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spk00: Good day and welcome to the Glatfelter's Q1 2024 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Romesh Shedegar. Please go ahead.
spk07: Thank you, Ruth. Good morning and welcome to Glatfelter's 2024 First Quarter Earnings Conference Call. This is Romesh Shedegar, Senior Vice President, Chief Financial Officer, and Treasurer. On the call to present our first quarter results is Thomas Fahneman, President and Chief Executive Officer of Glatfelter, 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 2023 Form 10-K, which has been filed with the SEC, and today's earnings release 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 Thomas.
spk06: Thank you, Ramesh. Hello, everyone, and welcome to Gladfelder's first quarter 2024 investor call. I'm pleased to report that the business produced solid but mixed results at the segment level as we continue to face industry-wide market headwinds and challenges from the volatile global economic environment, with Europe representing our most difficult market currently. We achieved adjusted EBITDA of $23.8 million for the quarter, or approximately $1 million lower than the same quarter last year. In relation to the proposed merger of Clubfelder with Berry Global's HHNF business, we reached a significant regulatory milestone with the expiration of the HSR waiting period. I will speak more to the work that is underway related to the proposed merger toward the end of today's call. Turning now to the highlights of Clubfelder's first quarter performance, The spun lace segment continues to gain momentum, having generated $5 million higher EBDA versus the first quarter of 2023. This performance was driven primarily by ongoing price-cost gap improvements, combined with approximately $2.4 million of operational efficiencies throughout our spun lace sites. In addition, we continue to hold pricing benefits for our branded Sontara products, and realized further gains in our Sulz, France facility following the site's 2023 restructuring. Also in Spunlace, I'm pleased to report that our Tennessee facility is fully operational following the tornado that swept through the community in December. I commend the team for their hard work and dedication to restoring operations while ensuring customer commitments were met during the recovery efforts. Transitioning to our composite fiber business, this segment continues to demonstrate a positive trajectory based on steps we have taken to maintain solid performance against the backdrop of a difficult European market. The composite fibers team delivered approximately 2 million higher EBITDA compared to the first quarter of 2023. This performance was achieved primarily through price cost gap improvements despite a nominal volume increase. Overall, composite fibers continues to be managed using a combination of carefully targeted pricing actions to effectively balance volumes, inventories, and operational uptime while mitigating volatile raw material and energy costs. Our most challenging segment in the first quarter was Airlade, as its European markets remained quite tenuous. The segment generated $9 million lower EBITDA with approximately $8 million of the decline attributed to the prolonged European market weakness, which resulted in lower shipments and production, along with adverse pricing dynamics. In addition, Airlight continues to experience growing competition from producers of related substrates. Despite the segment's dynamics, we are accelerating our efforts with new, innovative products that have the potential to address customers' ongoing demand for sustainable, plastic-free alternatives and new, creative applications using Club Zelda's Airlight materials. And I'm excited to share that we recently qualified a key customer for a brand new air-led solution with production targeted for Europe. Shipping volume for this application, when fully ramped up, has the potential to generate meaningful volume annually. Also, we recently shipped our first commercial plant-based caps to Blue Ocean Closures for use by a Swedish manufacturer of nutritional supplements. These innovation initiatives are part of our overall allied business strategy to reduce customer concentration in the segment. I will now turn the call over to Ramesh.
spk07: Thank you, Thomas. Slide three of the investor presentation provides a summary of our first quarter results. Adjusted EBITDA was $23.8 million, approximately $1 million lower compared to the same period last year, while EBITDA margins improved by 70 basis points. Airlate materials EBITDA was lower by $9 million versus a very strong quarter last year. The drop in earnings was mainly driven by weaker European demand leading to lower shipments and consequently lower production to manage inventory levels. Composite fibers EBITDA improved by $2 million, mainly from favorable price-cost gap. Spun lace EBITDA was higher by $5 million compared to the same quarter last year, driven by favorable price-cost gap, headcount reduction, and operational improvements. Slide 5 shows a summary of first quarter results for the air-laid materials segment. Revenues were down 18% on a constant currency basis versus the same period last year, driven primarily by lower selling prices of approximately $20 million and 4% lower shipments. 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 regain volume. On a net basis, the price-cost gap was unfavorable to earnings by $2.4 million. Volume was lower year over year, primarily due to weaker shipments in categories like hygiene, home care, and tabletop in Europe. The decline was largely driven by pricing actions taken in 2023 to protect margins and improve our price-cost dynamic. Ongoing market softness in Europe continued with downward pressure, further impacting volume. In addition, mix was unfavorable compared to last year when we had much stronger color tabletop shipments. These two factors combined unfavorably impacted results by approximately $1.8 million. Operations were unfavorable by $3.8 million versus the prior year, primarily due to lower production of approximately 2,800 tons to manage inventory levels. 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 one million, primarily due to hedging gains from the prior year. Slide six shows a summary of first quarter results for the composite fiber segment. Total revenues were down 13% on a constant currency basis, mainly due to lower selling prices of $11 million from floating contracts implemented with larger food and beverage customers, and targeted pricing actions to preserve volume. And although shipments overall were nominally higher by 1%, mainly from the composite laminates and metalized categories, mix also contributed to lower revenue for the quarter compared to the same period last year. Overall, the price-cost gap for composite fibers remains favorable, with prices declining by $11.1 million versus lower prices for key raw materials energy, and freight, which improved earnings by $13.6 million versus the same quarter last year. Operations and other was unfavorable by $800,000, mainly due to lower production. And foreign exchange was unfavorable by $200,000. Slide seven shows a summary of first quarter results for the Spunley segment. Revenues were down 8% on a constant currency basis, driven by lower selling prices, of approximately $4 million coming from raw material cost pass-throughs, primarily in the hygiene and wipes categories. Volume was lower by 2% driven by softer shipments in the wipes, healthcare, and hygiene categories, but partially offset by stronger shipments in critical cleaning. Raw material, energy, and other inflation were favorable by $7.4 million, resulting in positive price-cost gap. Operations and other items were $2.4 million favorable through intense focus on manufacturing efficiencies, headcount reductions, and lower operational spending. Slide eight shows corporate costs and other financial items. Corporate costs were $700,000 lower versus the first quarter of last year, largely driven by lower professional services spending this year. However, strategic initiatives costs were higher this quarter driven by our proposed transaction with Barry's HHNF business. Slide 9 shows our cash flow summary. For the first quarter of 2024, our adjusted free cash flow was $9 million lower versus the same period in 2023. Cash interest was elevated by approximately $5 million related to our refinancing in Q1 2023 and the higher interest rate environment. Working capital cash usage was higher by $2 million, and cash taxes paid in 2024 were higher by $1 million. Slide 10 shows some balance sheet and liquidity metrics. Our leverage ratio as calculated under the bank credit agreement was 3.7 times as of March 31st, and we had available liquidity of approximately $85 million at the end of Q1. This concludes my prepared remarks.
spk06: I will now turn the call back to Thomas. Thank you, Ramesh. The team and I remain excited by the prospects of Gladfelder merging with Berry Global's HHNF business, which is anticipated to close in the second half of 2024. Extensive efforts are underway to prepare for integrating the two businesses into a combined organization that will create a leading publicly traded company in the specialty materials industry. Integration planning includes extensive work to assess the two organizations and ensure effective operations starting on day one under the direction of Kurt Bagley, new co-CEO. Multiple teams are focused on key areas such as organizational structure, including the formation of a board of directors and the leadership team, while assessing talent throughout the organization. In addition, the work is focused on business processes and IT systems, along with operational excellence that leverages the combined companies' complementary products and manufacturing technologies. The integration is being guided by a carefully planned schedule which is well underway, and I'm pleased by the tremendous efforts of our collective teams. As we approach closing of the proposed transaction, I look forward to sharing additional details regarding the integration and the efforts to ensure meaningful performance of Gladfelder in the coming months. I will now open the call for questions. Ruth?
spk00: Thank you. If you would like to ask a question, please signal by pressing star 1 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. Again, please press star one to ask a question. We'll pause for just a moment.
spk03: We'll go first to Josh Wol with Carlson Capital.
spk04: Hey, Thomas, Ramesh, good morning. Thanks for taking my questions. Good morning. Good morning.
spk01: Before I get to some questions on Q1, a few questions just on the Barry deal and the process from here. I know you noted HSR approval. I also saw a press report in late April talking about the financing preparations. When do you and Barry expect to place the new financing? And outside of financing, when do you expect to file a preliminary S4? And is there a target for when you could announce a name for new co.? ? and some of the corporate branding.
spk05: Thanks for the question, Josh.
spk06: Again, we are still heavily working on all the different things we have to do and conditions we have to meet in order to close the transaction, which includes approval by CloudFelder shareholders securing several regulatory approvals outside of the U.S., So we are still very optimistic that we are closing the transaction in the second half of this year. And as far as your question about financing is concerned, that's still to be determined. And it depends. First of all, we need to get all the approvals from the different authorities.
spk04: Okay. Thanks for that.
spk01: And then on Q1, normally I ask about volumes generally and then price costs generally. But given the performance in airways, I thought I would just kind of focus on that segment as a whole. And it seems the biggest driver of the weakness was the economic downtime. And so I guess I'm trying to understand a little bit kind of how you guys were caught so off guard. I mean, I realize shipments were down year over year, but they improved sequentially. And I think the year over year decline was a little bit less than Q4. And maybe as it relates to that question, some of the CPG data I've seen has continued to improve sequentially, including some of what I'm hearing from Europe, like the guys that make label stock, which can usually be a leading indicator. So what was the issue with either planning or forecasting that, or why you had to take such a severe downtime to get your inventory back in line?
spk06: Okay, Josh, I think let me just go through segment by segment because we have a different picture in the segment. Maybe let's start with composite fibers. In composite fibers, we saw a 10% volume growth from Q4-23 to Q1-24. And this growth was mainly driven by composite laminates and wall copper. The food and beverage side was slightly lower. And that was mainly driven by tea, but we're expecting that this kind of subsegment tea will pick up in Q2. We are still seeing, and again, in the other areas, I think the destocking has more or less vanished. It's gone. The only segment where we're seeing it a little bit is still in the food and beverage area, mainly coffee, where we are still kind of, that's still lagging the trend of all the other areas. And then what's really positive in the CF area composite laminates? We are running right now at a weight which would actually if we continue doing this would be 20% higher than in 2023 So that's kind of CF on the spun lace side Also spun lace is actually improving. We have an overall 5% volume growth from Q4 23 to Q1 and And the growth in that area was mainly driven by hygiene and wipes because we have seen some large customers for additional volume in Q1. And going into Q2 and seeing April a little bit, I mean, we also see some upsides here on the volume and also on the mix side. You might remember when we talked about this a year ago, we said we are qualifying and all that, but we are seeing right now Sontara shows a 10% increase, mainly in the critical cleaning, with higher volumes from new business development, but also with existing customers. So that's kind of the spun lace area. And on air late, we really have to look at the different regions. If I look at air late, In North America, we have an overall volume increase of 13% in Q1 versus Q4. And we are seeing this really in all different categories. It's not just one category. We see it in hygiene and wipes, tabletop, home care. And also here, we think that the stocking has been done. Unfortunately, Europe is a totally different story. In Europe, the markets are much more challenging. and our volume dropped by 7% from Q4 to Q1. And the decline in that area in Europe was mainly driven by hygiene, with probably minus 10, minus 11%. And here we had to take action to really protect our margins. And our goal, and you know that we have an overall strategy to really be less dependent on big customers and widen our product portfolio, But we have to offset this with new products. We have made some really good progress with new products and new customers, and we are kind of at the edge right now that we are kind of really making supplying customers with the first shipments and all this, and we'll see actually better results in the second half of this year, but probably in 2025. But Europe is the big issue as far as L.A. is concerned. And what we're also seeing is competition from other substrates, competition from Asia, Turkey. Europe is the issue in L.A.
spk07: And, you know, Josh, we did kind of flag Europe as being an issue, right, when we kind of came out of the fourth quarter. But clearly things have gotten worse there for us, you know, from a geographic standpoint. And that's why the dramatic decline in kind of year-over-year earnings.
spk01: Now, the context is helpful, including around the other segments, but just to kind of home in a little bit more on just kind of the inventory and the downtime, how unusual, I don't have a table of your economic downtime in airways, but give us some context. How unusual is that level of downtime? I'm just trying to understand how much of that is going to be persistent You know, maybe to some extent we've been spoiled by the reliability in interlates for many years, but it just is surprising because it's not like you went from a strong period of demand and volume growth in Europe, you know, so just kind of wondering what could have really happened this quarter that was so much different than your expectation, or maybe this happens from time to time.
spk07: Yeah, I would say, you know, clearly, as we were seeing the demand kind of soften for us in Europe, we had to dial down our production as well. So the absorption impact of that was quite meaningful. You know, the capacity utilization where we've typically seen this being in the mid to high 80s was kind of in the mid to high 70s. And, you know, having a pretty capital intensive business across all three segments, you know, the absorption impact can play a very, very meaningful role. Also keep in mind that we made some conscious volume decisions with certain customers in terms of going into 2024, which we had also talked about previously, that if the book of business is not generating enough money, then we want to be able to reallocate that capacity to the BNC customers. And that takes time, right? We want to make sure that we're broadening the customer base. We want to make sure... Yeah?
spk01: Yeah, maybe the last question then around this is just so... I was saying that the last question I have around kind of the issue in airways is so broadening out the customer base and finding, I guess, new customers to replace some of that. When do you think that could get the operating rate and absorption back to a more normal level? Is that like a Q2 or is it more second half? Just some context there.
spk06: Okay, Josh. Now, what we're seeing right now is that we are seeing first shipments in Q2. But these are, again, we are ramping up. It's new application and all this. we see already coming some volume in the second half of this year and then the full impact you'll see in 2025 and 2026 where we can replace it. And again, as I mentioned in my remarks earlier, it's really exciting. We have nice, absolutely new applications where we can position ALAID and also in a segment which is also providing enough profitability because that's the biggest issue because we get faced with other substrates which have a totally different price point, and we just can't do that. We don't see that in the US yet, but we're seeing it in Europe, mainly coming from Turkey and Asia, and we already initiated the strategy back 15, 16 months ago, and it's coming to fruition. But again, coming back to your question, you'll see something a little bit in the second half of this year and then in 2025, 2026.
spk04: Okay.
spk01: And let's talk about the price of pulp. And here you can speak to airways as well as composite fibers, but just kind of looking at pulp prices in North America and Europe, they entered 2023 at a very elevated level. They dipped pretty hard through the summer, and now they've been rising again, albeit they're below the last peak. When should we see the impact of rising pulp prices in your margins, and will the experience be any different this year positive or negative given either changes to contracts or the fact that you're not also being squeezed on energy or maybe negatively because of what you said, competition with other substrates and that competitiveness getting worse as the price of pulp goes up.
spk06: Okay. Okay. I mean, we are seeing the pulp price increases in Q2. So we are holding normally a two, two and a half month inventory. then if I look at our floating customers we will pass that on with a I would say around about three months time lag so we'll get it but there's a time lag and contract a little bit different but it's it's on average just round about three months and also we have as you know a implemented some of these floating mechanisms in our food and beverage uh segment and with other customers so that that'll help there's always a time lag but it'll help and we'll pass that on if i look at the non-floating side we already were able to increase our prices roughly by two three percent in north america and this was generally accepted Again, here, Europe is much more challenging with the very competitive market conditions, but we are working on that as we speak.
spk04: Okay. Helpful.
spk01: Just one last question, and then I can get back in the queue. Around cash flow, just any context on the performance in Q1 versus your expectations and kind of normal seasonality, and are there any guideposts around seasonality? and also the timing of some of the restructuring spend over the balance of 2024 that can kind of help us model that out.
spk07: Sure. So, Josh, I would say in terms of, you know, seasonality in the cash flow, typically the first quarter is a heavy cash outflow for us, and we've seen that over, you know, the last several years. I would say from a working capital standpoint, if inflation, you know, stays moderated, we can continue to have at least a break even to slightly positive working capital profile. And that's what we've been expecting. But if inflation starts to creep up here, whether it's in input costs, whether it's in energy, that could have a similar impact like we saw last year as well, where working capital was quite strained. But our going-in expectation is having the cost pass-throughs structured appropriately we should be able to manage the working capital situation this year as well. So overall, you know, as we think about the rest of the year, you know, the second half of the year is typically more positive cash flow from a seasonality perspective. But some of these one-time restructuring costs, the costs that we're incurring related to the kind of pre-merger integration and the HHNF transaction, you know, all of that is kind of fairly spread out throughout the year all the way until closing. So we're going to be continuing to manage that appropriately. But as of right now, our cash flow picture going into this year versus where we are right now is largely unchanged.
spk01: Okay, perfect.
spk04: I'll get back in the queue. Thanks, guys.
spk02: Thanks, Josh. Ruth, is there anyone else in the queue at the moment?
spk00: There are no others in the queue at this time.
spk07: Then why don't we give Josh an opportunity to ask any further questions if he does have.
spk00: Yes, sir.
spk03: Mr. Wall, if you do have a question, please press star 1.
spk04: That's it for me, guys.
spk01: I appreciate it, and thanks for taking the question.
spk05: Thanks, Josh. Thank you, Josh.
spk00: There are no other questions at this time.
spk07: All right. Thank you very much, and we will speak with you again next quarter. Okay.
spk00: Thank you. This does conclude today's conference call. Thank you for your participation. You may now disconnect.
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