Glatfelter Corporation

Thank you for standing by. You're currently on hold for the Glatfelter's Q4 2023 earnings release conference call. At this time, we are assembling today's audience and plan to be underway shortly. We appreciate your patience and ask that you please remain on the line. Thank you.

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Ladies and gentlemen, good day and welcome to the Glatfelter's Q4 2023 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ramesh Shedegar. Please go ahead, sir.

Thank you, Lisa. Good morning and welcome to Glatfelter's 2023 Fourth Quarter Earnings Conference Call. This is Ramesh Shedegar, Senior Vice President, Chief Financial Officer, and Treasurer. On the call to present our fourth quarter results, is Thomas Fahneman, President and Chief Executive Officer of Gladfelter, 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 2022 Form 10-K and our 2023 Form 10-Qs, all of which have been filed with the SEC and today's release, 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 are under no obligation to update them. I will now turn the call over to Thomas.

Thank you, Ramesh. Hello, everyone, and welcome to Gladfelder's fourth quarter and full year 2023 investor call. I begin by sharing that our fourth quarter results were solid and as expected in light of continued industry-wide market challenges. We achieved adjusted EBITDA of $25.1 million for the quarter, consistent with the third quarter, and $93 million for the full year in line with guidance. Also, and most notably, on February 7th, we announced a significant strategic milestone for the company and our shareholders with proposed plans to merge Gladfelder with Barrie Global's HHNF business, which I'll speak to in more details towards the end of the call. Turning now to the highlights of Gladfelder's fourth quarter performance. The team achieved exceptional results during the fourth quarter in our Spamle segment, by generating improved volume and profitability compared to the prior quarter, which contributed to approximately $9 million improvement in adjusted EBITDA over a 12-month period. This outcome is a direct reflection of the expanded commercial focus for our Sonterra branded products, operational improvements in each of our four spun-lace sites, and careful cost discipline throughout the segment. In addition, we are pleased with the fourth quarter progress in our composite fiber segment, as the underlying fundamentals are sustaining the gains made previously throughout the third quarter, with EBITDA margins approaching 10% in the second half of the year. We are seeing the direct benefits from the turnaround actions we took throughout the year, largely attributed to addressing the price-cost gap and improving our inclined wire production. In addition, the segment benefited from having divested the Oberschmitten Germany facility earlier in the year. As a result of this momentum, we have increased our commercial efforts on restoring key volumes as we carefully balance inventories with fixed cost absorption to match demand in our major markets. In our air-laid segment, we experienced pronounced competitive and market challenges, with this segment's overall volumes down 5% compared to the fourth quarter of 2022, namely in our feminine hygiene and European tabletop categories. In addition, we conducted an extensive plant maintenance shutdown in our Gatineau facility, which also negatively contributed to the segment's performance. As we entered 2023, we quickly realized that the market required us to take significant actions to maintain our air-laid profitability and diversify our customer base. As a result, we consciously made the decision to protect margins through pricing actions at the potential expense of volume, which we are now seeing play out as consumers have been slow to respond in this inflationary environment. Also, we are working to diversify our customer base and product portfolio to reduce customer concentration while expanding our efforts in innovation and sustainability. We recognize this multifaceted approach will take time to deliver the intended results. I will now turn the call over to Ramesh.

Thank you, Thomas. Slide 3 of the investor presentation provides a summary of our four-quarter results. adjusted EBITDA was $25.1 million, which was in line with our third quarter results, despite lower production, typical in the fourth quarter to manage inventory levels. 2023 full-year EBITDA was approximately $93 million and within the guidance range provided last quarter. Airline materials EBITDA was lower by approximately $6 million versus a very strong quarter during the same period last year. Lower earnings were mainly driven by adverse price-cost gap, lower shipments, and planned maintenance downtime. Composite fibers EBITDA improved by approximately $2 million, driven by higher inclined wire production and favorable price-cost gap. Spun lace EBITDA was higher by approximately $4 million compared to the same quarter last year, driven by favorable price-cost gap, as well as turnaround actions related to headcount reductions and operational improvements. Slide 5 shows a summary of fourth quarter results for the air-laid materials segment. Revenues were down 19% on a constant currency basis versus the same period last year, mainly driven by lower shipments and lower selling prices of approximately $17 million. Selling prices were lower mainly due to cost pass-throughs reflecting declines in raw material and energy costs in Europe and selective price concessions to non-floating customers to preserve volume. On a net basis, the price-cost gap was unfavorable to earnings by $1.7 million. Volume was lower by 5% year-over-year, primarily due to weaker shipments in the tabletop category. This was largely driven by market softness in Europe, coupled with ongoing competition from alternate substrates due to the high cost of fluffball. Operations were unfavorable by $2 million versus the prior year, primarily due to extended maintenance downtime in our Gatineau facility to improve operational efficiency. Also, wage and other general inflation were higher compared to the same period last year. Foreign exchange and related currency hedging negatively impacted earnings by $900,000, primarily due to hedging gains from the prior year. Slide 6 shows a summary of fourth quarter results for the composite fiber segment. Total revenues were down 18% on a constant currency basis due to lower shipments and selling prices of $8.2 million from floating contracts implemented with larger food and beverage customers. Excluding sales from the Oberschmitten operation that was divested in the third quarter, Euro beer volume was lowered by approximately 7%. The decline was primarily due to wall cover and food and beverage categories, but was partially offset by improvement in composite laminates and technical specialties. Also, the fourth quarter was the first full quarter since the divestiture of our Oberschminton site, eliminating any further ongoing losses and favorably impacted year-over-year results by $1.2 million. Lower prices for key raw materials, energy, and freight improved earnings by $9.5 million versus the same quarter last year, reversing the negative price-cost gap trend. Operations and other was favorable by $1.3 million, mainly driven by benefits from higher inclined wire production. and foreign exchange was unfavorable by $1.5 million, driven by hedging gains from last year. Slide seven shows a summary of fourth quarter results for the spun lace segment. Revenues were down 7% on a constant currency basis, driven by lower selling prices of approximately $7 million, coming from raw material cost pass-through provision, primarily in hygiene and wipes materials. Volume was higher by 3%, driven by improved shipments in the consumer wipes and critical cleaning categories, partially offset by lower shipments in the healthcare and hygiene categories. Raw material, energy, and other inflation were favorable by $9 million, resulting in positive price-cost gap as we end at 2023. Operations, FX, and other items were $1.9 million favorable through intense focus on manufacturing efficiencies, headcount reductions, and higher production. In the fourth quarter, the fundless converting operation in Tennessee was impacted by a series of tornadoes that damaged a portion of the production and warehousing facilities. Production was subsequently resumed in an undamaged area within the facility. The cost of the repairs are expected to be fully covered by the company's insurance, except for a $5 million deductible, which was expensed in the fourth quarter and has been excluded from adjusted earnings. Slide eight shows corporate costs and other financial items. Corporate costs were approximately $1.9 million lower versus the fourth quarter of last year, and on a full year basis, 2023 corporate costs were in line with 2022. Slide 9 shows our cash flow summary. For full year of 2023, our adjusted free cash flow was approximately $30 million higher versus the same period in 2022. Working capital cash usage was lower by approximately $32 million, driven by raw material price declines and working capital initiatives under our turnaround strategy. Cash interest was elevated by approximately $26 million related to our refinancing and the higher interest rate environment. Cash taxes paid in 2023 were lowered by $15 million, mainly driven by changes in jurisdictional income and timing of payments carried over into 2024. And CapEx was lowered by $4 million. Slide 10 shows some balance sheet and liquidity metrics. Our leverage ratio as calculated under the bank credit agreement was 3.4 times as of December 31st. And we had available liquidity of approximately $135 million at year end. Slide 11 is a summary of our EBITDA and cash flow guidance for 2024. We're expecting 2024 EBITDA to be in the range of $110 and $120 million. As it relates to cash flow items, we expect the following. Cash interest of approximately $70 million. Capital expenditures to be between $35 and $40 million. Cash taxes estimated to be between $15 and $20 million. Working capital cash usage is projected to be favorable by approximately $10 million. And non-operating cash costs related to merger integration planning, tornado insurance deductible, turnaround strategy, and other one-time items are expected to be approximately $25 million. This concludes my prepared remarks. I will now turn the call back to Thomas.

Thank you, Ramesh. As I mentioned at the start of the call, I'm really excited about the recently announced plans for merger with BERI Global's HHNF business, which is anticipated to close in the second half of 2024. The proposed combination of BERI merging a majority of its global nonvolvents and films business with Glattfelder will create a leading publicly traded company in the specialty materials industry. The proposed transaction values the combined company at performer revenue of approximately $3.6 billion and performer adjusted EBITDA of approximately $455 million, including expected synergies. For our shareholders, this transaction provides a strong foundation for growth by addressing Gladfelder's current subscale size within the capital markets and rating agencies. and with customers and suppliers. Also, the combined company creates greater balance sheet capacity for future strategic acquisitions, and this transaction also improves Gladfelder's leverage profile to a performer net leverage of four times. We are excited about the prospect of joining forces to leverage our combined talent, technologies, scale, and footprint to deliver a range of complementary products and solutions for our customers. We anticipate Glutfelder will benefit in areas where Berry is stronger, such as the Asia Pacific and Latin American markets, and the converting capacity of the two businesses will create opportunities for Glutfelder's Sontara brand. We will work diligently to establish a successful start for the new business with meaningful innovation and a platform for long-term growth. Finally, I'm confident the two organizations share a similar culture and set of values that will serve stakeholders very well. Between now and the time we close on the proposed transaction, the Glattfelder team will remain tenacious and focused on delivering strong performance in 2024. We will continue to further execute on our turnaround strategy as we prepare for a successful integration once the proposed transaction is completed. Given the outstanding work the Klattfelder team has completed in 2023, I believe in our ability to deliver full EBITDA in the range of $110 million to $120 million for 2024. This guidance reflects anticipated continued headwinds and limited market visibility, along with macroeconomic volatility, particularly in Europe. Despite these ongoing challenges, our business fundamentals remain strong, and we eagerly anticipate shaping the new organization along with our Barry colleagues. And finally, we look forward to providing updates on our progress in the months ahead. I will now open the call for questions.

Thank you, Mr. Fahneman. Ladies and gentlemen, if you would like to ask a question, please signal to my Christine star one on your telephone keypad. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. And once again, that is star one to ask a question. And our first question today comes from Roger Spitz with Bank of America. Please go ahead, sir. Your line is open.

Hi, good morning. This is actually Olivia on for Roger. Thanks for taking our questions. Hi, Olivia. Hi, good morning. So what are the market shares of Berry, HHNF, and Glasfelter and other main players in the key business where Glasfelter and HHNF overlap?

Okay. Even though we have product in the same end categories like health, hygiene, we are really very complementary. So we don't really compete product on product. But we just compete in the same segment. So this is really one of the really very positive things about this proposed merger, that we will have some synergies, but we are really not competing product by product. It's just in the same segments with different products.

Got it. And what percentage of the global market do fiber-based nonwovens directly compete with polypropylene-based nonwovens?

I mean, this is a very difficult question to come up really with a percentage. But what I can say is that there's many different end users where people can make a choice between the different products. And it always varies based on the performance characteristics. I mean, auto building or construction are using different products than the healthcare section. And in certain applications, you can even go either way. You can go more on the polymer side or you can go more on the fiber side. But again, as I mentioned before, the product portfolios of various business and ours are really complementary, and there are not a lot of products which are the same. But again, there's some... flexibility for customers to switch depending on the application.

Okay, got it. Thank you. And then how much CapEx does HH&F spend?

Yeah, Olivia, historically they've spent anywhere between 3% and 6% of sales. But, you know, looking forward, I would say probably for the next two to three years, I think it's fair to project probably 2% to 3% of sales, and then longer term, probably more along the lines of 4% to 5%.

Okay, thank you. That's very helpful. And I guess, what is the maintenance capex and normalized capex of the new code?

Yeah, Livia, it's a bit too early for us to comment on that. As these two companies come together, As we look at the asset portfolio, as we look at the scheduling of what is maintenance, what is growth, that will probably take some time before we can provide a finer point of view on that.

Okay, that's fair. Thank you. And then I guess, will the glass filter bonds benefit from guarantees of the mature entities that will be providing guarantees to the new co-credit facilities?

Yes, the Gladfelter bonds are expected to be guaranteed by all of the domestic entities that will guarantee NUCO's credit facilities. And to the extent that those credit facilities include foreign borrowers or guarantors, those foreign entities will not be expected to guarantee our Gladfelter bonds.

Okay, thank you. And then how much debt will be transferred from HHNF and will be repaid with the new co-credit facilities?

Yeah, so I would say about a billion and a half will be the debt that will be raised, that will be coming from SpinCo into the merger, of which about a billion dollars will be used to dividend up to Barry, about, call it, you know, 400 million to retire all of the existing Gladfelter debt between the revolver and the Angelo Gordon term loan, and then the rest will be for transaction costs. But at closing, the new company, NUCO, will essentially start with an undrawn revolver.

Okay, thank you. That's very helpful. And then our last question. How does NUCO plan to report on HHNF in the segment?

Olivia, this is really too early right now. We have two weeks' announcement, and as I mentioned before, we'll provide information along the line to closing, but this is too early right now to tell.

Okay. Thank you so much. That's all for us.

Okay, thank you.

And once again, if you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. We'll pause just a moment to allow everyone the opportunity. And our next question comes from Mike Jennings of Angelo Gordon. Please go ahead, sir. Your line is open.

Good morning, Thomas and Romaine. Mike, good morning. How are you?

Good morning.

Excellent. Let's talk about Spunlace for a minute. Obviously, kind of a standout performance and kind of nice trajectory over the course of the year. Can you give us a little bit more color, think about how much of this is sustainable, how much it's one time in nature, and generally kind of how you're thinking about that business for 24? Sure.

Again, We are very pleased with the – and this is a real turnaround result and story, if you think about it, where we started. So we worked very diligently. If I look at our two sites for the hygiene wipe segment on Asheville and Salts, we dramatically improved our operational performance, whether it's waste, downtime, line availability, and quality. So this helped tremendously to improve the performance. And on the other side, our Sontara business, where we are now, and I think we reported a year ago, it takes a little time to get into new segments and all that. And we are focusing on the critical cleaning area, where we see a real unique opportunity for us. And this is coming now, and that's paying off. To answer your question is, if you look at Q4 performance, this is definitely, I mean, we're very pleased with that. And we see that we were able to do the turnaround. Can you take Q4 times four? That's probably still a little bit too early, and we still need to see. But we are very excited about this bundles business, mainly about Zontara, because we are seeing growth now, and further growth will come from the Zontara side. And so I think, yeah, we made a huge step forward, and I would characterize it right now, Mike. This business is now on a good foundation. We stabilized it. I mean, we're not losing money. We're making money, stabilizing it. We are around about at a 7% EBITDA margin, and I think we know where to go, and we are very optimistic.

Congrats. I know that's been a big focus. And then on the air-laid side, Can you help us understand a little bit more, you know, seeing some of the commentary mostly around Europe being some of the softness? Can you help maybe give a little bit more visibility into sort of what you're seeing in the U.S. versus what you're seeing in Europe, whether that be kind of volume or margin or sort of however you think is best to lay that out for us?

I mean, if you look at our allied business, we have – Again, still a lot of headwinds, and there was still also some destocking going on in 2023. The main critical areas as far as volume are concerned is feminine hygiene, which was under pressure, and specifically the European tabletop segment, where we were really, to be honest, disappointed in the market. I mean, the volumes are really down there, but because customers also looked for cheaper alternatives. I mean, they like the product, it's high quality, but based on inflation and the overall economic situation, mainly in Europe, I mean, a lot of customers kind of move to, let me say, cheaper solutions. Okay. Now, the other one which we're doing is we're looking at the L.A. product also here, finding different actually segments where our product could really add value to customers, and that work is ongoing. It takes a little bit of time, and that's also, if I look into 2024, the second half of 2024 in ALAID will be better than the first half. We already have projects and all that, and it's coming, but it takes a little bit of time. And at the same time, we are also, as mentioned before, we had a very high concentration on big customers, which actually represented a big portion of our ALA business. And again, if the market is in a more or less balanced situation or even sold out, this is fine. But we realized this end of 2022, early 2023, and we said, when the market is turning, we need to be more robust in our customer portfolio. We are doing that as well. So we lost consciously some volume. And we are replacing this volume with what I would call B and C customers. But also that takes a little bit of time. And last but not least, in LA, there's one unfortunately phenomena that if I look at the fluff pulp pricing, everything went down. But fluff pulp was much slower to come down. And now it's even going up again. So that's another issue which we have to tackle. And it's a challenge in our LA business. Yeah, so all that combined made a little more complicated. But we have a clear strategy. So we are executing that strategy. And you will see that the second half will be better than the first half. And we'll get back to where we used to have.

Excellent. Thank you guys very much. Congrats again on the quarter.

Thank you. And once again, to join our queue, please press star 1 on your telephone keypad. And ladies and gentlemen, there are no further questions. And this does conclude today's Glatzelters Q4 2023 Earnings Release Conference Call. Thank you for your participation. You may now disconnect.