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Glatfelter (GLT -3.11%)
Q2 2020 Earnings Call
Aug 4, 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 Glatfelter's Q2 2020 Earnings Conference Call. At this time all participants lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Ramesh Shettigar from Glatfelter. Thank you. Please go ahead, sir.
Ramesh Shettigar -- Vice President, Investor Relations and Corporate Treasurer
Thank you, Kyle. Good morning and welcome to Glatfelter's 2020 second quarter earnings conference call. This is Ramesh Shettigar, Vice President of Investor Relations and Corporate Treasurer. On the call today to present our second 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 2019 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, Chief Executive Officer
Thank you, Ramesh. Good morning and thank you for joining us. Glatfelter delivered another solid quarter continuing the positive momentum we have been building. We generated adjusted EBITDA of $29 million and earnings per share of $0.22, a 16% improvement in EPS over the same period last year. Airlaid Materials posted record EBITDA of $17.8 million and EBITDA margin of 19%, a 360 basis point increase over the same quarter last year.
Our Airlaid segment successfully delivered strong quarterly earnings on the back of robust demand for home care and health and hygiene products coupled with disciplined focus on spending. This performance paved the way for delivering record-breaking earnings and margins despite the negative impact of reduced tabletop volumes caused by pandemic-related restaurant closures around the world.
Composite Fibers delivered a better than expected quarter in terms of profitability. Demand for wallcover products was favorable relative to the initial weak outlook at the beginning of the quarter. And we experienced continued strong volume growth in the food and beverage category. Aggressive cost control actions across the segment helped to mitigate the anticipated negative earnings impact from lower overall shipments and market-related downtime. EBITDA margin for the quarter was approximately 15% and on par with Q2 2019.
At the enterprise level, our operations in human resources leadership teams and production employees continue to keep all facilities operating despite the ongoing threat of COVID-19. The hygiene and safety protocols we instituted are serving us well and have been pivotal in keeping our employees healthy and safe while maintaining the uninterrupted supply of critical products to our customers. As for our non-manufacturing workforce, the work from home arrangements have been successful and very productive and remain in place today.
At this point, I will turn the call over to Sam to provide an in-depth review of our second quarter results. I will then offer some closing remarks before opening the call for your questions. Sam?
Samuel L. Hillard -- Senior Vice President, Chief Financial Officer
Thank you, Dante. Second quarter adjusted earnings from continuing operations was $9.9 million or $0.22 per share, an increase of $0.03 versus the same period last year. On a GAAP basis, we had a loss from continuing operations of $2.3 million or $0.05 per share. The GAAP loss was driven primarily by the pension plans settlements, excise tax accrual of $8.3 million, metallized restructuring expenses and other cost optimization charges of $5.4 million and a non-cash impairment of the Dresden wallcover trade name of $900,000.
Slide 4 shows a bridge of adjusted earnings per share of $0.19 from the second quarter of last year to this quarter's -- this year's second quarter of $0.22. Composite Fibers results reduced earnings by $0.02 from lower demand for wallcover products and related market downtime in Dresden, but were partially offset by strong shipments in the food and beverage category, improved operations and aggressive cost control actions.
Airlaid Materials results improved earnings by $0.03, despite lower volume driven by favorable sales mix and strong shipments in wipes, home care and feminine hygiene products. Volumes overall were impacted by the decline in demand for tabletop products as restaurants globally remained closed or operated at dramatically reduced capacity. Corporate costs were relatively in line with last year's second quarter and taxes and other items favorably impacted results by $0.02 driven by a lower tax rate for the quarter due to a delay in the timing of tax legislation enactment in the UK originally expected for the second quarter, but now expected to occur in the third quarter.
Slide 5 shows a summary of second quarter results for the Composite Fibers segment. Total revenues for the quarter were 6.3% lower on a constant currency basis compared to last year, driven by weaker wallcover shipments year-over-year of 49%, a direct effect of the COVID-19 pandemic as global wallcover retail markets remained closed for most of the quarter. The decline in wallcover products was partially offset by strong shipments in the food and beverage category, which were up 12%, representing growth in both tea and coffee product lines. Selling prices decreased by $2 million, but were more than offset by lower raw material and energy prices of $3.1 million primarily related to easing wood pulp prices.
Operations were slightly unfavorable as our Dresden facility had significant market-related downtime in the second quarter due to reduced demand, but this was mostly offset by strong production on inclined wire machines to meet customer needs. Additionally, aggressive cost control actions were taken across the segment in anticipation of the lower wallcover demand. The net effect of foreign exchange and hedging in the quarter relative to the same period last year was slightly unfavorable by $200,000.
Looking ahead to the third quarter, shipments for the overall segment are expected to be up 5%-plus relative to the second quarter driven by the expectation of gradual recovery in the wallcover markets with retailers slowly reopening and stocking up on new designs. The favorable impact of the wallcover recovery is expected to be partially offset by unfavorable mix driven by seasonal slowdown in demand for food and beverage products in the third quarter.
Selling price and raw material prices are expected to be in line with the second quarter. However, we expect operations to be unfavorably impacted by $1 million as increased wallcover production in our Dresden facility will be more than offset by market downtime on some of our inclined wire production assets necessary to manage inventory levels and for seasonal maintenance. We expect Q3 earnings for Composite Fibers to be approximately in line with Q2.
Slide 6 shows a summary of our second quarter results for Airlaid Materials. This segment posted another record quarter with operating profit of $12.3 million and operating margin of 13%, exceeding our margin guidance of 10% to 11% provided at the beginning of the year. Despite the uncertainty in global markets, EBITDA margin of 19% was another quarterly record set by Airlaid Materials. This underscores the relevance of our product categories as essential consumer staples in times of economic uncertainty.
Revenues were down 7.2% versus the prior year quarter on a constant currency basis, driven by lower selling prices of $4.6 million from contractual cost pass-through arrangements with customers. However, this was more than offset by lower raw material and energy prices of $5.1 million. Shipments were 2% lower driven by softer than expected tabletop demand as restaurants around the world largely remained close during the quarter. However, the Airlaid segment experienced favorable mix with strong demand for wipes, home care and feminine hygiene products as the COVID pandemic brought about increased consumer focus around hygiene products in general.
Operations favorably contributed to profitability by $900,000 driven by higher production at our North American facilities to meet elevated customer demand and disciplined cost control actions taken to mitigate the impact from the decline in tabletop. For the third quarter, we anticipate total shipments to increase slightly sequentially, mainly driven by the gradual recovery of tabletop products as global economy slowly reopen. Selling prices and raw material prices are both expected to increase slightly but fully offsetting each other. We expect operations to be unfavorable by $1 million on account of lower production to manage inventory levels.
Slide 7 shows corporate costs and other financial items. For the second quarter, corporate costs were slightly unfavorable by $300,000 when compared to the same period last year. In April, we completed the previously announced closure of our metallized operations in Gernsbach, Germany with all metallized production now based in our Caerphilly, UK facility. Year-to-date we have recorded $6.2 million for employee severance-related costs and $4.9 million to accelerate the depreciation of equipment idled during the quarter and to write off spare parts and miscellaneous inventory that are no longer usable.
We also implemented cost optimization initiatives in other European locations during the first six months to further improve our cost structure. As it relates to our pension plan settlement, we held $55.5 million of excess plan assets following a post-settlement true-up adjustment. After transferring $14.1 million to a suspense account to fund future 401(k) contributions and then accruing $8.3 million of excise taxes, we are left with $33.1 million of excess cash that has now been formally reverted for general corporate purposes.
We continue to expect 2020 corporate costs to be in the range of $28 million to $30 million, consistent with previous guidance. Interest and other income and expense are projected to be approximately $3 million lower in 2020 compared to 2019 or about $10 million in total for this year.
Slide 8 shows our cash flow summary. During the first half of the year, operating cash flow was negative $900,000 and $18.4 million higher versus the same period last year. This improvement was driven primarily by stronger cash earnings and lower cash interest and tax payments. Also in the first half of 2019, we successfully settled the litigation related to the Fox River matter with a payment of approximately $21 million. Correspondingly in the first half of 2020, we made restructuring and cost optimization related payments of $9 million and higher incentive compensation payments of approximately $5 million.
Our tax rate for 2020 is estimated to be between 38% and 40% consistent with prior guidance, but we expect the Q3 rate to be approximately 47% driven by the UK tax rate increase originally expected to take effect in Q2 but now projected to occur in the third quarter. We expect capital expenditures for the year to be between $30 million and $33 million slightly below our previous guidance. Depreciation and amortization expense is projected to be $52 million.
Slide 9 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 June 30th was $271 million with leverage of 2.4 times and available liquidity of approximately $190 million. We expect our liquidity and net leverage to further improve in 2020 as earnings and cash flow increase. And finally, we continue to be encouraged that both Moody's and S&P reaffirmed their respective ratings for Glatfelter during the second quarter as well as maintaining their stable outlook.
This concludes my prepared remarks. I will now turn the call back to Dante.
Dante C. Parrini -- Chairman, Chief Executive Officer
Thanks, Sam. Although we continue to operate in a volatile and unpredictable environment, we remain confident in our ability to deliver value to our customers and shareholders. As a result of our ongoing business transformation, Glatfelter is now equipped with a highly defensible portfolio of essential products, a talented and dedicated workforce and a robust balance sheet. Our Board also shares this sentiments and demonstrated its confidence in the strength of our business and cash flow profile by rewarding shareholders with a dividend increase in the second quarter. Also during the quarter, we fully completed the termination and settlement formalities of our US defined benefit pension plan returning just over $33 million of excess cash back to the Company.
Our continued ability to generate strong earnings and translate them into free cash flow is creating the opportunity to delever our balance sheet and build capacity for growth investments that will better position the Company for the future and we remain prepared to weather any potential near-term disruptions related to the pandemic.
In closing, our top priorities remain keeping our employees healthy and safe and providing our customers premium quality products and outstanding customer service during this critical time. We will continue to find ways to optimize our trusted brands, strong customer relationships and robust demand for essential consumer staples while monitoring the performance of the wallcover and tabletop product categories that are most adversely impacted by the pandemic. We remain focused on operational excellence and outstanding tactical execution, while building critical capabilities that will enable Glatfelter to continue to deliver solid performance and emerge from the pandemic even stronger.
I will now open the call for your questions.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of Anojja Shah from BMO Capital Markets. Anojja, your line is now open.
Anojja Shah -- BMO Capital Markets -- Analyst
Thank you. Good morning.
Dante C. Parrini -- Chairman, Chief Executive Officer
Good morning.
Samuel L. Hillard -- Senior Vice President, Chief Financial Officer
Good morning.
Anojja Shah -- BMO Capital Markets -- Analyst
Good morning. It was a very nice quarter in Airlaid and I noticed that home care was up 64%. Can you give a little more detail on that and what products specifically did well in there?
Dante C. Parrini -- Chairman, Chief Executive Officer
Sure. So I would say home care had another strong quarter and that was driven by a few things. One, I see an emerging shift in the hygiene standards that consumers are using for home care. So this would be things like disposable floor mops by way of example. And over the last several quarters, we have forged a strategic supply relationship with a major player in that category, which is also bolstering our sales.
Anojja Shah -- BMO Capital Markets -- Analyst
Great. Okay. Thank you. My next question is when you think about Airlaid capacity over the next five years or so, do you see yourself adding more capacity? And with some of your competitors struggling, does that create more opportunity or any opportunities for you?
Dante C. Parrini -- Chairman, Chief Executive Officer
Yeah. So it seem [Phonetic] in the second quarter the entire Airlaid segment operated at capacity utilization levels in the mid 90%s. So we still have some upside. And as we look at continuous improvement and ways to further optimize our production wheel and how we produce certain products on the lines that they are best suited for, we will be able to continue to peak out some incremental production capacity and drive down unit costs. And I think I've said several times that this is a category that we are committed to. We're committed to the customers. We think we have a technology advantage and we're prepared to continue to invest in growing our platform, whether that be through organic investments, inorganic investments or both.
Anojja Shah -- BMO Capital Markets -- Analyst
Great. Thank you. And then just on that $33 million available for general corporate purposes, the cash freed up from termination of the pension plan, can you give any specifics yet on how you're planning to use that?
Samuel L. Hillard -- Senior Vice President, Chief Financial Officer
I would say just general debt reduction at this point. We obviously, as Dante just mentioned, continue to keep a focus on growth investments as well, but earmarked for nothing at this point.
Anojja Shah -- BMO Capital Markets -- Analyst
Okay. Great. Thank you very much.
Samuel L. Hillard -- Senior Vice President, Chief Financial Officer
Thank you.
Operator
We also have a question from Kurt Yinger from D.A. Davidson. Kurt, your line is now open.
Kurt Yinger -- D.A. Davidson -- Analyst
Yes. Thanks. Good morning everyone and appreciate you taking my questions.
Dante C. Parrini -- Chairman, Chief Executive Officer
Hi, Kurt.
Kurt Yinger -- D.A. Davidson -- Analyst
Good morning. I just wanted to start in Composite Fibers, could you just talk about the mix impacts there and how that impacted pricing in the quarter? I mean, is that improvement versus Q1, really just a function of wallcover being lower and that kind of being a higher basis weight product?
Dante C. Parrini -- Chairman, Chief Executive Officer
Sure. So as you might recall, Q1 our wallcover year-over-year shipment volume was up 18% and we had guided down rather substantially, although we did better than we had anticipated given the fact that the Russian wallcover market started to reopen in June. But if you do look at mix, our food and beverage category, which had a very strong quarter, up 12% year-over-year and both tea had a very, very strong quarter, those products transact at higher price per ton. They have more specialized input costs. So, if you recall abaca is used to produce these grades and that's more of a niche tree-free fiber that's -- that we harvest in the Philippines predominantly along with Central America. And so that helps with our mix. So when we have very strong food and beverage quarter that helps to sweeten the mix.
Kurt Yinger -- D.A. Davidson -- Analyst
Got it. Makes sense. And I guess for just pricing more broadly in Composite Fibers, I mean how has that trended? And is there any concern around maybe given a little bit of that back just with pulp costs coming down in general?
Dante C. Parrini -- Chairman, Chief Executive Officer
Yeah, I would say it varies across product category and region. When you do see a rather pronounced downturn in input costs, there are times where some of that is returned to the customer to keep the value proposition fair and equitable across counterparties. But I would say if you look at our overall profit performance, if you think about how we guided the impact of dramatically reduced wallcover and fixed cost absorption penalties that comes from taking substantial downtime and the fact that we still delivered 15% EBITDA margins in the middle of a pandemic when you had a very occluded view to demand when customers couldn't really tell us very well what to expect, I think the team did a very good job of being aggressive with our cost control, managing things within our span of control, being very agile and course correcting and adapting very quickly and cost-effectively to serve our customers and to earn the trust and confidence of all of our customers. So, yeah, I would say that it varies by category.
I think, all in all, it was a really solid quarter with a lot of good performance on execution and around things that were within our span of control. And I think we also did a good job of mitigating those factors that were outside of our span of control.
Kurt Yinger -- D.A. Davidson -- Analyst
Right, right. Okay. That's helpful. And then obviously a very strong quarter for Airlaid's kind of outside that tabletop segment. It sounds like you're taking a little bit of downtime in Q3 and maybe that's just seasonal. But any thoughts or concerns around maybe a little bit of an inventory hangover there?
Dante C. Parrini -- Chairman, Chief Executive Officer
I would say, no big picture concerns at all. I continue to be very bullish on the outlook for the Airlaid form factor and the categories that we serve. I also think that some of the lasting impacts of this pandemic are going to favorably impact this part of our business as consumers around the world continue to increase their hygiene standards and studies have proved that when consumers elevate hygiene standards, they rarely go backward, and I think that will help us across these categories. It's not typical to go through such a volatile and tumultuous period of time end up in a [Phonetic] global pandemic and some of this was unprecedented. So having some period to period anomalies, whether it's home care up 64%, tabletop down 63%, these are not reflective of the trends of the categories. It's reflective of a point in time that was quite volatile and unprecedented.
So I'd say, big picture, we're very bullish on all the categories within our Airlaid space. I think tabletop over time, as restaurants open, will see recovery. I also believe that there could be some substitution from linens to Airlaid as consumers may prefer disposable tabletop products as opposed to linen products that are laundered.
Kurt Yinger -- D.A. Davidson -- Analyst
Right. Yeah. That makes a lot of sense. Okay. And it sounded like wallcover recovered a bit in June and it seems like across the world things are starting to slowly kind of reopen. I was wondering if you could just talk about the volume progression within those two areas, wallcover and tabletop, kind of through the quarter and maybe how you're thinking about a regression to the mean, so to speak, over, call it, the next 12 to 18 months?
Dante C. Parrini -- Chairman, Chief Executive Officer
Yeah. So if you look at wallcover as we entered Q2, it was rather anemic because the primary markets were under shelter-in-place restrictions and the retail outlets were closed. And so as Russia, Ukraine specifically and across Europe countries and regions began to restrict shelter-in-place conditions and reopen slowly and reopen retail then we started to see demand from our customers, which was driven by consumers pick back up. And so June was a much stronger month in the quarter than April and May for wallcover and we see that trend continuing into Q3.
I would say that just because of so much uncertainty and whether or not there is a COVID wave two or regulations around different jurisdictions change quickly, which they can, it makes it a little bit more difficult to predict with great accuracy over the near term. I would say over the longer term -- I'd say, statistically a reversion to the mean typically happens as long as there are no other exogenous shocks that could either favorably or unfavorably influence the trajectory of these businesses. So we expect wallcover to migrate to something that's more typical and normal over the 12 to 18-month period and we have the same attitude about tabletop. How fast and when, it's very difficult to forecast at this stage of the game.
Kurt Yinger -- D.A. Davidson -- Analyst
Right, right. Okay. And just two final quick ones, hopefully. On the tax rate, could you remind us how we should be thinking about that for 2021 and whether there is any real difference between cash and book taxes? And then also, Sam, I think you mentioned you expect cash flow generation to improve over the back half. Any, I guess, color as to what you think that might be or how much you think you could delever by year-end?
Samuel L. Hillard -- Senior Vice President, Chief Financial Officer
Yes. So I guess a couple of things. First on the tax, just a reminder that we do expect the rate for Q3 to be elevated because of the timing of this expected rate change in the UK. So we're looking at 43% -- or excuse me 47%, but we reiterate our full year guidance. So it's kind of a Q2 to Q3 shift here, but no major impact on the full year. We have withdrawn sort of formal guidance for long -- long-term tax rates. But at this point for modeling purposes, I would probably use a similar 40% rate that we guided to this year. But again that's something we'll give a refresh on as we enter next year.
As far as the cash flow, we don't issue public leverage targets. But I would say, as we noted, we expect that to continue to decline as earnings increases and as we get some of these one-time cash charges in our rearview mirror as well.
Kurt Yinger -- D.A. Davidson -- Analyst
Got it. Okay. That's helpful. I'll turn it over. Thank you, guys.
Samuel L. Hillard -- Senior Vice President, Chief Financial Officer
Thank you.
Operator
I'm showing no further questions at this time. Mr. Parrini, please continue.
Dante C. Parrini -- Chairman, Chief Executive Officer
Okay. Well, thank you for joining our call today. We look forward to speaking with you again next quarter. Thank you.
Operator
[Operator Closing Remarks]
Duration: 28 minutes
Call participants:
Ramesh Shettigar -- Vice President, Investor Relations and Corporate Treasurer
Dante C. Parrini -- Chairman, Chief Executive Officer
Samuel L. Hillard -- Senior Vice President, Chief Financial Officer
Anojja Shah -- BMO Capital Markets -- Analyst
Kurt Yinger -- D.A. Davidson -- Analyst
