Glatfelter (GLT) Q1 2021 Earnings Call Transcript

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Glatfelter (GLT -0.68%)
Q1 2021 Earnings Call
May 4, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the Glatfelter's Quarterly Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] Thank you.

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

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

Thank you, Patricia. Good morning and welcome to Glatfelter's 2021 first quarter earnings conference call. This is Ramesh Shettigar, Vice President of 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 slides. We will also make forward-looking statements today that are subject to risks and uncertainties. Our 2020 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. Glatfelter continued to achieve strong overall results, which were ahead of expectations in the first quarter. Despite the pandemic and its associated challenges we delivered adjusted earnings per share of $0.19 and adjusted EBITDA of $31 million. Slide 3 of the investor deck provides highlights for the quarter. Airlaid Materials performed below expectations due to ongoing softness in the tabletop category related to government lockdowns and delayed restaurant openings. During the quarter we also experienced lower than anticipated demand in wipes, homecare and feminine hygiene products as customers and consumers adjusted their buying patterns to account for higher inventory levels.

As a result, it was necessary to take additional downtime to manage inventories, which negatively impacted profitability. Although the pandemic is still evolving in our core markets, we remain optimistic about demand recovery for tabletop products as vaccinations increase, infection rates decline, governments relax restrictions on dining establishments and the warmer weather arrives. Composite Fibers posted another strong quarter as robust demand for Food & Beverage and technical specialties products helped drive results. When coupled with higher asset utilization, profitability for this segment had its highest level in four years. We recently announced an 8% price increase for Composite Fibers products to address cost inflation for raw materials, energy and logistics.

We expect the impact of these pricing actions to begin flowing to the bottom line in Q2 with greater realization to occur in the second half of the year. At an enterprise level, we maintained our focus on the health and safety of Glatfelter people. These efforts kept all facilities operational ensuring uninterrupted supply of essential products to our customers. Lastly, in March, we announced the conclusion of the regulatory review process for our pending acquisition of Georgia-Pacific's U.S. Nonwovens business and now expect the transaction to close in mid-May. We're excited to begin this integration that will enable us to optimize capacity, improve operational efficiencies and accelerate innovation efforts across our expanded Airlaid platform.

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

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

Thank you, Dante. First quarter adjusted earnings from continuing operations was $8.4 million or $0.19 per share, a decrease of $0.05 versus the same period last year driven by pandemic-related softness in our Airlaid Materials segment and a higher effective tax rate, which I will cover in more detail shortly. Slide 4 shows a bridge of adjusted earnings per share of $0.24 from the first quarter of last year to this year's first quarter of $0.19. Composite Fibers results improved earnings by $0.01 driven primarily by better mix and improved asset utilization.

Airlaid Materials results lowered earnings by $0.06 due to softness in tabletop products as restaurant dining continues to be significantly affected by the pandemic, as well as other COVID-related weakness in certain categories. Corporate costs were $0.02 favorable versus last year's first quarter from lower spending and cost control initiatives and interest, taxes and other items drove earnings lower by $0.02 versus the same period last year, mainly due to a higher effective tax rate. Q1 2021 had a tax rate of 45% versus a tax rate of 39% for the same period last year. The higher rate versus our previous full year guidance of 38% to 40% was driven by unexpected German tax rate changes that occurred during the quarter.

Slide 5 shows a summary of first quarter results for the Composite Fibers segment. Total revenues for the quarter were 1.4% lower on a constant currency basis due to lower shipments of metalized products in 2021 compared to Q1 2020. As a reminder, we shipped metalized products the entire first quarter of 2020 from our UK and German facilities before the restructuring in early Q2. Excluding metalized shipments in the quarter were in line with last year. We continued to experience stable growth in our Food & Beverage and Technical Specialties product categories offset by lower shipments in wallcover and composite laminates.

Selling prices were flat versus the same period last year, but improved mix from higher shipments in Food & Beverage and Technical Specialties favorably impacted results by $1.1 million. Higher wood pulp and energy prices negatively impacted results by $1.3 million but were mostly offset by favorable operations driven by improved material efficiencies and lower spending for labor and maintenance. Looking ahead to the second quarter of 2021, we expect shipments in Composite Fibers to be in line with the first quarter and we expect selling prices to be higher as we benefit from our previously announced price increases. However, we also expect raw material, energy and freight inflation to continue to escalate in the second quarter, more than offsetting the price benefit with a net negative impact of $1 million to $2 million.

In addition, we have already taken and expect incremental planned downtime over holiday periods in the second quarter to perform required maintenance, which will set us up well for production for the remainder of the year. This however will negatively impact earnings by approximately $2 million in the second quarter. Slide 6 shows a summary of first quarter results for Airlaid Materials. Revenues were down almost 19% versus the prior year quarter on a constant currency basis, mainly driven by lower shipments of 18%. The tabletop category was down 55% compared to last year due to continued softness in restaurant demand as COVID drove government imposed lockdowns and dining closures globally. Also shipments were lower than originally anticipated in wipes, homecare, and feminine hygiene product categories as customers adjusted their order levels during the quarter due to the higher year-end inventory reserves built earlier in the pandemic.

As a result, lower volume unfavorably impacted results by $3.2 million versus same period last year. Higher selling prices from contractual cost pass-through arrangements with customers were more than offset by higher raw material and energy prices, reducing earnings by a net $300,000. Operations lowered results by $1.3 million mainly due to market-related downtime in the quarter to manage inventory levels to better align with customer demand. With the anticipated closing of the GP U.S. Nonwovens acquisition in mid-May, we expect to include approximately 6 weeks of Mount Holly's performance into the Airlaid Materials financial results during the second quarter.

Factoring that into our second quarter guidance, we expect shipments of Airlaid Materials to be approximately 15% higher, although at an unfavorable mix. We anticipate selling prices and input prices to both be slightly higher offsetting each other. And we will continue to take market-related machine downtime during Q2 including at Mount Holly during the cutover. As a result, we expect Q2 overall operating profit for this segment to be in line with the first quarter. Slide 7 shows corporate costs and other financial items. For the first quarter, corporate costs were favorable by $1 million when compared to the same period last year, driven by continued spend control. We expect corporate costs in Q2 to be in line with Q1 and for full year 2021 to be between $25 million and $26 million, lower than our previous guidance of $27 million.

Interest and other income and expense are now projected to be approximately $12 million for the full year, reflective of the incremental debt related to the Mount Holly acquisition. Our tax rate for 2021 is estimated to be between 42% and 44%, which is higher than our previous guidance. The higher tax rate overall is driven by recent changes to the local German tax rate that increased in Q1, as well as an expected uptick in our UK tax rate in the third quarter of this year, also related to new legislation. Slide 8 shows our cash flow summary. First quarter adjusted free cash flow was higher by approximately $2 million, mainly driven by lower capital spending. We expect capital expenditures for the year to be between $40 million and $42 million, while depreciation and amortization expense is now projected to be $62 million.

Both figures now incorporate the pending acquisition. Slide 9 shows some balance sheet and liquidity metrics. Overall, we are very well-positioned from a liquidity and leverage perspective. Our leverage ratio increased slightly, driven by higher working capital usage typical in the first quarter. Our net debt on March 31 was approximately $219 million and we had available liquidity of $265 million, providing ample firepower for growth. We also recently concluded our credit review with Moody's and S&P. Both agencies maintained their respective ratings with stable outlooks, while viewing the GP U.S. Nonwovens acquisition favorably and finding such investments to be consistent with our growth strategy.

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

Dante C. Parrini -- Chairman, Chief Executive Officer

Thanks, Sam. From a strategic perspective, I'm pleased with the ongoing execution of our business transformation and growth strategy. Our portfolio of products tied to essential consumer staples will serve us well and provide greater stability to margins and cash flows in the long-term. Demand for Composite Fibers products is robust and we expect that to continue into the second half. Demand for Airlaid products across the broader industry has been negatively impacted by the pandemic in the short term. Although we expect many of these transitory issues to begin to abate as we enter Q3. And we're adding new innovative product offerings to our portfolio. One example is the recent launch of GlatClean, a cellulose-based surface disinfecting like product line. This material was just nominated by INDA for the World of Wipes Innovation Award.

As elevated hygiene standards are expected to prevail in a post-COVID world providing customers with high performing and sustainable plant-based materials should further bolster our position as an industry leader. The mid-May closing of the acquisition of GP's U.S. Nonwovens business provides Glatfelter complementary manufacturing assets, new R&D capabilities and a talented workforce while adding scale to our U.S. operations. Our aggressive stance on cost reduction will continue to contribute to our growth targets for EBITDA and free cash flow. And Glatfelter people around the world continue to perform exceptionally well responding to the challenges and opportunities that come their way.

In summary, we see the second quarter as an inflection point for the business. From a timing perspective, we expect the positive impacts from recent pricing actions, and new product introductions to lag the headwinds created by significant input cost increases, higher logistics costs, and uneven demand in Q2. Our outlook for the second half is constructive as we expect more consistent demand across the portfolio, meaningful fall-through from pricing actions taken in Q1 and we integrate the GP Nonwovens business into our existing Airlaid business. So we're excited and looking forward to the prospects for an improved second half of '21.

This concludes my remarks and I'll now open the call for your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Anojja Shah from BMO Capital Markets. Your line is open.

Anojja Shah -- BMO Capital Markets -- Analyst

Hi, good morning.

Dante C. Parrini -- Chairman, Chief Executive Officer

Hi Anojja. How are you?

Anojja Shah -- BMO Capital Markets -- Analyst

Good, thank you. I wanted to go back to this tabletop and Airlaid specifically. It sounds like you're thinking about a recovery in the third quarter. Is that true, first of all? And then second, I think in the past you had mentioned that once restaurant traffic comes back, you could actually benefit because restaurants may be looking for more disposable options. Is that true? And does that mean that there will be an additional lift once restaurant traffic does come back?

Dante C. Parrini -- Chairman, Chief Executive Officer

Happy to answer that question. I think there are a number of factors lining up that are positive for the tabletop business. Clearly as the vaccinations increase in our core markets, as infection rates decline and governments relax lockdown restrictions and allow restaurants to open and operate at greater levels of capacity and the warm weather arrives are all very favorable. I would say that the U.S. and North American market is leading that recovery and we expect the European market to follow behind. In terms of the dynamics that we think will influence tabletop demand and the form factors of choice for customers we do think that disposability will be in favor with consumers, as they have greater sensitivities toward the transmission of germs and things of that nature. And I think perhaps people have taken a bit of a time-out on their focus on plastic and petroleum-based feedstocks versus plant-based and cellulose feedstocks and its impact on waste streams, landfills, etc. And so, Glatfelter's product offering of having a very soft and cloth-like feel material that's made from biodegradable plant-based feedstocks I think is also an advantage to us. So from a broader ESG perspective, I think it lines up quite well.

Anojja Shah -- BMO Capital Markets -- Analyst

Great. Thank you. And then could we just maybe talk about capital allocation given that the GP transaction is about to close? Is M&A still your preferred use of cash or are there other -- how are you thinking about capital allocation?

Dante C. Parrini -- Chairman, Chief Executive Officer

Sure. So, as you know our transformation and growth strategy was designed to reset the company, establish the correct base for us to build the new Glatfelter and to become a more profitable growth business over time. So clearly the GP U.S. business fits into that strategy. I envision future acquisitions and so maintaining good balance sheet capacity is going to be very important. And I expect Glatfelter to be a participant and helping to consolidate the different parts of the market that we participate in.

Anojja Shah -- BMO Capital Markets -- Analyst

Okay. Thank you very much. And then a few years ago, I think you mentioned an interest in building out your position in filtration media and technical specialties, things like batteries and other consumer products. Is that still an area of interest for you and maybe you can give an update on your thoughts there?

Dante C. Parrini -- Chairman, Chief Executive Officer

Certainly. As we look at areas for investments and how to expand our portfolio, certainly investments that help us broaden and expand our existing platforms will be the most synergistic and perhaps the easiest to understand and convince ourselves that we are the rightful owners of these assets. The two GP acquisitions in 2018 and now in 2021 are perfect examples of those. We've also talked about categories, whether that's the broader categories of filtration, the continuum of technologies that are used to supply health, hygiene, and homecare markets; we've talked about electrical and we're seeing part of the reason why I see Composite Fibers continuing to strengthen as the recovery categories in our portfolio, we're seeing gaining strength so whether that's materials that go into battery construction capacitors and things of that nature. And we think the electrification of the world will continue. So I think those are important and interesting areas to name a few.

Anojja Shah -- BMO Capital Markets -- Analyst

Great. Thank you. And then my final question is just on the tax rate. I know you mentioned the German tax rate and the UK legislative change, but it has been above 40% for I think about two years now if I'm not mistaken. What's driving it higher, if you can just remind us? And is this a long-term sort of level or are there things you can do over time?

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

Sure. So again, we had guided to a rate below 40% for this year, but unfortunately with these changes in the rates and UK and Germany, that's causing it to tick back up to above 40%. We do think we have the capabilities to bring it back down well below. Now, obviously, Anojja, there is a lot of pending legislation in terms of tax reform around the globe and in the U.S. So it's hard to predict exactly what's going to happen, but ignoring what could or couldn't happen there I do think we see good potential to lower our tax rate.

The biggest driver is the fact that we're operating at a loss in the U.S. After we sold our Specialty Papers business, we only had one facility remaining in the U.S., but we had U.S.-based corporate costs, U.S.-based interest expense, which are big factors for us. And then we are unable to get deductions for our foreign income taxes due to some of the provisions around GILTI. However, with the acquisition of something like Mount Holly we closed the gap meaningfully in terms of the losses that we're generating in the U.S. We're not out of the woods and we need to continue to grow our income in the U.S. so additional income in the U.S. either organic or acquisition will help lower that tax rate over time.

Anojja Shah -- BMO Capital Markets -- Analyst

That's very helpful. Thank you very much.

Dante C. Parrini -- Chairman, Chief Executive Officer

Thank you.

Operator

There are no further questions at this time. Speakers, you may proceed.

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. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 30 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

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