delivering excellent operational performance despite the pandemic. They work tirelessly to keep our mills running in a safe and compliant manner, while exceeding customer expectation, and I commend them for their hard work, professionalism, and unwavering commitment.

Now I'd like to shift gears to some other positive news. On Earth Day we launched a new website with updated content to keep pace with the new Glatfelter and reflect our transformation efforts as a leading engineered materials company. Our expanded -- we expanded our ESG reporting to highlight our commitment to sustainability, including various initiatives, policies, and priorities. We hope you find the new website informative and easy to navigate.

Also as Sam just reported, we recently concluded conversations with our credit rating agencies where both reaffirmed their respective ratings for Glatfelter and maintained their stable outlook. This is another testament to our robust balance sheet, strong liquidity profile, and the positive direction of our business.

In closing, we remain fully committed to keeping our employees safe and healthy and serving our customers during this critical time. Demand for our Airlaid Materials remains strong, especially due to elevated health and hygiene standards around the world. And apart from the wallcover and metallized categories, our Composite Fibers segment is experiencing relatively stable demand for its products.

Even though COVID-19 is having an unprecedented impact on society and the global economy, we are encouraged by the performance of our business in the face of such volatility and uncertainty. We're very confident in the durability of our business model and believe Glatfelter remains well positioned to generate meaningful value over the longer term.

I will now open the call for your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Kurt Yinger from D.A. Davidson. Your line is open. Please ask your question.

Kurt Yinger -- D.A. Davidson & Co. -- Analyst

Yes. Good morning, everyone, and thanks for taking my question.

Dante C. Parrini -- Chairman and Chief Executive Officer

Hey, Kurt.

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

Hey, Kurt.

Kurt Yinger -- D.A. Davidson & Co. -- Analyst

Just wanted to -- morning. I just wanted to start on the Composite Fibers volume guide. I mean, if my math's correct, the wallcover and metallized components of that are about 25% of sales. And so I'm just having a tough time kind of bridging how those two segments by themselves can kind of lead to that full-segment 25% decline sequentially. So maybe if you could just touch on other areas of the portfolio that might be weak as well that would be helpful.

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

Yeah. Sure, Kurt. So, first of all, your rough math is right. I think wallcovering in Q1 was 15% of Composite Fiber sales and metallized was 9%. So it is about a quarter of the revenue for the segment. But keep in mind, you've got the compounding impact of both the lost volumes but then also the downtime related to it, and it's the downtime that's of particularly interest and that's a meaningful financial impact. So that $5.5 million to $6 million is related to those two segments and the combined impact.

Kurt Yinger -- D.A. Davidson & Co. -- Analyst

Got it, OK. That makes sense. And within food and beverage in Composite Fibers, are you seeing any benefits from the stay-at-home orders at all, or it's pretty much business as usual there from a demand standpoint?

Dante C. Parrini -- Chairman and Chief Executive Officer

Well, as Sam said, we had year-over-year growth in both tea and single-serve coffee. And as you know, in 2019, single -- the tea category was a little bit soft. So we've seen recovery in tea, and we continue to have a very strong position in single-serve coffee. Keep in mind that the consumers didn't start to really react en masse to COVID-19 until the second half of March. So we've seen a little bit of a tailwind pickup across a number of categories for people that were, whatever you want to call it, hoarding, pantry-stuffing, just accumulating supplies for the transition to working from home and dealing with uncertainty. So we did see some upside, and we expect that the food and beverage category will continue to perform well in Q2.

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

And Kurt, don't forget, too, that there is also the in-office consumption of single-serve beverages, which obviously would be down in this type of environment.

Kurt Yinger -- D.A. Davidson & Co. -- Analyst

Right. Okay, that makes sense. Appreciate that. And then just within Composite Fibers, I mean given a potentially weaker demand environment, how are you thinking about the pricing backdrop and just the overall competitive landscape there and maybe any risk looking forward?

Dante C. Parrini -- Chairman and Chief Executive Officer

Well, I think if you look at our Q1 results, you can see the relationship between selling price, volume and mix, and then input cost and energy changes, and so that was a beneficial combination, which helped us increase our margins by 230 basis points. We do recognize that when input costs are down, we do have some pass-through arrangements for customers, but it tends not to have as much of an impact on the margin.

So I will also qualify all of our comments today about guidance for Q2 is I think we have a better view than perhaps many but not a perfect view, and we know that the current landscape between the pandemic and the actions taken by reserve banks and governments around the world are creating a lot of volatility and uncertainty, and so we have a bit of an occluded view but we do have a view. And we're pretty confident in the guidance that we're providing for Q2 across both of our reporting segments.

Kurt Yinger -- D.A. Davidson & Co. -- Analyst

Got it. Appreciate that, Dante. And then just last two. Could you just update us on how you're thinking about capital allocation priorities? And then within the $30 million to $35 million capex guide, could you also remind us maybe some of the more discretionary items within there and what you would think about as more of a barebones capital spending level on an annual basis?

Dante C. Parrini -- Chairman and Chief Executive Officer

Sure, I'll deal with the capital allocation piece and I'll let Sam talk about capex. So I think it goes without saying that when you're in an environment that we're in making sure you protect your balance sheet, making sure you're very aggressive with your costs, and making sure that you have a very acute eye on cash flows are imperatives. And the actions that we have taken over the last 18 to 24 months put Glatfelter in a very good position heading into the crisis and will continue to serve us well as we manage through each phase of the crisis.

So in the near term, we're going to continue to focus on making sure we have a strong balance sheet, we have a strong liquidity position that we are able to endure and sustain regardless of what comes our way, and we also want to be in a position where when it's time to shift gears and be more aggressive about making investments to grow our business, we're willing and able to do that. Sam, you want to comment on capex?

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

Yeah, sure. So for Q1, we had $7 million of capex. So if you annualize that that's $28 million versus the guidance we've given of $30 million to $35 million, so a little bit behind that, fair to say, but we did see similar patterns last year where we made it up in the back half of the year. But I would say this, we're going to continue to watch the overall performance of the company and our capital spending and our cash flow like a hawk and respond accordingly. Obviously, with all the mills continuing to operate, we need to make sure they're well maintained and we're spending money on maintenance and replacing parts as they wear out. So that's going to have to continue. If something were to happen where that -- we were no longer firing on all cylinders, then sure, you would expect to have less maintenance and spend needs, but we'll continue to watch that and we'll deliver capital back if it's not needed.

Kurt Yinger -- D.A. Davidson & Co. -- Analyst

Great. Appreciate the color and good luck in the upcoming quarter.

Dante C. Parrini -- Chairman and Chief Executive Officer

Thank you.

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

Thank you.

Operator

Your next question comes from the line of Anojja Shah from BMO Capital Markets. Your line is open. Please ask your question.

Anojja Shah -- BMO Capital Markets Corp. -- Analyst

Hi, good morning.

Dante C. Parrini -- Chairman and Chief Executive Officer

Good morning, Anojja.

Anojja Shah -- BMO Capital Markets Corp. -- Analyst

Hi. You had mentioned some cost reduction efforts in the EU. I think that's separate from what you're doing at Caerphilly. And if so, I'm sorry if I missed it, but did you give any sort of financial savings that you expect from that, and can you give more details there on the restructuring?

Dante C. Parrini -- Chairman and Chief Executive Officer

Yeah, sure. So the vast majority of the restructuring spend we reported for this quarter was related to the consolidation from our Gernsbach facility to our Caerphilly facility, and that's for metallized production. So that was I think $6 million of the $7.7 million spend. You did see another kind of $1.5-ish million spend in EU, which we expect to deliver certainly savings next year -- sorry, savings for the rest of the year, but by far, the savings or the restructuring spend related to Caerphilly is -- some of it is in the EU as well, because it's Germany.

Anojja Shah -- BMO Capital Markets Corp. -- Analyst

Got it. So this isn't a separate EU sort of program -- a new program?

Dante C. Parrini -- Chairman and Chief Executive Officer

It's just something -- yeah, I mean we conveyed this after Q4 earnings call or during the Q4 earnings call where we said, hey, we're going to shut down the metallized operation in Gernsbach, move everything to the UK. That will take out about 100 FTEs. We'll do some restructuring of that part of the business to get a better cost structure and have a one discrete manufacturing facility for metallized. We've also looked at some other European facilities, whether it was Dresden to take -- a crew out of the wallcover business and this was pre-COVID-19, tightening things up a little bit across the portfolio, I would say.

Anojja Shah -- BMO Capital Markets Corp. -- Analyst

All right. Okay. And then switching gears, you mentioned that the switch to the functional management structure is complete and you're already seeing some benefits. Can you just give us a little more detail on that, what you're seeing, what you expect to see?

Dante C. Parrini -- Chairman and Chief Executive Officer

Sure. I'll start and I'll invite Sam to add any other comments. The drivers of putting in this different operating model was really a function of the divestiture of our specialty business and how we wanted to build the new Glatfelter as an engineered materials business and adjust our cost to fit the footprint and the scale of the new business. And we felt we had duplicative costs that were in these business unit structures. We wanted to have standard processes across the globe. We wanted more focus on excellence in commercial execution, more focus and expertise in global supply chain execution, and we put leaders in place, and they've built their organizations and are instituting standard business processes, streamlining and thinning out, so we have a flatter, wider organization, being able to operate more quickly, and we're placing an emphasis on agility and speed prior to COVID-19.

So I think that served us well. And some of the benefits that you saw in Q4 in Composite Fibers in terms of top line and volume performance and how that carried over into Q1 I believe are representative of a more coordinated and focused commercial effort, and we're seeing the same play out in our global supply chain, especially as we're having to implement very dynamic and hands-on task forces is to make sure that we manage our suppliers and our distribution network, and ensure that our supply chain is strong and reliable, so that we can maintain strong and reliable service to our customers.

And you've also seen continued improvement in our overall corporate costs. So I would say those are a handful of benefits, some are more quantitative, some are qualitative, but directionally, we're pleased with where we are at this point. You want to add anything, Sam?

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

I think that covered it very well. Maybe just one other tangible example to point to. In Q4, we -- last quarter we commented that we were looking to improve our Airlaid operating margins to 10% to 11%. Q4 was the first quarter we had our new SVP of global supply chain in place. Q4 he and his team have been firing on all cylinders, and we delivered operating margins ahead of the expected improvement we guided to. So, just one more tangible example of that.

Anojja Shah -- BMO Capital Markets Corp. -- Analyst

Great. That's all really helpful. Thank you.

Dante C. Parrini -- Chairman and Chief Executive Officer

Thank you.

Operator

There are no further questions. I will now turn the call over to Mr. Dante Parrini.

Dante C. Parrini -- Chairman and Chief Executive Officer

Okay. Well, I'd like to thank everyone for joining our call today, and we look forward to speaking with you again next quarter. Have a good day and stay well.

Operator

[Operator Closing Remarks]

Duration: 29 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

Kurt Yinger -- D.A. Davidson & Co. -- Analyst

Anojja Shah -- BMO Capital Markets Corp. -- Analyst

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