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spk04: Good day and thank you for standing by. Welcome to the GLAP CELTR's quarterly earnings conference call. At this time, all participants line are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to your first speaker today, Mr. Ramesh Shetegar. Please go ahead, sir.
spk02: Thank you, Patricia. Good morning and welcome to Glatfelter's 2021 First Quarter Earnings Conference Call. This is Ramesh Shetegar, Vice President of Investor Relations and Corporate Treasurer. On the call today to present our first quarter results are Dante Perini, 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.
spk00: Thank you, Ramesh. Good morning, and thank you for joining us today. Gladfelter 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 19 cents and adjusted EBITDA of $31 million. Slide three of the investor deck provides highlights for the quarter. Airline 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, home care, 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 and beverage and technical specialties products help drive results. When coupled with higher asset utilization, profitability for this segment hit 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 Gladfelter 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 Airlade platform. At this point, I'll turn the call over to Sam to give an in-depth review of our first quarter results. Sam?
spk01: Thank you, Dante. First quarter adjusted earnings from continuing operations was $8.4 million, or 19 cents per share. A decrease of 5 cents versus the same period last year, driven by pandemic-related softness in our air-laid 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 24 cents from the first quarter of last year to this year's first quarter of 19 cents. Composite Fibers results improved earnings by 1 cent, driven primarily by better mix and improved asset utilization. Airline 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 fiver segment. Total revenues for the quarter were 1.4% lower on a constant currency basis due to lower shipments of metallized products in 2021 compared to Q1 2020. As a reminder, we shipped metallized products the entire first quarter of 2020 from our UK and German facilities before the restructuring in early Q2. Excluding metallized, shipments in the quarter were in line with last year. We continued to experience stable growth in our food and beverage and technical specialties product categories, offset by lower shipments in wall cover and composite laminates. Selling prices were flat versus the same period last year, but improved mix from higher shipments in food and 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 and 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 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, home care, 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 GPUS nonwovens acquisition in mid-May, We expect to include approximately six weeks of Mount Holly's performance into the Airline Materials financial results during the second quarter. Factoring that into our second quarter guidance, we expect shipments of Airline 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. 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 seven 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 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 eight 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 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 31st 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 maintain their respective ratings with stable outlooks while viewing the GPUS 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.
spk00: 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 air-laid 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 wipe 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 Gladfelter 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 Gladfelter 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 Airlate 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.
spk03: Thank you. And as a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that's star 1 on your telephone. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Anodja Shah from BMO Capital Markets.
spk04: Your line is open.
spk05: Hi. Good morning.
spk01: Hi, Anodja. How are you?
spk05: Good. Thank you. I wanted to go back to this tabletop in Airlade 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?
spk00: 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 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. I think perhaps people have taken a bit of a timeout on their focus on plastic and petroleum-based feedstocks versus plant-based and cellulose feedstocks and its impact on waste streams, landfills, et cetera. And so Gladfelter'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.
spk05: Great. Thank you. And then can we just maybe talk about capital allocation, given that this 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?
spk00: Sure. So, as you know, our transformation and growth strategy was designed to, you know, reset the company, establish the correct base for us to build the new GLAD filter. and to become a more profitable growth business over time. So clearly the GPUS 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 Gladfelter to be a participant in helping to consolidate the different parts of the market that we participate in.
spk05: 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?
spk00: Certainly. As we look at areas for investment 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're the rightful owners of these assets. The two GP acquisitions in 2018 and now in 2021 are perfect examples of those. Now, 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 home care markets. We've talked about electrical, and we're seeing part of the reason why I see composite fibers continuing to strengthen is the recovery categories in our portfolio are 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.
spk05: 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?
spk01: Sure. So, again, we had guided to a rate, you know, below 40 for this year, but unfortunately with these changes in the rates in UK and Germany, that's causing it to tick back up to above 40. You know, we do think we have the capabilities to bring it back down well below. Now, obviously, Anuja, there's a lot of pending legislation in terms of tax reform around the globe and in the U.S., so, you know, it's hard to predict exactly what's going to happen, but, you know, ignoring what could or couldn't happen there, I do think we see good potential to lower our tax rates. 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 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.
spk05: That's very helpful. Thank you very much.
spk01: Thank you.
spk04: There are no further questions at this time. Speakers, you may proceed.
spk00: Okay. Well, thank you for joining our call today. We look forward to speaking with you again next quarter. Have a great day.
spk03: This concludes today's conference call. Thank you all for participating. You may now
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