Glatfelter (GLT) Q1 2022 Earnings Call Transcript

Glatfelter (GLT -4.32%)
Q1 2022 Earnings Call
May 03, 2022, 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] I will now hand the conference over to your first speaker today, Ramesh Shettigar from Glatfelter.

Sir, you may begin.

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

Thank you, Peter. Good morning, and welcome to Glatfelter's 2022 first-quarter earnings conference call. This is Ramesh Shettigar, vice president of ESG, 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; and myself.

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 2021 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 Parrini -- Chairman, President, and Chief Executive Officer

Good morning, and thank you for joining us today. Glatfelter has experienced a challenging start to the year, stemming from the Russia/Ukraine military conflict, and the various impacts this conflict is having on our business, including the unprecedented escalation of energy prices in Europe and severe sanctions instituted by the United States, G7, and EU, impacting both the financial system and commercial activities in the region. While energy price inflation was partially reflected in our guides for the first quarter, the breakout of the conflict exacerbated this headwind and introduced new geopolitical complexities. The Russia-Ukraine military conflict, which began in February and its associated implications resulted in non-cash asset and Goodwill impairment charges taken in the first quarter within our composite fibers segment.

Despite the significant impact of these external factors, we continue to forge ahead to mitigate their effects and focus on the most critical areas within our span of control. Along these lines, we made meaningful progress on two high-priority initiatives, converting more customers to cost pass-through models, primarily for the composite fibers segment and improving the performance of the newly acquired spunlace segment, where we expect this business to return to profitability in the second quarter. Slide 3 of the investor deck provides the key highlights for the first quarter. We [Technical difficulty] reported of $23 million and an adjusted earnings per share loss of $0.14.

composite fibers results were lower than expectations driven by continued escalation of energy, raw materials, and logistics costs as well as lower shipments of wallcover products. On a more positive note, by the end of the first quarter, we had converted 35% of our revenue base to a cost pass-through model and are tracking well toward achieving our previously announced goal of 50% conversion for the year. We also implemented price increases in energy surcharges for many other customers. Airlaid materials demand was strong for the quarter with legacy volume up 22%, driven by growth in tabletop, hygiene, and home care products.

And Mount Holly contributed incremental revenue of $27 million over the prior-year quarter. Our investments in building this business over time into a high-performing industry leader have been exciting and rewarding. Our spunlace segment results were above expectations, driven by better than projected demand generation. Input costs and energy prices continued to impact profitability as we were unable to fully recover these costs through selling price increases and energy surcharges.

We are turning the corner with this business as we continue to deliver strong customer orders and expect our [Technical difficulty] it tends to significantly improve profitability in the second quarter. While our net leverage increased in the first quarter, we were compliant with all financial covenants. However, in response to the current economic and geopolitical environment driven in large part by the conflict between Russia and Ukraine, we recently began working with our bank group to amend our debt covenant framework to ensure we have sufficient financial flexibility for the future. I will now turn the call over to Sam and Ramesh to provide more details on our first-quarter results.

Sam Hillard -- Senior Vice President and Chief Financial Officer

Thank you, Dante. First-quarter adjusted earnings from continuing operations was a loss of $6.2 million or $0.14 per share, a decrease of $0.33 versus the same period last year. This decline was driven primarily by significantly higher raw material and energy price inflation, elevated interest expense related to our bond issuance to finance the Jacob Holm and Mount Holly acquisitions and an unfavorable tax expense. Slide 4 shows a bridge of adjusted earnings per share of $0.19 from the first quarter of last year to this year's first-quarter earnings per share loss of $0.14.

composite fibers results lowered earnings by $0.20, driven primarily by adverse volume impact from the Russia/Ukraine crisis and escalating inflationary pressures in energy, raw materials, and logistics, which exceeded our pace of price increases. Airlaid materials results increased earning by $0.06, mainly due to strong volume recovery in tabletop as well as the addition of Mount Holly compared to the prior year. Spunlace results lowered earnings by $0.02, driven by inflationary headwinds experienced in energy and raw materials that exceeded our customer price increases. Corporate costs were $0.01 favorable versus the quarter last year, due to cost control efforts.

Interest expense lowered earnings by $0.08 driven by the issuance of a new bond to finance the two acquisitions and taxes and other items were $0.10 unfavorable due to significant changes in international jurisdictional pre-tax income [Technical difficulty] U.S. and the absence of tax benefits from U.S. interest expense due to our valuation allowance. I will now pass it over to Ramesh, who will provide a more detailed review of our first-quarter segment and consolidated results.

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

Thank you, Sam. Slide 5 shows a summary of our first-quarter results for the composite fibers segment. Total revenues for the quarter were up nominally on a constant currency basis, driven by higher selling prices of $17.6 million, resulting from multiple pricing actions and energy surcharges taken last year and in the first quarter of this year. However, this was not enough to mitigate rising energy prices in Europe, which further spiked in the first quarter, due to the Russia/Ukraine conflict along with continued inflationary pressures in raw materials and logistics.

Shipments were down 19% or nearly 5,900 tons with wall cover accounting for more than 70% of this decline followed by the food and beverage category accounting for approximately 20%. Wallcover shipments were significantly impacted by the Russia/Ukraine crisis. As orders from Ukrainian customers stopped completely while sales to our Russian customers declined in March after the onset of the conflict. Our tea shipments to Russian customers were also impacted in the first quarter, contributing to the decline in the food and beverage category.

Energy, wood pulp, and freight prices continue to escalate in the first quarter and negatively impacted results by $29 million versus the same prior-year period. Sequentially from the fourth quarter of last year, this headwind was $13 million and more than offset the $8 million of price increase we achieved. On the logistics front, North Atlantic freight rates, more than doubled since Q4 as congestion at port [Technical difficulty] or reducing our margins in the food and beverage category. To counteract these inflationary impacts.

We have been actively working with our customers to convert them to a dynamic pricing model that has cost pass-through provisions. By the end of the first quarter, we had made significant progress by converting 35% of our composite fibers revenue base, to a floating model. And we implemented price increases for many other customers. These actions will aid in mitigating any continued raw material and energy inflation help reduce volatility and improve segment margins and profitability over the longer term.

Operations were unfavorable by $4 million, mainly driven by inefficient fixed cost absorption from lower wallcover production as well as inflationary impacts in our operations. Currency and related hedging activity favorably impacted results by $900,000. The Russia/Ukraine military conflict it's associated effects and the resulting international sanctions are expected to have a significant impact on our Dresden wallcover operations and the composite fibers segment. Glatfelter recorded non-cash asset goodwill impairment and working capital charges of $121 million in the first quarter.

This included $61 million of Dresden asset impairment, $56 million of composite fibers goodwill impairment related to the long-term fair value implication of the conflict and the related unprecedented energy prices in Europe and a $4 million write-down of Russia and Ukraine accounts receivable and inventory. Looking ahead to the second quarter of 2022, we expect selling prices to fully offset raw material and energy cost inflation. Volumes are expected to be between 5% to 10% lower sequentially, primarily in wallcover. This decline along with the market-related downtime is expected to lower operating profit by $2 million.

Offsetting this impact will be $2 million lower D&A expense from the recent write-down of assets. These items collectively are expected to result in breakeven operating profit for composite fibers in Q2. Slide 6 shows a summary of our first-quarter results for Airlaid materials. Revenues were up 83% on a constant currency basis versus a prior-year period supported by the addition of Mount Holly.

Shipment of tabletop more than tripled while the wipes category more than doubled driven by strong post-pandemic recovery of tabletop volume and the addition of Mount Holly's product portfolio. When excluding Mount Holly, volume from our legacy business also grew by 22% with strong demand in the hygiene and home care categories. Selling prices increased meaningfully from contractual cost pass-throughs, as well as from price increases implemented for customers that don't have such arrangements. We also enacted an energy surcharge on all customers served from Europe to specifically offset the sharp rise in European energy costs.

While these actions collectively held the segment to offset the higher raw material prices, they fell short of recovering the greater than anticipated energy prices -- energy price increases unfavorably impacting results by $3.2 million. However, on a sequential basis, selling prices fully offset raw material and energy cost inflation. Operations were favorable by $1.3 million compared to the prior year, mainly due to higher production in the tabletop and hygiene categories. And foreign exchange was unfavorable by $1.1 million.

For the second quarter, we expect selling prices to fully offset raw material and energy prices. Volume is expected to be slightly lower, but the impact should be fully offset by favorable mix. Operating profit is expected to be lower by $2 million due to downtime from a meaningful capital project in Falkenhagen, which was delayed from 2021 due to COVID. Slide 7 shows a summary of first-quarter results for the spunlace segment with its first full quarter under Glatfelter ownership.

Revenue for the segment was approximately $96 million, while shipments for the quarter were approximately 21,000 tons, which is 10% higher than our expectations for the quarter. Volume growth was mainly driven by stronger demand in the consumer wipes category and improved results by $800,000. Selling prices and energy surcharges lifted results by $2.3 million versus the previous quarter, but were more than offset by input cost inflation totaling $2.9 million, particularly from synthetic fibers and energy costs at our European sites. Other costs were $500,000 higher reflecting elevated levels of production waste and inefficiencies brought about by material and labor shortages in North America and transportation strikes in Spain.

For the second quarter of 2022, selling prices are expected to fully offset raw material and energy costs. Slightly higher volume and improved mix are expected to improve results sequentially by $1 million and continued operational efficiencies and benefits from our integration efforts are expected to yield an additional $3 million in operating profit. Slide 8 shows corporate costs and other financial items. For the first quarter, corporate costs were $1 million favorable versus the same period last year, mainly due to lower incentive accruals, cost control initiatives, and the timing of spent.

For the full year, corporate costs are estimated to be approximately $25 million, which is $2 million lower than our previous guidance. We expect our full-year interest and other financing costs to be approximately $34 million or $1 million lower than our previous guidance. Our tax rate for the first quarter was a negative 58%. This rate was due to significant changes in international jurisdictional pre-tax income, while also being driven by U.S.

pre-tax losses, including the absence of a tax benefit from U.S. interest expense because of our valuation allowance. Given the unusual volatility in our tax rate components and the level of dependency on income generated from each of our jurisdictions, we are limiting our tax rate guidance to Q2 only. We expect our second quarter tax rate to be between negative 56% and negative 60% roughly in line with our first quarter and largely driven by the same factors as outlined for Q1.

Slide 9 shows our cash flow summary. Q1 2022 adjusted free cash flow was lower by approximately $66 million versus the same quarter last year, mainly driven by working capital usage of $42 million and lower cash earnings of about $9 million. Higher working capital was driven by multiple factors, including the termination of spunlace factoring program post-acquisition, higher accounts receivables reflecting price increases and elevated inventory values absorbing raw material and energy inflation. Cash taxes were about $5 million higher, mostly because of Canadian withholding and income taxes.

While capital expenditures were approximately $7 million higher. We expect capital expenditures for 2022, including spunlace and Mount Holly to be between $45 million and $50 million, $7 million to $8 million of which pertains to spunlace systems integration costs. Depreciation and amortization expense is projected to be approximately $68 million, which is $6 million lower than our previous guidance, reflecting that resident impairment charges booked in the first quarter. Slide 10 shows some balance sheet and liquidity metrics.

Our bank covenant leverage ratio increased to 4.8 times as of March 31 versus year end 2021 of 3.8x, mainly driven by lower earnings and higher working capital usage. We were compliant with all financial covenants for the quarter and are working with our banks proactively to amend the debt covenant framework to reflect the current economic and geopolitical realities of our business environment. This concludes my prepared remarks. I will now turn the call back to Dante.

Dante Parrini -- Chairman, President, and Chief Executive Officer

Thanks, Ramesh. Looking ahead, we're planning for the macroeconomic and geopolitical challenges that impacted the business in the first quarter to persist in the near to midterm. As such, we will remain laser focused on a shortlist of business imperatives, mitigating inflation through aggressive cost control, strategic sourcing and moving more customers to a cost pass-through model, especially for composite fibers, progressing the integration of the new spunlace segment and returning this business to profitability in Q2, successfully executing our capital project for the growing Airlaid segment, addressing labor availability while sustaining employee health and safety and driving cash flow generation. At the same time, we'll continue building the new Glatfelter as a leading sustainable engineered materials company.

90% of our products are essential consumer staples with two-thirds of the portfolio consisting of high-value wipes, hygiene, and food and beverage materials. 80% of our product categories are growing at or faster than GDP. Most of our products are plant-based feedstocks. Our innovation efforts are accelerating and garnering greater attention.

A most recent example is Glatfelter receiving the first IDEA 22 Sustainability Advancement award for our innovative sustainable fiber-based screw caps in partnership with Blue Ocean Closures and ALPLA. And we will continue to leverage our scale, deep industry insights and expertise and steely resolve to manage through this period of market turbulence, just as we've done successfully through our history, which spans more than 158 years. Finally, as I wrap up my prepared remarks, I want to take this opportunity to thank Sam for all his contributions during his tenure at Glatfelter. Sam has been a valuable member of our senior leadership team and played a pivotal role in Glatfelter's strategic transformation.

He's leaving to pursue a professional opportunity as CFO of an early stage technology company. I know Sam will be successful in his new role and we send him off with our sincere appreciation and very best wishes. Before opening the call for questions, Sam would like to say a few words.

Sam Hillard -- Senior Vice President and Chief Financial Officer

Thank you, Dante for your kind words. It's been an absolute pleasure working with you and the team over the past six-plus years. And I'm very much going to miss the people and the culture that make Glatfelter so special. I'm confident in Ramesh and his leadership abilities, as he steps into the CFO role to take GLT to the next level.

And I want to thank you and the board and all of our stakeholders for the wonderful support and the many friendships. And I look forward to following the continued transformation of this great company.

Dante Parrini -- Chairman, President, and Chief Executive Officer

Thank you, Sam. This concludes our closing remarks. We'll now open the call for questions.

Questions & Answers:

Operator

[Operator instructions] Your first question will come from Mark Wilde from Bank of Montreal.

Mark Wilde -- BMO Capital Markets -- Analyst

Good morning, Dante, Sam, Ramesh. I wondered if you can give us a little more color on efforts to mitigate the drop-off in the Russian and Ukrainian business, actions that you're taking in both Dresden and Gernsbach.

Dante Parrini -- Chairman, President, and Chief Executive Officer

Sure. Good morning. So clearly challenging developments related to sanctions and the military conflict. So with Dresden that primarily produces wallcover.

And in Q1, our capacity utilization was just below 50%. So we still have other wallcover customers outside of Russia-Ukraine that will continue to service but yet to be determined, if there will be a jurisdictional mix change in terms of how customers for wallcover source. But as a leader in that particular category, I think we have as good of insights as anyone. We also continue to work on developing new products that could be cost-effectively produced at Dresden on a similar asset with minor or no capital expenditure.

As it pertains to Gernsbach in the first quarter, our asset utilization rate for our inclined wire system was quite high. It was up into the mid 90s. So those assets have greater flexibility and can produce a wider range of products and can be shipped all around the world. So I would say that higher degree of confidence that will find ways to utilize Gernsbach capacity across the broader portfolio of inclined wire products and more work to do at Dresden.

So we will take all the necessary measures at Dresden to recalibrate our staffing levels and our cost structure to accommodate what the projected near-term demand is. As you may recall, we've done this before at Dresden by reducing shifts and scaling back in 2014 when Russia invaded Crimea and upon the end of that excursion and when the market settled back out, we were able to restaff and ramp capacity backup. So we have a demonstrated competency of being able to scale these operations down or up to synchronize them with projected demand. But in the near term, our expectation is that the Dresden asset will run below 50% capacity.

Mark Wilde -- BMO Capital Markets -- Analyst

OK. And Dante is there any way to kind of size the kind of cumulative Russian-Ukrainian exposure over Gernsbach? And then, if you're moving volume around or repositioning kind of customers there, is there any impact on mix?

Dante Parrini -- Chairman, President, and Chief Executive Officer

Yes. So I think the best way to describe it, because it is a very fluid and dynamic set of circumstances and the data changes almost on a daily basis. And if you look at our first-quarter impact from Russia-Ukraine, Ramesh correct me if I'm wrong, but it translated to around $3 million of cost penalties associated with that region. And then as we're guiding for Q2, I think we're in the --

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

We're in the $3 million range for Q2 as well. Yes. That's right.

Dante Parrini -- Chairman, President, and Chief Executive Officer

And then market all depends on how long these sanctions are in place. And I think it's a bit premature for us to forecast for the entire year. Your question about Gernsbach and mix changes, yes, we do have high-value products in other categories besides food and beverage. And so we will look to our technical specialties and our composite laminates categories, and some of the consumer products that we produce to see if there's either a margin enhancing mix opportunity or a margin neutral opportunity.

So again, I don't see as much of a material impact on Gernsbach, big picture as I do with Dresden, because Dresden is a one-machine facility that has been focused on optimizing wallcover over time.

Mark Wilde -- BMO Capital Markets -- Analyst

OK. All right. That's helpful. And then just in terms of price cost, I mean, it sounds like you were close to neutral in the first quarter.

I'm just curious, any view at this point on when you're going to be able to catch up, I think European energy prices have come in a bit at the same time, the pulp costs continue to go up. So just what would be your kind of thoughts as we move through the year and where you stand from a price cost standpoint?

Dante Parrini -- Chairman, President, and Chief Executive Officer

Sure. We have to compartmentalize how we think about the business given the rather unique circumstances that we face from a macro perspective. We're making a lot of progress on a number of important initiatives that are going to benefit this business over the medium to long term. And so from a trend point of view, our guidance for Q2 is the first quarter where every segment is projecting a fully offset input cost and energy increases with pricing.

So as we were chasing during 2021 and we were catching up. So we've caught up. And now the expectation is without a crystal ball to project exactly what happens with energy availability and pricing and raw materials and logistics costs, which are not inconsequential in this market environment as well. We're going to push to turn that into a positive in the second half of the year.

So from a trend point of view, we were close to having it as a push in Q1. We're projecting it to be a push in Q2. We'll work diligently to see if we can make that even better. And the expectation is that we'll move heaven and earth to try to start clawing back.

Some of these lost EBITDA dollars in the second half of the year.

Mark Wilde -- BMO Capital Markets -- Analyst

OK. And finally, can you update us at all on the bank covenant comments.

Dante Parrini -- Chairman, President, and Chief Executive Officer

Sure. Ramesh?

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

Yes, absolutely. So we were – from a covenant compliance standpoint, Mark, we were fully compliant in Q1, but as we plan ahead, wanted to get ahead of this and start the conversations with the banks. So those conversations are progressing very well. We are expecting to get an amendment done here in the second quarter.

So far we don't anticipate any issues, but once we have that buttoned up, we'll make the right disclosures and share that information.

Mark Wilde -- BMO Capital Markets -- Analyst

OK. All right. Sounds good. I'll turn it over.

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

Peter, do we have another question in the queue?

Operator

Yes, we do have, sir. Your next question will come from Chris McGinnis with Sidoti. Your line is open.

Chris McGinnis -- Sidoti and Company -- Analyst

Good morning. Thanks are taking my questions and for all the commentary on the slide decks, especially.

Dante Parrini -- Chairman, President, and Chief Executive Officer

Good morning, Chris.

Chris McGinnis -- Sidoti and Company -- Analyst

Good morning. Can you maybe just dig in a little bit on the spunlace, the improvement in Q2 or in Q1 and kind of the demand trends you're seeing? It seems like it might be a little bit sustainable, what was the kind of the surprise there in the quarter? And can you just dig into that a little bit? I know it's a newer asset for you.

Dante Parrini -- Chairman, President, and Chief Executive Officer

Sure. So I'm very pleased with the demand generation that our commercial team worked on and delivered. And so volume was 10% higher in Q1 then we had guided. So there was a big benefit from that, part of that benefit was sought off by some of the energy and inflation costs, especially when it comes to synthetic fibers.

But we did 20% better than we were expecting from an op perspective, across not just spunlace, but across the entire portfolio. Demand is not the big challenge for us. It's reconciling what's going on with energy and raw materials and logistics costs. And some of the issues that are knock-on effects from the Russia/Ukraine military conflict.

So we're projecting a rather significant improvement in spunlace for Q2. A million of that is going to come from pricing-related actions. And another 3 million of that improvement is coming from operational improvements and synergy delivery. So again turn that business back around, get it back into profit-making capacity, and then we can continue to build on the momentum that the team is generating.

Chris McGinnis -- Sidoti and Company -- Analyst

I appreciate that. Yes. And I guess last quarter, you ran into a little bit of demand destruction with the pricing and now you're – that volume turnaround is obviously pretty positive.

Dante Parrini -- Chairman, President, and Chief Executive Officer

Yes. Please just keep in mind that Q4 for spunlace was a partial quarter for us. We own the business for 60 days, 61 days, something like that. So Q1 was our first full quarter and closing at the end of the year in tumultuous market was less than ideal.

So we needed to dig in, get our arms around what the shortlist of most critical issues were, helped the team get focused, leverage the Glatfelter tool kit, and the scale that we've built in understanding these types of specialty engineered materials businesses and our spunlace colleagues and our legacy Glatfelter colleagues worked well together and the team responded.

Chris McGinnis -- Sidoti and Company -- Analyst

Perfect. And then just found in composite fibers and the 35% you already switched over on the new pricing strategy. I guess just obviously gives you confidence toward that 50% target. Could you do better than that this year, or do you not need to do that? Just kind of given the other pricing strategies you have in place with the other customers.

Thanks.

Dante Parrini -- Chairman, President, and Chief Executive Officer

Sure. Yes. Very pleased with the progress we made in Q1, that progress continues into the second quarter, which gives us confidence that we'll be able to meet or exceed the 50% target that we had committed to for the year. Of course, we'll push as hard and as far as we can go, because we think it makes good sense, not just for us, but for our customers and our customers are getting whip side, just like we are with a lot of this volatility.

So we're going to push to get as much of our revenue base across all of our segments to some form of a dynamic cost price through model. And then for those who don't, we'll have – we'll be more conventional with price increases and energy surcharges as warranted, which was the case in Q1. We implemented other price increases in energy surcharges above and beyond what was included in the cost price through agreements that we reach with customers.

Chris McGinnis -- Sidoti and Company -- Analyst

OK. Thanks for taking my questions. Good luck in Q2.

Dante Parrini -- Chairman, President, and Chief Executive Officer

Thank you.

Sam Hillard -- Senior Vice President and Chief Financial Officer

Thank you, Chris.

Operator

[Operator instructions] I'm showing no further questions at this time. I will now hand it back over to Dante Parrini for closing remarks.

Dante Parrini -- Chairman, President, and Chief Executive Officer

All right. Well, thank you for joining our call today and we look forward to speaking with you again next quarter. Have a good day.

Sam Hillard -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

[Operator signoff]

Duration: 35 minutes

Call participants:

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

Dante Parrini -- Chairman, President, and Chief Executive Officer

Sam Hillard -- Senior Vice President and Chief Financial Officer

Mark Wilde -- BMO Capital Markets -- Analyst

Chris McGinnis -- Sidoti and Company -- Analyst

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