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Glatfelter (NYSE:GLT)

Mergers & Acquisitions Call

March 13, 2013 02:00 PM ET

Executives

John Jacunski - CFO

Dante Parrini - Chairman and CEO

Analysts

Steve Chercover

Lawrence Stavitsky

Gaten Mantora

Stuart Fenway

Operator

Good afternoon. My name is Chris and I will be your conference operator today. At this time, I'd like to welcome everyone to the acquisition of Dresden Papier conference call. (Operator Instructions). John Jacunski, Chief Financial Officer, you may begin your conference.

John Jacunski

Thank you, Chris. Good afternoon and welcome to Glatfelter's conference call to discuss our purposed acquisition of Dresden Papier.

Before we begin our presentation I have a few standard reminders. During our call today, we will use certain non-GAAP financial measures. A reconciliation of these financial measures to our GAAP-based results is included in today’s investor slides.

We will also make forward-looking statements today that are subject to risks and uncertainties. Our 2012 Form 10-K filed with the SEC and this morning’s press release which are both available on our website disclose factors that could cause our actual results to differ materially from these forward-looking statements. These forward-looking statements speak only as of today and we undertake no obligation to update them.

And finally, we have made available a slide presentation to accompany our comments on this afternoon’s call. You may access the slides on our website or through the webcast provider.

I will now turn the call over to Dante Parrini, Glatfelter's Chairman and Chief Executive Officer.

Dante Parrini

Thanks, John, and thanks all of you for joining us on relatively short notice. This is an exciting time for Glatfelter, and we’re pleased to have the opportunity to speak with you today. This morning, we announced that we signed a definitive agreement to purchase Dresden Papier, the leading global supplier of nonwoven wallpaper base material and a major supplier of most of world largest wallpaper manufacturers, Dresden is currently owned by Fortress Paper Ltd, a North Vancouver, British Columbia-based company listed on the Toronto Stock Exchange.

The agreement to acquire Dresden further demonstrates our commitment to building leading positions in niche global growth markets for specialty papers and fiber-based engineered materials. As we have been saying over the last years, we’re focused on adding industry leading nonwoven product lines to our composite fibers business.

And Dresden Papier's clearly an industry leader in fact, they are both the cost and quality leader when it comes to nonwoven wallpaper based materials. They also have great relationships with the kind of customers we’d like to do business with, premier, global producers of consumer and industrial products.

And we like the business opportunities too they’re particularly strong in northern and eastern Europe with ongoing growth potential there and in Asia as well. Before we get into the specific about Dresden Nonwoven Wallpaper material segment, let me first walk you through the details of the transaction.

As we reported, we’ve entered into a definitive agreement to acquire Dresden from Fortress Paper for EUR160 million or approximately $209 million. The transaction is subject to customary closing conditions including receipt of German and Ukrainian regulatory approvals. We anticipate closing during the second quarter.

In 2012 Dresden’s revenues were EUR117 million or approximately $151 million. And EBITDA was approximately EUR30 million or $38 million. We’ll finance this proposed transition through a combination of cash on hand and availability under our current revolving credit facility. As of December 31, 2012, Glatfelter had a cash balance of $98 million and 345 million available under its revolving credit facility.

From a preformed leverage point of view as of 12-31-2012, that leverage would be approximately 1.7 times on a net debt basis. So not only are we in a great position to finance this transaction but following the close we’re also be able to retain the financial flexibility in that facility continued executing our growth strategy.

We anticipate the proposed transaction be immediately accretive to earnings per share by approximately $0.25 on an annualized basis. Dresden is a well-managed business but provides this the opportunity to add another growing global niche product line that being the nonwoven wallpaper base materials business to our composite fibers business unit.

Now let`s take a closer look at Dresden. The company’s state-of-the-art 60,000 metric-ton capacity manufacturing facility is located in Heidenau, Germany, near Dresden. There are approximately 146 employees at this facility including a dedicated and very knowledgeable management team, well recognized in the industry for their successful track record of profitable growth and industry leadership.

We look forward to working with the Dresden team to continue to build upon their success. Dresden Papier is in an enviable position of being both the cost and quality leader in the nonwoven wallpaper base segment and it’s a major supplier to most of the world’s largest wallpaper manufacturers.

Its success is based on innovative products, proprietary manufacturing technologies and long standing customer relationships. Strengthen that we at Glatfelter enjoy in many of our current businesses as well.

Nonwoven wallpaper covers offers superior performance and characteristics such as dry strip-ability, higher tear resistance and dimensional stability which means that materials don’t shrink or expand when wet which makes it the product of choice for wallpaper installers and design professionals in Europe, particularly Northern and Eastern Europe with significant growth potential in Asia.

So, here we are a strong organization but as you will see in slide four; is in a growing profitable segment. The nonwoven wallpaper industry has been primarily focused in Europe or interior wall construction; typically involve plaster over wood rather than the dry wall that is typically found in North America.

The thicker nonwoven wallpapers work much better over plaster and European installers and design professionals have become very skilled with an unwoven wallpaper materials. It has increasingly become the product of choice among this group, despite the ongoing economic challenges in parts of Europe, we believe the European unwoven wallpapers segment will continue to grow and we expect global growth that are compound annual growth rate of at least 10%.

It’s important to note that the European market continues to grow even throughout the recessionary conditions in 2008 and 2009 and that growth has accelerated in recent years.

Regarding further growth, the most likely opportunities are going to come from additional expansion in Northern and Eastern Europe as well as in Asia.

These opportunities will be primarily driven by residential renovation activity not necessarily new housing starts. The nonwoven product is often used as a higher quality replacement for traditional paper-based wallpaper.

We believe the addition of Dresden to our Composite fibers business is an excellent strategic set for us.

As mentioned earlier, Dresden is a well-managed business that provide us the opportunity to add another leading nonwovens product line through our composite fiber's business.

This new product; this industry position of potential growth opportunities reinforced our commitment towards strategy of building leading positions and niche global growth segments for specialty papers and fiber-based engineer materials.

Furthermore, we are excited about the opportunities this acquisition brings. It broadens our relationships with leading producers of consumer in industrial products that provides the potential to leverage our operating platform in composite fibers.

We expected to generate modest synergies primarily from supply chain opportunities and it furthers our globalization initiatives.

And finally, we will see an immediate positive, financial impact from the acquisition of Dresden. We expect the transaction will be accretive to earnings by approximately $0.25 per share on an annualized basis.

Upon closing this transactional increase, our participation in global growth markets with approximately 48% of net sales and 54% of adjusted EBITDA coming from our growth businesses on a 2012 pro forma basis.

As you can see on slide six, the transformation since 2006 has been quite dramatic as we have expanded our exposure to growth businesses. At the same time, we have implemented continuous improvement and operational excellence initiatives to drive profitability throughout Glatfelter.

Dresden Papier is a great addition for Glatfelter because of their growth history and potential and because they have done a very nice job running a lean and efficient business. Now, we have the opportunity to help them get to the next level of success which can be a significant step forward in our progress to increase value for our shareholders, customers, suppliers and employees.

This concludes our prepared remarks. I’d now like to open the call up for your questions.

Question-and-Answer Session

Operator

(Operator’s Instructions). Your first question comes from the line Steve Chercover your line is open.

Steve Chercover

Perhaps some of these questions should be better addressed to the vendor, but do you know what Fortress did at that mill to make it so good? Because if I'm not mistaken, once upon a time it was part of Mercer, I don't think the numbers were nearly as good from sales or EBITDA.

Dante Parrini

Well, we clearly have a point of view, we don’t have all the history that the current owner has other than they have done a very nice job but what we can say is that we've been very impressed with the focus of the leadership team, the technical capabilities and the creativity that we've seen from producing a high-value nonwovens materials, especially when you're working with synthetic fibers and things of that nature. So, I believe that the facility in its earlier days produced a wider variety of products and had narrowed its focus and really committed to being experts not only in process but product quality and overall productivity.

Steve Chercover

And so, what would the inputs be, Dante, if it's not paper-based?

Dante Parrini

So, there are components of pulps. There are synthetic materials and chemicals, that all go into the furnace to produce these nonwoven wallpaper bases.

Steve Chercover

Okay. And I might've missed it. What did you say your leverage is following the deal? Because I don't think it's still below 1.5?

John Jacunski

Steve, we were 0.9 times on a net debt basis at the end of 2012, if we pro forma for this transaction, it would be 1.7 times.

Steve Chercover

1.7 times, and what's your, remind us, please, John, your comfort zone?

John Jacunski

I think we talked before up to about 2.75 times to 2.75 to three times but we're still well below what we think is the high end of the range.

Steve Chercover

Okay so not to get over our skis here but are you still on the hunt for further acquisitions, what's the landscape like.

Dante Parrini

Well as you know we don't comment on what we may or may not be doing. I think the important element is Glatfelter's track record of generating value for our shareholders and doing that through a variety of mechanisms that range from organic growth to share repurchases, we just increased our dividend 11% as you may know and strategic acquisitions from time to time.

John Jacunski

Look Steve I think that much like we have in the past, our expectation is that we will manage our leverage in a pretty conservative way and that we ease our cash flows to pay down debt as we go forward. So I think our leverage is very manageable today, gives us the opportunity to continue our growth initiatives, things like the capacity expansion, we have it going on with (inaudible) fibers in using cash flow to retain our financial flexibility.

Steve Chercover

And I recognize this call is all about the acquisition here but, can you give us any commentary on your press release from 2 days ago, with respect to the lithium ion battery separators.

Dante Parrini

Just very quickly, innovation is one of the four core growth drivers for Glatfelter and so is globalization and when we look at some of the megatrends that are evolving throughout the global economy and energy storage and transmission is clearly one of those areas. We already have some products that we produce that go into these broader energy related paper markets and this is just another example of the networking and partnerships that we're developing to continue to expand our technology profile and stay with cutting edge developments in this evolving and emerging segment of the industry.

Steve Chercover

All right, so that's ongoing business. We don't change our numbers necessarily for that one, but the other one is 25% accretive. Okay, thanks. I'll get back in the queue.

Operator

Your next question comes from the line of Lawrence Stavitsky, your line is open.

Lawrence Stavitsky

I just wanted to ask you, you cited the 10% annual growth rate globally. Is there any way to break that down into, I guess, Europe versus Russia versus China? Is there any way to quantify that a little more granularly?

Dante Parrini

I don't know that I can give you the type of granular information you're looking for but what I can say is that our assessment of the global nonwoven wall covering base market isn't not too dissimilar than what we're seeing with other parts of Glatfelter’s global specialty fiber-based material businesses where you may see slightly slower or lower growth rates in Western Europe, higher growth rates in Eastern Europe and markets like Russia and Ukraine and emerging and developing regions in Asia Pacific in China where you might be operating from a smaller base, so the year over year projected growth rates are substantially higher and so when we look at the global nature of the market, we arrive at a blended average of about 10% per year.

Lawrence Stavitsky

Okay, so that 10% is, I guess, currently, today? So hopefully, it will be a little higher in the coming quarters or years?

Dante Parrini

This is what we’re projecting over the next few years.

Lawrence Stavitski

Okay, okay, got you. And does that have any other businesses, Dresden? Or is it basically, it's just this nonwoven wallpaper segment or do they have any tangential businesses that you guys would be acquiring?

Dante Parrini

No tangential businesses. They are the leading supplier of nonwoven wallcovering base to the industry.

Lawrence Stavitski

And I'm sure you're not going to be able to comment, as the previous caller kind of asked you, but would you be able to give any comment on what further acquisitions would be? Would they be within the Composite Fibers segment? I know some of the competitors have acquired some premium paper brands recently. Would that be kind of on the back burner and you guys are focusing more on the composite fibers and airlaid segment?

Dante Parrini

Yes, not to be difficult, but I think we've given you as much as we’re going to give on that topic.

Operator

Your next question comes from line of Gaten Mantora. Your line is open.

Gaten Mantora

Can you talk about what would be the market share in this new business for Glatfelter?

Dante Parrini

Sure. We think that Dresden, if you're talking just about the nonwoven portion of the segment, we think they have approaching 50% market share and there is four or so other competitors that split the other half of the market.

Gaten Mantora

Okay, so four other competitors who split the market?

Dante Parrini

Right.

Gaten Mantora

Okay. And then, can you talk a little bit about just the sort of customer contracts, the duration, and what sort of passthroughs are there in the contracts?

Dante Parrini

Yes, I don’t want to get into that specifics about customers that we don’t technically own yet, what I can say is that our assessment is that they have very strong relationships with their key customers and many of the major wallcovering producers especially in Europe and that these relationships are longstanding, so we feel quite good about the confidence and the trust that the Dresden team has earned over the years and we think that’s also a very fit with how Glatfelter goes to market in other specialty niche market.

Gaten Mantora

And then, just a couple of quick ones. Can you comment at all at what operating rate did the mill run last year, in 2012?

Dante Parrini

Well, what I can tell you is that the estimated volume is about 60,000 metric-tons and the current owner has projected capacity of approximately 70,000 metric-tons over the next couple of years. So, John anything you want to add.

John Jacunski

They have a very good track record of continuing to improve productivity and generate incremental capacity, not too dissimilar from what we’ve done in our composite fibers in our other businesses where our continuous improvement initiatives tend to generate some of the incremental capacity. So, they’ve got a very good track record to be able to do that and as we’ve looked at the plans that the management team has for continuing to improve productivity. We feel good that they’re going to be able to accomplish that and create growth potential for the business.

Gaten Mantora

And then, any comments on what would be the maintenance capital in this business and the tax rate?

John Jacunski

Tax rate would be sort of the standard right around 30%. There is some capital investments that we would expect to be able to make in the near term to help improve some of the productivities. I think for now we’ll wait on giving some guidance more specific guidance until we get towards the closing.

Operator

Your next question comes from the line of Stuart Fenway. Your line is open.

Stuart Fenway

So can you tell me how much of the business is residential versus commercial?

Dante Parrini

I don’t have that level of detail available with me right now.

Stuart Fenway

Okay. From the chart you're showing on page five, or I guess maybe four, the business was very small in 2005. So how long has the nonwoven paper business been around? I mean, it's a fairly new business, new product line?

Dante Parrini

Yes. It’s a relatively new product line and what you’re seeing is the cannibalization of the established paper based wallpaper for nonwovens and what's really driving this is a combination of factors that designers and installers find incredibly appealing and that’s the dry strip-ability that we talked about. So, if you ever applied wallpaper to a wall taking it off is not always easy and sometimes it can damage the wall; this doesn't happen, it has higher tear resistance and when we talked about the dimensional stability, what that means is that once it's wet it doesn’t shrink or expand and the other application is that you can put the paste directly on the wall as opposed to taking wallpaper dipping it in water folding it up and waiting for the glue to set up. So for all of these reasons, the market saw no real downside to switching and once people got comfortable with the new technology, you see the evidence of that over the last ten years or so in terms of the position that nonwoven has taken over the time and we think that will continue.

Stuart Fenway

And so that's why you are saying that you think it is resistant or resilient to macro-economic volatility; it's because it's a growing product as opposed to just meeting demand?

Dante Parrini

Right. There are a number of factors that are driving, in our opinion; demand and when you see the substitution rate as one of the key fundamentals, we think it provides downside protection in terms of other exogenous shocks like macroeconomic conditions and that's why we cited how the business performed in 2008 and 2009 as further evidence of that.

Stuart Fenway

And you said that it would broaden your relationship with your other customers. I mean, is there any synergies between this business and your ongoing businesses?

Dante Parrini

That's something we want to more thoroughly explore once we own the business but clearly we have assets that can produce a variety of nonwoven materials. We have a metalizing business that can vacuum-coat and apply a variety of different finishes and metallic surfaces to materials; papers, films, nonwovens and so we think there may be some opportunities to leverage the broader Glatfelter platform to help support and accelerate Dresden's growth. Aspirations also look at the existing incline where asset base that we have and determine if in fact we want to use some of those assets to continue to produce nonwoven wall covering materials and then get the technical communities together to really begin to share, experiences, knowledge and know-how that has been accumulated over many decades of hard work to think about ways that we can further improve efficiency, product quality and innovation across all of our long fiber product categories.

Stuart Fenway

And one last quick one, it seems a little unusual for a company to sell a business that's growing pretty well and making a nice profit. Was there any particular reason that you could cite for them selling at this point?

Dante Parrini

I don't want to speak on behalf of the seller. What I do want to say that we think this is a very good fit for Glatfelter. We think it’s a fair price and we are excited at the prospects of building it into our portfolio and continuing the successful growth pattern that the team has already established.

Operator

Your next question comes from the line of Paul Quinn.

Paul Quinn

I've been covering Fortress for five years, so I just wanted to congratulate you on the acquisition. This is a great facility and it's been a cash cow for them, and I wouldn't be surprised if it continues to generate lots of cash for yourself. The question I had really is on evaluation and more on the high end and what you've been seeing. I'm sure you've been out in markets around the world, taking a look for assets like this. Have you seen in Europe, kind of just a general comment, that valuation multiples have been pushed down over the last little while, just because of economic conditions in the area?

Dante Parrini

Yes, I really don’t want to comment on what we may or may not be seeing in the other regions of the world and what others may be experiencing in terms of valuation multiples. I will just go back to the things that are important for Glatfelter; one is sticking with our core value financial discipline, being very thoughtful about the diligence that we apply and how we identify in that targets and we turned down and say no far more frequently than we say yes and making sure that we maintain a strong balance sheet so we have financial flexibility and find businesses that we think we're rightful owners for. And this was one of those circumstances where I think the unique positioning of Glatfelter as a specialist was a good fit and we are happy that we were able to arrive at a common understanding of value and being able to move forward.

Operator

Your next question comes from the line Gaten Mantora.

Gaten Mantora

Thank you. Thanks for taking my questions. Do you think that productivity improvements in capacity would be able to meet the growth in demand over, let's say, next two to three years, or will you need some specific capacity expansion that will be needed?

Dante Parrini

So our going-in position is that the combination of what the Dresden team has been able to achieve to date and what they have on the drawing board for incremental capacity projects over the next couple of years, we think we will be able to meet market demand for the next couple of or three years. We are also very eager to introduce the Dresden team to Glatfelter’s continuous improvement professionals and to share with them some of the experiences that we've had that with very little to no capital have been able to add incremental capacity to other paper machines across our broader system, and so we think it's the combination of the very strong technical capabilities and process know how that the Dresden team has demonstrated over time, the plans that they have in place and our continuous improvement capabilities, should be able to meet the market growth projections over the next couple three years.

Gaten Mantora

And then, just one last one. Does this in any way change the way Glatfelter looks at returning cash to shareholders say, in terms of share repurchases?

Dante Parrini

No.

Operator

There are no further questions at this time; I turn the call back over to the presenters.

Dante Parrini

Okay, well again I’d like to thank you all for joining us today to discuss our definitive agreement to acquire Dresden Paper, we're very excited about the opportunity and look forward to closing the transaction in Q2 and speaking with you in the future, have a good day.

Operator

This concludes today's conference call, you may now disconnect.

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