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spk00: Good day, and thank you for standing by. Welcome to GUTS Felter's Quarterly Earnings Release Conference Call. At this time, all participants' lines are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will 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. I would now like to hand call over to your speaker today, Mr. Ramesh Shetigar. Please go ahead.
spk01: Thank you, Buena. Good morning and welcome to Gladfelter's 2021 Second Quarter Earnings Conference Call. This is Ramesh Shetigar, Vice President of Investor Relations and Corporate Treasurer. On the call today to present our second quarter results are Dante Perini, Gladfelter'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 risk 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.
spk04: Thank you, Ramesh. Good morning and thank you for joining us today. Gladfelter delivered positive overall results versus expectations, despite entering the quarter anticipating softer demand and market-related downtime associated with customer destocking for the air-laid segment. These outcomes were driven by a recovery in demand for tabletop products and strong performance from Mount Holly. Also, consistent with the execution of our ongoing transformation and growth strategy, We announced the pending acquisition of Jakob Holm, a leader in the nonwoven sector. I'll provide more details about this important acquisition throughout the call. As for second quarter results, we reported adjusted earnings per share of 18 cents and adjusted EBITDA of $28 million. Slide three of the investor deck provides the highlights for the quarter. Air-laid materials performed above expectations, driven by a rebound in the tabletop category, as in-person dining began to recover globally. Mount Holly contributed favorably to the quarterly results, following the team's excellent execution in closing the transaction, standing up a new integrated system, and restarting production and shipping, all within 48 hours after closing. We're excited for the ongoing opportunities we see with the addition of Mount Holly to the Gladfelter portfolio. While overall volume growth was healthy, we did experience lower than anticipated demand in hygiene products as customers continued to destock from elevated inventory levels maintained during the pandemic. We expect the buying patterns in this category to return to more normalized levels during the third quarter and positively impact segment profitability in the second half of the year. Composite fiber's results were below expectations as unfavorable mix and higher than anticipated energy prices negatively impacted profitability. And while shipping volume was up meaningfully, inflationary headwinds proved to be challenging for this segment. The pricing actions announced in the first quarter helped to address some of the raw material input cost pressures, but not enough to offset the higher than anticipated energy prices and logistics costs during the second quarter. we expect a more meaningful benefit from the price increases to take effect in the third quarter. At an enterprise level, our focus remains on the health and safety of Gladfelter people. Our efforts continue to keep all facilities operational, as they did in the quarter, while ensuring uninterrupted supply of essential products to our customers, despite the current evolving nature of the pandemic. It goes without saying that 2021 has been a momentous year thus far in executing Gladfelter's ongoing transformation and growth strategy. In May, we closed on the acquisition of Mount Holly, which has strategically positioned us to more fully benefit from the long-term growth in the health and hygiene category, while also being immediately accretive to earnings. And as I mentioned in my opening remarks, on July 22nd, we announced the acquisition of Jakob Holm, a global leading manufacturer of premium quality nonwovens, with an attractive platform to expand Gladfelter's scale, technologies, product portfolio, and global reach. I'll provide additional commentary on the Jakob Holm acquisition after Sam completes his review of our second quarter results. Sam?
spk02: Thank you, Dante. Second quarter adjusted earnings from continuing operations was $8 million, or 18 cents per share, a decrease of 4 cents versus the same period last year, driven by pandemic-related softness in our Air League Materials segment reflected in our guidance last quarter. Also noteworthy is that Q2 results include the acquisition of Mount Holly, reflecting six weeks of ownership during the quarter. Slide 4 shows a bridge of adjusted earnings per share of 22 cents from the second quarter of last year to this year's second quarter of 18 cents. Composite fibers results lowered earnings by one cent, driven by higher inflation in raw materials and energy. Airline materials results lowered earnings by six cents, primarily due to softness in the hygiene category and lower production as customers continued to destock from pandemic driven elevated inventory levels. Corporate costs were three cents favorable from ongoing cost control initiatives and interest taxes and other items were in line with the second quarter of last year. Slide 5 shows a summary of second quarter results for the composite fiber segment. Total revenues for the quarter were 7.1% higher on a constant currency basis, driven by higher selling prices of $2 million and the near doubling of our wall cover volume from the trough of the pandemic in 2020. Excluding metallized, shipments in the quarter were approximately 26% higher, driven by strong growth in wall cover, technical specialties, and composite laminates. The food and beverage category, however, was impacted by shipping container shortages, thereby resulting in lower volumes during the quarter. The strong demand overall required increased levels of production, driving a $3 million benefit to earnings. Higher wood pulp and energy prices negatively impacted results by $6 million, creating a significant headwind for the segment. We continue to implement announced pricing actions, but during the quarter, Selling price realization only partially offset the higher input costs. And currency and related hedging activity unfavorably impacted results by $600,000. Looking ahead to the third quarter of 2021, we expect shipments and composite fibers to be 2% to 3% higher sequentially, favorably impacting results by approximately $400,000. We expect higher selling prices to fully offset raw material, energy, and logistics inflation when compared to the second quarter. And operations are expected to be in line with the second quarter. Slide 6 shows a summary of second quarter results for air-laid materials. Revenues were up 5% versus the prior year quarter on a constant currency basis. supported by the addition of Mount Holly and a strong rebound in tabletop demand as in-person dining began to recover globally. Demand for hygiene products, however, was lower for the quarter as customers continued to destock from high inventory levels maintained during the pandemic. As previously stated, we believe this decline is transitory, and as a result, we are projecting meaningful growth in Q3 in all product categories. As evidence, demand for wipes has picked up materially in July, and hygiene has started to improve. We expect more normalized buying patterns in all of our categories to return in the second half of the year. Selling prices increased from contractual costs passed through arrangements with customers, but were more than offset by higher raw material and energy prices, reducing earnings by a net $800,000. Operations lowered results by $1.9 million, mainly due to lower production in the quarter to manage inventory levels and better align with customer demand. And foreign exchange was unfavorable by $300,000 versus the second quarter of last year. For the third quarter of 2021, we expect shipments in air-laid materials to be approximately 15 to 20% higher. Selling prices and input prices are both anticipated to be higher, but fully offsetting each other. Additionally, we expect higher production levels to meet the strong customer demand and also to prepare for a Q4 machine upgrade. The increased production is expected to favorably impact operating profit by approximately $1 to $2 million sequentially, in addition to the increased volumes. Slide 7 shows corporate costs and other financial items. For the second quarter, corporate costs were favorable by $1.9 million when compared to the same period last year driven by continued spend control. We expect corporate costs for full year 2021 to be approximately $23 million, which is an improvement from our previous guidance of $25 to $26 million. Interest and other income and expense are now projected to be approximately $11 million for the full year, lower than our previous guidance of $12 million. Our tax rate for the quarter was 33%, and full year 2021 is estimated to be between 38 and 40%, lower than our previous guidance of 42 to 44%. The lower overall tax rate is driven by changes in the jurisdictional mix of pre-tax earnings slightly offset by an increase in the UK rate. Slide 8 shows our cash flow summary. Second quarter year to date adjusted free cash flow was lower by approximately $6 million, mainly driven by higher working capital usage after adjusting for special items. We expect capital expenditures for the year to be between $30 and $35 million, with the reduction being driven largely by our better than anticipated execution on Mount Holly integration costs. Depreciation and amortization expense is projected to be approximately $60 million. Slide nine shows some balance sheet and liquidity metrics. Our leverage ratio increased to 3.1 times at June 30, 2021, mainly driven by the Mount Holly acquisition we completed in May 2021, which increased our net debt by approximately $175 million. Even after this acquisition, we continue to maintain liquidity of approximately $200 million. These figures do not include the recently announced pending acquisition of Jakob Holm, which Dante will cover more shortly. We also have additional financing details located in the appendix of our investor deck. This concludes my prepared remarks. I will now turn the call back to Dante.
spk04: Looking ahead, we remain very optimistic about the prospects for the second half of the year and beyond as we continue building momentum for the company. Demand for composite fibers products is robust, and we expect that to continue for the foreseeable future. Our pricing actions are taking hold, and will be a meaningful contributor to earnings in this segment as we offset inflationary pressures. We will continue to work to mitigate the effects of input cost inflation and global supply chain constraints in order to optimize operations and deliver on strong customer demand. Air-laid materials demand is strengthening across all categories. Tabletop is benefiting from improved demand conditions as consumers resume leisure travel and in-person dining. July was very strong for wipes, and we believe we are exiting the period of demand weakness associated with destocking that took place during the first half of the year. Additionally, demand in the hygiene category is beginning to recover, with the second half of the year expected to return to more normalized levels. Our continued aggressive stance on cost control is contributing to maintaining an efficient cost structure, thereby improving EBITDA and free cash flow. And glass shelter people are performing exceptionally well. responding to challenges, seeking new opportunities for growth, and delivering on the Mount Holly integration and synergy realization. From a strategic perspective, I'm pleased with the accelerating pace of execution of our business transformation and growth initiatives. As noted, we signed a definitive agreement to purchase Jakob Holm for $308 million. We're very excited about this new addition to the portfolio, which will add meaningful scale, new technologies, and product diversification, and will expand Gladfelter's growth platforms and global footprint. Jakob Holm is a leading producer of spun lace materials and sustainable nonwoven fabrics, providing access to new customers in the personal care, hygiene, industrial, and medical categories. Headquartered in Basel, Switzerland, the company has four manufacturing facilities, two in the United States and one each in France and Spain. The company is organized in three operating units, Sonterra Professional, a former DuPont business, Health and Skin Care, and Personal Care. As you can see from slide 12, their operating units offer an expansive product portfolio covering diverse applications with a prominent customer base. In the 12 months ending June 30th, the Jakob Holm business generated revenue of approximately $400 million and EBITDA of approximately $45 million. Of these earnings, we believe $10 to $15 million could be attributed to COVID-driven demand that is expected to normalize. We project this transaction to be highly synergistic with significant value creation opportunities that will benefit all Gladfelter stakeholders. Through product line optimization, operational improvements, strategic sourcing savings, and cost reductions, we anticipate annual synergies of approximately $20 million within 24 months after closing. The estimated cost to achieve these synergies is $20 million. The acquisition is subject to customary antitrust regulatory review and is expected to close later this year. While we have obtained 100% committed financing for this transaction, we intend to finance the purchase with the issuance of a new $550 million senior unsecured bond. With the Jakobholm transaction, Glattfelter's net leverage is expected to increase from approximately three times to four times pro forma at closing when reflecting the COVID-adjusted EBITDA and synergies. This acquisition will create an exceptional portfolio of premium quality, sustainable engineered materials with opportunities for long-term growth that aligns well with post-COVID lifestyle changes. It will also increase Clydefelter's global scale with pro forma annual sales of approximately $1.5 billion. As you can see, these are exciting times at Clydefelter. Slide 13 provides a brief snapshot of the breadth and depth of the company's evolution and recent transformation actions and outcomes. Our near-term priorities and value creation focus will be on integrating our new acquisitions with an emphasis on capturing synergies and deleveraging, accelerating innovation by fully utilizing our growing portfolio of technologies, assets, and intellectual property, and exploring the next wave of growth investments, both organic and inorganic, with continued balance sheet discipline. We are truly generating momentum and accelerating the pace of execution as we build a new Gladfelter. This concludes my closing remarks. I will now open the call for your questions.
spk00: As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw a question, press the pan key, and please stand by while we compile the Q&A roster. Your first question is from Mark Willey of Bank of Montreal. Your line is now open.
spk03: Morning, Dante. Morning, Sam. Morning, Mark. Hey, Mark. Sam, I wondered if we could start by just... thinking about the third quarter in terms of what it means in terms of price costs in both Aerolite and composite fibers. I mean, you have a little bit of gap in the second quarter in Aerolite, but a much bigger gap in composite fibers. In your comments, it wasn't clear to me whether you simply expected to kind of maintain, you know, your current position in the third quarter in composite fibers or whether we're actually going to recover some of that second quarter gap that you had.
spk02: We expect them to maintain both the raw material price, but also the selling prices to be fully offsetting each other.
spk03: So when would you expect, what would be the timeline and actually recovering some of that negative gap, which I think was about 4 million in the case of composite fibers?
spk02: I think it's a little hard to give a specific timeframe here. I mean, obviously, we don't have direct visibility into long-term raw material prices, Mark, but it's something we monitor very closely. And, you know, we'll keep a good pulse on in terms of the raw material and energy price balance with pricing. And I think we've done a good job of announcing the earlier price capture increase and trying to get as much of that in the market as we can. But as you know, it's a delicate balance, trying to make sure, you know, we keep our customers happy and maintain our positions in the market.
spk03: And is there any reason you wouldn't be making a little more headway in the third quarter here? I mean, I can understand sort of lags, but it seems like, you know, we might expect you to start kind of catching up to those earlier cost increases in the third quarter.
spk02: So you're talking specifically composite fibers here, just to make sure?
spk03: Yes.
spk02: Because I think we'll see some of that on the air late side. Obviously, as you know, we've got the pass-throughs built in.
spk03: Yeah, the pass-throughs there are pretty good, yes.
spk04: So, Mark, maybe I can add a comment. So the pricing actions that we took at the end of Q1 started to materialize, and there was some fall through in Q2. We expect a more significant contribution from the announced and negotiated and in-place pricing actions for Q3 and Q4. So that will definitely help compensate some of the input cost inflation elements. And I think the point Sam was making is, With some of these logistics issues and some of the supply chain dislocations, that one's a little bit more challenging to project with great specificity. But we definitely expect a little bit more of a matchup with inflation factors and offsetting cost actions we're taking internally and pricing actions that are put in place and will be more material in Q3 and Q4 as compared to Q2.
spk03: Okay, that's helpful, Dante. And then I noticed the volume was pretty weak in tea and coffee on a year-over-year basis in the second quarter. I mean, for the last several years, tea and coffee have been big drivers in that business. Can you give us some sense of what you expect for the full year and where you see kind of trend growth now in the tea and coffee volumes?
spk04: Yeah, I would say big picture. We still are holding to our projections of segment or category growth for both tea and coffee. For tea, more so than coffee, we had a pretty strong comp on a year-over-year basis because Q2 was one of the early products that benefited from pantry stuffing were tea bags. So that was a factor. And Sam also referenced some of the logistics challenges and shortages of containers. And sometimes you get some geographic or regional mix changes that can affect a period-to-period comparison. I would say from a coffee point of view, we still had a good quarter for coffee on a year-over-year basis, and we're anticipating that mid-single-digit growth rate to continue. So I would say generally speaking, no real issues with tea and coffee other than having to react to some of these nuances that are provided by the supply chain dislocations around the world. Okay.
spk03: And Sam, turning to the balance sheet, you're going to be up about four times following the outcome. Can you just remind people of what your target leverage range would be?
spk02: So, Mark, we don't have a target leverage range out there. I mean, I think historically, though, we can point to the fact that when we have levered up in the wake of an acquisition, we have been very focused on committing to deleveraging. And you saw that, you know, after we had the sales specialty papers with the simultaneous acquisition of the Steinfurt mill from GP, you know, we were levered up over times and then, you know, as recently as last quarter, we're down to around 1.8. So, you know, we'll, we'll, we'll, we'll replicate that playbook here. Obviously coming up to four times is, is, you know, higher than what we have typically been at, but we don't have a specific target target range out there, Mark.
spk03: Okay. And then Dante, just turning to Jakob home, can you help people understand sort of the, differences between your existing business and what Jakob Holm will do for you from just where you sit in the product spectrum?
spk04: Certainly. So the acquisition is very consistent with our ongoing transformation and growth strategy. We've talked, Mark, on several occasions about investments that we felt would add scale to the business, would broaden and complement our existing lines of business, or could add You know new product categories or even a new business unit if we felt that the adjacencies were The correct ones and that we could be the rightful owners and investors in these types of businesses So on the continuum of nonwoven technologies, you know We the Jakob home business kind of fits in nicely in terms of filling some holes or some gaps in terms of our technology portfolio as you know, we have wet laid nonwoven capacity through our inclined wire Assets in composite fibers. We have air laid assets in the early materials segment and now with Jakob home, which is predominantly a spun lace producer Yeah, it helps broaden our existing lines of business. There's still overlap with hygiene and personal care filtration And then it provides some new benefits I would say specifically about Spunley not to get too technical and But it offers very high web strength and good uniformity, a very wide range of basis weights, very wide range of filament diameters and fiber shapes. So it gives us capabilities to produce a lot of different types of materials with a lot of different feedstocks. I think sometimes people associate spun lace with petroleum-based inputs. And one of the things that we appreciated about Jakob Holm was the fact that about 50% of their feedstocks across the entire business portfolio are plant-based and that they have a stated goal prior to Gladfalter's ownership of within the next 10 years or so having 100% sustainable alternatives for all product categories. So we're excited at the prospects of combining the businesses, the technology platforms, the know-how, the intellectual property to continue to advance and progress are issues around sustainable engineered materials. So again, very complimentary. And one other attractive aspect of the Jakob Holm business is a handful of years ago, they acquired DuPont Santera Business, which is a very well-respected franchise, and it also produces finished goods. So this will introduce a new set of process technology and element along the value stream that would be helpful to Gladfelter as we think about additional growth factors over time. So, again, a lot of very attractive complementary fit with GLT and really fills in some holes in our portfolio.
spk03: Okay. And Dante, just, you know, for either you or Sam, but if we take out the kind of COVID-related benefits that you think they've gotten, and then we add in your synergies, it still yields an EBITDA margin, which is lower than your currently related business. And when you look at the portfolio of what they do, it actually seems to be a lot of stuff that would be fairly value additive. You might expect the margins to actually be a little better, and the implied margins are actually quite a bit lower than your existing margins. So can you address that issue?
spk04: Yes. So in some ways, there are parallels between when we acquired Concert Industries, which was a small, subscale, independent player in the broader nonwoven space. And Mark, if you may recall, year one of Concert Industries slash our air-laid business, our EBITDA margins were 6.5%. And through a lot of dedicated effort and hard work, we were able to put the Glidefelter business model in play and put scale into these businesses and build centers of excellence and find more cost efficiencies and buy better. Because we had more scale, we could attract a different caliber of talent. And so there were a multitude of factors that went into bringing scale and a little bit more of a broader, more global purview and a seat at the table as a key strategic supplier across a lot of these product categories. And we expect the same to be the case with Jakob Holmes. I would say the jumping off point of normalizing their EBITDA by a $10 to $15 million reduction off the 45 trailing 12 and then 20 million of synergies on top is a good jumping off point, but that's not where we envision the endpoint to be. We will continue to apply continuous improvement, build in our centers of excellence, leverage the scale that we are building, and look for accelerating innovation, especially as the world is much more sensitized to sustainability and ESG. And we think the portfolio that we're building is a perfect solution for those applications. Okay.
spk03: And Dante, the last one for me. Just when we get to the, think about your capacity base, following this machine rebuild that I think you said you're doing in the fourth quarter, know how much slack capacity would you have at the company what would be the point at which you might need to think about either acquiring or organically kind of growing capacity glass filter yeah so first i'll start with q2 capacity utilization rates across our segments so for composite fibers
spk04: We're in the high 80s, and for the early business, we were in the high 70s. So we still have room to go to utilize our existing asset base to accommodate market growth and any types of share changes that may accrue to Gladfelter based on earning customers' trust and confidence. Secondly, we're going to be very focused on execution and making great use of our shareholders' money that we just put to work at Mount Holly. and expecting post-close for Jakob Holm, and synergy realization and deleveraging. You know, to tag on to the question you asked Sam about leverage targets, my tenure goes back a bit longer, and you may recall we made two acquisitions in 2006 when we bought, made an investment in the United States and one in Europe, and our leverage went to the low to mid-fours when we were a much smaller and less sophisticated company. and we made it a priority to de-lever quickly, and we did. I think this team is much more capable, and we have better tools and execution track record, so I fully expect us to be successful in reducing debt pretty quickly. And then we will continue to re-up our unconstrained demand forecast across our new and expanded portfolio and identify areas where we think the market will require and perhaps expect support from Gladfelter to continue supporting these trends of GDP, GDP plus growth across a large part of our portfolio. So we're not in a position to put a finer point on a date or when that may happen, other than that's part of our planning calculus. But we've got some short-term tactical execution to make sure we do a fantastic job with the investments that we're making today, and that we continue to earn the trust and confidence of our customers. And as we get closer to being at full capacity and having a clear point of view on what is the logical and best next investment for GLT, whether that's inorganic or organic, we will certainly let the investing public know that. Okay.
spk03: Fair and reasonable response. Good luck in the second half, Dante. Thanks, Mark.
spk00: And there are no further questions. Please continue, sir.
spk04: Okay, well, thank you very much for joining us today, and we look forward to talking to you again after our third quarter. Have a good day.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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