Glatfelter (GLT) Q4 2020 Earnings Call Transcript

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Glatfelter (GLT -4.52%)
Q4 2020 Earnings Call
Feb 4, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by and welcome to the Glatfelter's Quarterly Earnings Release Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ramesh Shettigar. Please go ahead.

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

Thank you, Celine. Good morning and welcome to Glatfelter's 2020 Fourth Quarter Earnings Conference Call. This is Ramesh Shettigar, Vice President of 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 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. Today's earnings call marks the conclusion of a very successful year in Glatfelter's transformation. Our strong financial performance amid a global pandemic, speaks to the durability of the new Glatfelter.

As businesses across the globe faced unprecedented challenges, we continued to make progress by focusing on employee health and safety, while ensuring uninterrupted supply of critical products to our customers. And our reshaped portfolio helped deliver full-year adjusted EBITDA growth of 12% for the company.

Slide 3 provides a summary of our fourth quarter results. Glatfelter continued its track record of delivering quarterly results that meet or exceed expectations by generating better-than-expected adjusted EBITDA of $30 million and adjusted earnings per share of $0.22.

Airlaid Materials posted higher quarterly shipments versus the same period last year in all product categories except tabletop, which continues to be heavily impacted by the pandemic. As a result, it was necessary to take additional downtime to manage inventory, which negatively impacted profitability

Composite Fibers posted excellent quarterly results as strong demand for wallcover and composite laminates products translated into higher production. This, when combined with a favorable mix and higher asset utilization boosted profitability.

At an enterprise level, we continued to benefit from our transformation, including an improved cost structure and an optimized Engineered Materials portfolio comprised of over 85% to central consumer staples.

Our adjusted free cash flow for the year increased by $29 million, driven by EBITDA growth and lower cash usage for working capital and taxes. With meaningful debt reduction and net leverage of 1.8 times, we ended the year with a very healthy balance sheet.

Additionally, we recently announced the acquisition of Georgia-Pacific's U.S. nonwovens business, further underscoring our focus on strategic growth. I will speak more about this acquisition later in my closing remarks.

At this point, I will turn the call over to Sam, to give an in-depth review of our fourth quarter results. Sam?

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

Thank you, Dante. Fourth quarter adjusted earnings from continuing operations was $9.6 million or $0.22 per share, an increase of $0.05 or 29% versus the same period last year. On a GAAP basis, we had income from continuing operations of $9.1 million or $0.20 per share versus a net loss of $44.8 million in the same period last year as a result of terminating our traditional-defined benefit pension plan.

Slide 4 shows a bridge of adjusted earnings per share of $0.17 from the fourth quarter of last year to this year's fourth quarter of $0.22. Composite Fibers results improved earnings by $0.04, driven primarily by higher volume, improved mix and elevated production to meet strong customer demand in nearly all product categories.

Airlaid Materials results were flat overall versus prior year as declining volumes from tabletop reduced selling prices and lower production were fully offset by favorable import prices and foreign exchange effects.

Corporate costs were $0.01 favorable versus last year's fourth quarter from cost control initiatives and interest, taxes and other items, in line with prior year.

Slide 5 shows a summary of fourth quarter results for the Composite Fibers segment. Total revenues for the quarter were 1.4% lower on a constant currency basis compared to last year as higher volumes were more than offset by lower selling prices. Volumes were up 2% overall with higher shipments in all product categories except Metallized.

Lower Metallized shipments were the result of our planned exit from the more commoditized parts of this business earlier in the year, as discussed in prior quarters. Excluding Metallized, shipments in the quarter were higher by 9% versus last year.

Selling prices were lower by $3.7 million but slightly more than offset by favorable volume, mix and lower raw material prices, primarily wood pulp. Operations improved results by $3.4 million, mainly driven by elevated production to meet the robust demand and rebuild depleted wallcover inventory. Also, the net effect of foreign exchange and hedging in the quarter relative to the same period last year was unfavorable $900,000.

Overall, Composite Fibers finished the full year with operating profit improvement of $4.2 million or 9% versus 2019 and an EBITDA margin of approximately 15%.

Looking ahead to the first quarter of 2021, we expect shipments to be lower by 5% compared to the fourth quarter of 2020, driven primarily by wallcover. Selling prices are expected to be in line sequentially while raw material prices are expected to increase slightly.

Higher production in the first quarter is projected to improve operating profit by approximately $1 million. Overall, we expect operating profit for the segment in the quarter to be in line with the fourth quarter of 2020.

Slide 6 shows a summary of fourth quarter results for Airlaid Materials. Revenues were down 5.2% versus the prior year quarter on a constant currency basis, mainly due to shipments being lower 3% as well as lower selling prices of $800,000 from contractual cost pass-through arrangements with customers. However, lower selling prices were more than offset by lower raw material and energy prices of $1.2 million.

Lower shipments were driven by softness in demand for tabletop products as restaurants continue to operate at dramatically reduced capacity under elevated restrictions and government-imposed lockdowns in our key markets. The shortfall in tabletop volumes during the quarter was mostly offset by stronger demand for home care, feminine hygiene and wipes products.

Operations lowered results by $700,000, driven by decreased production in tabletop in response to restaurant closures, curfews and cold weather. And we expect tabletop demand to remain correlated with pandemic-related factors in the coming months.

Finally, foreign exchange contributed favorably to operating income by $900,000 mainly from the net effect of a strengthening euro.

Overall, Airlaid operating profit for the quarter was in line with the prior year, and we finished 2020 with an operating profit margin of 11.8%, exceeding the higher end of our guidance of 10% to 11%; and EBITDA margin for 2020 was almost 18%.

For the first quarter in 2021, we anticipate shipments to be lower by 5% compared to the fourth quarter of 2020, driven primarily by reduced demand for tabletop products. Higher selling prices are expected to be offset by lower production to manage inventory levels, while net raw material prices are projected to remain flat sequentially.

Overall, we expect operating profit for the segment to be lower by $1 million during the quarter compared to the fourth quarter of 2020.

Slide 7 shows corporate costs and other financial items. For the fourth quarter, corporate costs were favorable by $700,000 when compared to the same period last year. Full year costs came in at $27.3 million, below the lower end of the range of our previous guidance of $28 million to $30 million. For 2021, we expect corporate cost to be approximately $27 million, in line with 2020.

Interest and other income and expense are projected to be approximately $1 million lower in 2021 compared to 2020 or about $10 million.

Slide 8 shows our cash flow summary. Fourth quarter adjusted free cash flow was higher by approximately $33 million, while the full-year benefit was $29 million compared to the same period last year. The improvements were primarily driven by stronger earnings, lower working capital usage and lower cash interest and tax payments. Capital spending was $28.1 million for the year, at the lower end of our previous guidance of $28 million to $30 million.

We concluded 2020 with a tax rate on adjusted earnings of 38.1% and 34.2% for the quarter. The full year adjusted tax rate was toward the bottom end of our guidance and the lower Q4 adjusted tax rate versus our prior guidance was primarily driven by higher overall earnings from foreign jurisdictions.

Despite these elevated rates on adjusted earnings, the fourth quarter cash flow from operations also included a $20 million tax refund related to the CARES Act received in December of 2020, which put us in a net refund position for our full-year 2020 taxes.

For 2021, we expect the tax rate of 38% to 40% on adjusted earnings, capital expenditures to be between $38 million and $42 million and depreciation and amortization expense of approximately $56 million.

Slide 9 shows some balance sheet and liquidity metrics. Overall, we are very well positioned financially following a solid 2020 with adjusted EBITDA growing 12% to nearly $120 million and strong cash flow generation reducing debt meaningfully. These successes are especially notable during such a tumultuous year.

Our net debt on December 31 was approximately $214 million, and our leverage ratio improved significantly to 1.8 times, with available liquidity of $275 million, providing ample firepower for growth.

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

Dante C. Parrini -- Chairman, Chief Executive Officer

Thanks, Sam. Summing up our accomplishments for the year, as presented on Slide 10. I'm pleased to report that we delivered on a variety of important dimensions. Above all, we kept our employees safe and our facilities operational despite the challenges of the pandemic.

Our Airlaid business managed to offset a decline in tabletop volume with growth in health and hygiene products. In Composite Fibers, our focus on continuous improvement and operational excellence, coupled with strong commercial execution, strengthened the profitability of the segment. We also optimized our Metallized products business by consolidating the German operation into our U.K. facility.

At an enterprise level, our flatter and more agile operating model generated greater speed and efficiencies while enhancing our overall cost structure. We de-levered the balance sheet using our strong cash flows to increase our capacity for future growth opportunities. And we issued our first sustainability report, formalizing our ESG priorities.

All of this would not have been possible without the hard work, dedication and resiliency of our global workforce.

We're excited about our recent announcement to acquire Georgia Pacific's U.S. nonwovens business, which is covered on Slide 11. This acquisition includes an Airlaid production facility in Mount Holly, North Carolina and an R&D center located in Memphis, Tennessee.

We believe this synergistic acquisition is a strong strategic fit for Glatfelter and is complementary to our existing Airlaid platform. The combination will enable capacity optimization, operational enhancements and higher output to better service our customers' growing needs in the nonwovens industry. This transaction also fits our strategy to expand our U.S. footprint, thereby gradually improving our tax position and capital structure.

The addition of this R&D pilot line provides opportunities to further advance our innovation efforts and expand our ability to develop new, value adding solutions for our customers.

We expect annual cost synergies of $4 million to $6 million within three years after the transaction closes, and transaction fees and integration costs of approximately $10 million. Given our strong balance sheet and stable cash flows, we are financially well-positioned to invest in such opportunities that further enhance our business and align with our long-term growth strategy. The acquisition will be financed with the combination of cash and borrowings under our existing revolving credit facility.

Slide 12 provides a high-level summary of our transformation and value creation framework as we build a new Glatfelter. Since 2018, we have undertaken a number of initiatives to realign our portfolio through a combination of divestitures, acquisitions and organic growth investments to build a more stable, growth-oriented engineered materials company.

With the strong earnings and cash flow generated over the last several quarters, we have successfully de-levered the balance sheet without compromising our ability to maintain our track record of dividend returns to shareholders. This disciplined approach to capital allocation has afforded us the strategic flexibility to continue making meaningful and accretive investments to advance our growth aspirations.

In closing, I'm very proud of the significant progress made by Glatfelter people in delivering stellar results in 2020 and we look forward to another promising year.

I'll now open the call for questions.

Questions and Answers:

Operator

[Operator Instructions]

Dante C. Parrini -- Chairman, Chief Executive Officer

While it appears that we don't have any questions, so I'll thank you for joining our call today, and we look forward to speaking with you again next quarter. Enjoy the rest of your day.

Operator

[Operator Closing Remarks]

Duration: 43 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

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