P. H. Glatfelter's CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.30.13 | About: Glatfelter (GLT)

P. H. Glatfelter Company (NYSE:GLT)

Q1 2013 Earnings Conference Call

April 30, 2013 11:00 ET

Executives

John Jacunski - Chief Financial Officer

Dante Parrini - Chairman and Chief Executive Officer

Analysts

Steve Chercover - D.A. Davidson

Mark Wilde - Deutsche Bank

Operator

Good afternoon. My name is Steve and I will be your conference operator today. At this time, I would like to welcome everyone to Glatfelter’s First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I will now turn the conference over to John Jacunski. Please go ahead.

John Jacunski - Chief Financial Officer

Thank you, Steve. Good morning, and welcome to Glatfelter’s 2013 first quarter earnings conference call. This is John Jacunski. I am the company’s CFO.

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 2012 Form 10-K filed with the SEC and available on our website discloses 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 morning’s call. You may access the slides on our website or through this morning’s webcast provider.

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

Dante Parrini - Chairman and Chief Executive Officer

Thank you, John. Good morning, and thank you for joining us today to discuss our first quarter results issued earlier this morning.

We had a solid start to 2013 as shown on slide three. Net sales for the quarter were $405 million, up 2% compared to last quarter. This was driven by strong growth from Advanced Airlaid Materials, where shipments increased 7% and by Specialty Papers that again outperformed the broader uncoated freesheet market by growing shipments by 3%.

Composite Fibers shipments were in line with the year ago quarter although this represented a very strong recovery from the fourth quarter of 2012 when weak shipments in December negatively impacted this business. For the quarter, we generated healthy increases in operating profit in our global growth businesses.

Advanced Airlaid Materials were up 17% and Composite Fibers’ operating profit increased 7% compared to the first quarter of last year. This business rebounded very well from a weak fourth quarter with operating profit increasing 68%. However, the improvements in operating profits from our fiber-based engineered materials businesses were more than offset by the expected decline in Specialty Papers’ operating profit. The year ago quarter was very strong for Specialty Papers when the market environment was more favorable and we had lower operating costs.

Adjusted earnings per share for the quarter were $0.40 compared to $0.43 per share in the first quarter of 2012. This reflects the lower year-over-year operating profit partially offset by favorable tax rate. During the first quarter, we also increased our dividend by 11%. This is the first dividend increase in over 20 years for Glatfelter and reflects the progress we have made improving our free cash flow. Additionally, it shows the confidence our Board has in our ability to sustain this progress.

During the first quarter, we also announced that we reached a definitive agreement to acquire Dresden Papier from Fortress Paper. I am pleased to report that this acquisition closed today which provides another important growth platform for Glatfelter. After John gives a more in-depth review of our first quarter results, I will provide some additional perspectives on our strategy and our outlook for the second quarter of 2013. John?

John Jacunski - Chief Financial Officer

Thanks Dante. For the first quarter, we reported adjusted earnings of $17.4 million, or $0.40 per share after adjusting to exclude acquisition integration costs and other items as shown in this morning’s release compared to $18.9 million or $0.43 per share last year.

Slide four shows a bridge of adjusted earnings per share from the first quarter of last year to this year. The major drivers of the change include as expected lower earnings from Specialty Papers, which reduced earnings per share by $0.09, improved earnings from Composite Fibers and Advanced Airlaid Materials, which each added $0.01 and a favorable tax rate and the comparison increased adjusted earnings per share by $0.04. Our tax rate during the quarter was 21.9% compared to 30.3% last year.

As we discussed during our call last year – last quarter legislation-related to the research and development tax credit for 2012 wasn’t signed into law until January of this year. As a result, this quarter’s rate includes $1.2 million benefit from the 2012 research and development tax credit in addition to those earned in the current quarter, which reduced our tax rate for the quarter.

Slide five provides a summary of Specialty Papers performance during the quarter. Net sales increased 1.5% or $3.3 million, driven by a 3.4% increase in shipments. This continues our track record of outperforming the broader uncoated freesheet market, which was down 6.2%.

We gained a good growth in shipments of envelope which was up 4% and non-carbonless forms products which were up 10%. This offset declines in carbonless and engineered products. The decline in carbonless was 5% reflecting the market decline, while engineered products were down 6%, driven by mix improvement opportunities and the timing of customer shipments and the scale up of new products.

Operating income for Specialty Papers as expected was down by $5.4 million in the first quarter of this year compared with last year. Last year reflected a favorable selling price and input cost environment as well as lower maintenance cost. During the first quarter of 2013 lower selling prices for books, forms and envelope products more than offset slightly higher prices in engineered and carbonless products. Overall selling price changes reduced operating income for the quarter by $1.8 million. This was offset somewhat by the increased margin from higher shipping volumes.

Input costs in the aggregate were essentially neutral in comparison to last year. Higher purchased pulp and starch costs were offset by lower coal and other energy prices. Operating income was also adversely impacted by higher maintenance costs and lower sales of renewable energy credits of approximately $1 million each, as well as other costs inflation. Our continuous improvement initiatives have been a significant driver of improved results over the last several years for this business. We have a number of projects in process, some of which required target investments during our annual maintenance shutdowns in the second quarter. We expect these initiatives to allow to us reduce costs and improve profitability in the second half of the year.

Slide six highlights the improvements in Composite Fibers in the quarter. As we expected Composite Fibers performance rebounded from a slow fourth quarter that was impacted by year end inventory reductions at many of our customers. During our fourth quarter earnings call, we stated that we believe that customer inventory reductions had largely run their course and we expected improvement in the first quarter.

We saw the improvement we expected with shipments during the first quarter increasing 7% over the fourth quarter. Shipments were flat compared to the first quarter of last year. Shipments of technical specialties increased 12% compared to the year ago quarter, while food and beverage shipments were essentially unchanged. Shipments of metalized products were down approximately 5%, operating income improved $700,000 reflecting improved operations and lower depreciation expense offset some of our lower selling prices. Foreign currency translation negatively impacted results by $500,000 due to the strengthening of the Philippine peso where we produced the abaca pulp which is critical in this operation.

With respect to the capacity expansion project, we are progressing as expected. The machine was taken offline in late February and is on scheduled to be restarted in mid-May. The downtime and startup costs negatively impacted first quarter results by $700,000 and are expected to be approximately $2 million in the second quarter.

Turning to slide seven, Advanced Airlaid Materials delivered a solid quarter. Net sales on a constant currency basis and shipping volume, both increased over 7%, driven by feminine hygiene and specialty wipes products. Lower selling prices reflect the contractual pass through of lower raw material costs as well as other contractual pricing changes. Overall operating income for this business increased 17% in the first quarter compared to last year with the impact of increased shipping volume more than offsetting the net impact of lower selling pricing and input costs. We also incurred cost penalties of $300,000 during the quarter related to the ramp of production of our next generation hygiene products.

Slide eight shows corporate costs and other financial items for the quarter. The second and third elements on this slide are excluded from adjusted earnings and pension will be reviewed on the next slide. Corporate costs for this quarter increased slightly, but declined substantially from the fourth quarter when we had significant spending related to strategic initiatives. The status of our pension plan is shown on slide nine. Pension expense increased $800,000 in the first quarter of 2013 compared to the same quarter last year largely due to the impact of lower discount rates. However, our plans remain over funded. We have not had to make cash contributions to our qualified plan in a very long time, and we do not expect that to make contributions for the foreseeable future.

Slide 10 shows our free cash flow. Free cash flow for the quarter was negative $10.4 million, reflecting normal seasonal working capital flows. Capital expenditures totaled $31.4 million for the quarter, including $10.9 million for the Composite Fibers capacity expansion project. We continue to expect our 2013 CapEx to be approximately $90 million to $100 million. And for all of 2013, we expect to again generate strong cash flows.

Finally, slide 11 shows some balance sheet and liquidity metrics. At the end of the first quarter of 2013, our balance sheet was very strong. We finished the quarter with $76 million of cash and an untapped $350 million revolving credit facility. In April, we closed a €42.7 million 10-year term loan in Germany at a very attractive fixed rate of 2.05%. And today, we completed the Dresden acquisition for €160 million using a combination of cash on hand and available borrowing capacity. On a pro forma basis to reflect the Dresden acquisition, our leverage on a net debt basis was 1.9 times at March 31. So, even after the acquisition, our balance sheet remains in great shape.

This concludes my comments. I will turn the call back to Dante.

Dante Parrini - Chairman and Chief Executive Officer

Thanks, John. Before opening the call for your questions, I have a few comments on our strategy as well as the second quarter of 2013. Our strategy over the last few years has included driving solid and consistent profitability and cash flows from our Specialty Papers business and investing to expand our growth businesses of Composite Fibers and Advanced Airlaid Materials. At the same time, we have used our improved cash flow profile and solid balance sheet to return capital to shareholders through both dividends and share repurchases.

We continued to make progress on the strategy during the first quarter with the announcement in subsequent closing of the acquisition of Dresden Papier. Dresden is the leading producer supplying the growing non-woven wall cover industry. We are excited to add this product line to our Composite Fibers business and expect it to be immediately accretive to earnings and cash flows. We are also progressing with the machine upgrade in Composite Fibers that will increase our inclined wire capacity to allow us to continue to grow our higher margin products in tea, single-serve coffee, and various technical specialties.

I am also pleased with the new product pipeline that we have in both Composite Fibers and the Advanced Airlaid Materials business. Just to name a few examples of our progress in new product development. In Composite Fibers, we have expanded our self-adhesive metalized label product line, and we are partnering with the technology startup company called Dreamweaver to develop next generation products for energy storage and transfer applications, you might recall seeing the release we issued in March.

And in Advanced Airlaid Materials, we have commercialized a new lower basis way of high-performance core for the fem care segment and introduce new product platforms to the adult incontinence and baby care segments that helped to drive the 7% shipment growth in our Airlaid business for the first quarter. We believe this innovation pipeline also gives us a long runway for continued growth in these businesses. As I mentioned earlier, we also increased our quarterly dividend by 11% in March. We are committed to paying a competitive dividend and returning value to shareholders with excess cash while at the same time maintaining a strong balance sheet in the financial flexibility to continue executing our strategy.

Now, I’d like to offer few comments about the second quarter. We expect shipments, selling prices, and input costs for Specialty Papers to generally be in line with the first quarter of 2013. The second quarter is also the time for our annual maintenance outages at our facilities. These outages are expected to impact operating profit by approximately $19 million.

Composite Fibers’ shipments are expected to be approximately 5% higher on a sequential quarter basis before the impact of Dresden driven by seasonal growth in our metalized product line. Selling prices and input costs are expected to be generally in line with the first quarter. And the Dresden acquisition that closed today is expected to be immediately accretive by approximately $0.25 per share on an annual basis. In Advanced Airlaid Materials, shipping volumes are expected to be generally in line with the first quarter of 2013 and the impact of higher input costs are expected to be offset by increased selling prices.

We have the opportunity to build on the solid start to the year and deliver another year of increasing earnings and strong cash flows by focusing on several key initiatives. Successfully executing the machine rebuild and startup to expand capacity in Composite Fibers, successfully integrating the Dresden acquisition to ensure we leverage the skills, breadth of expertise and opportunities presented by this business, continuing to partner with customers to leverage our unique innovation and new product development capabilities to provide new growth options for the company, and driving continuous improvement initiatives and operational excellence to further optimize our operating cost structure and create incremental capacity on existing assets. So, in 2013, as we have in eight of the last nine years, we expect to grow our adjusted earnings per share and generate substantial free cash flow. At this point, I would now like to open the call for any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Steve Chercover from D.A. Davidson. Your line is open.

Steve Chercover - D.A. Davidson

Thanks. Good morning. It looks like one of your larger Airlaid competitors will be rolled into GP/coke, do you believe this is going to change competitive landscape at all or maybe provide some opportunities?

Dante Parrini

This is Dante. So, certainly we do compete with Buckeye and certain limited product lines as well as other producers and material substrates. So, we don’t know whether GP will change the focus of Buckeye’s Airlaid operation or not. So, it’s very difficult to speculate on how it might impact us over the broader market. But Steve what we are going to do is continue to do what we have doing since acquiring this business in 2010, which is the focus on the things we can’t control. And that’s creating high-quality innovative products that meet the needs of our customers and continuing the growth trajectory that we have established for this business, that’s been a volume CAGR of about 8% per year since we made the acquisition in 2010.

Steve Chercover - D.A. Davidson

Perfect, thanks for that, Dante. And maybe one quick one for John, the integration costs the $2 to $3 million that you have called out for Q2, will you call those extraordinary as you did in Q1?

John Jacunski

Yeah.

Steve Chercover - D.A. Davidson

Yeah.

John Jacunski

Yes, we will take those out of adjusted earnings.

Steve Chercover - D.A. Davidson

Excellent, that’s well done. Okay, thank you for that. That’s all I had for the moment.

John Jacunski

Sure.

Operator

Your next question comes from line of Mark Wilde from Deutsche Bank. Your line is now open.

Mark Wilde - Deutsche Bank

Good morning, Dante. Good morning John.

Dante Parrini

Hi, Mark. Good morning.

Mark Wilde - Deutsche Bank

Can you guys give us a little more color on that first quarter maintenance expenses in Specialty Paper, the results they were little bit weaker than I expected?

John Jacunski

Sure, Mark. I think that first off a year ago was a fairly low period for maintenance that helped our earnings in that period. And our maintenance for this year was up about $1 million over last year. We had a couple of items like the couple tube leaks and boilers that created some of extraordinary maintenance cost. There was no other than that kind of thing there was nothing extraordinary. So, it was about $1 million. I think the results were largely in line with the guidance we provided as we head our first quarter call. And so we were expecting the profitability to decline given the strong market environment and lower input cost environment we had a year ago.

Mark Wilde - Deutsche Bank

Okay. And John just a kind a couple of other things on Specialty Papers, did you mentioned that they won some preparatory work or maybe where in the first quarter and thought of making some changes at one or both of the mills too reduce cost?

John Jacunski

Yeah. We’ve – our continuous improvement initiatives that have been an integral part of the profitability improvement for this business is something that’s ongoing. And as part of the first quarter, we have been preparing for some projects that span things like energy efficiency, improving the effectiveness, and efficiency of our wood yards doing some automation that allows us to reduce materially, our improved material usage and yields. So, some of that work was being prepared in the first quarter and we will make some of these investments during our annual maintenance outages in the second quarter. And we would expect that to start to help our profitability as we hit the second half of the year.

Mark Wilde - Deutsche Bank

Okay. And is there anything out there in the second quarter that would move up any prices and especially I thought I had seen something on some carbonless price initiatives?

Dante Parrini

Yes we have announced price increases on carbonless products and also many of our engineered products prices were increased earlier in the year. So, those two price increases will continue to roll through as we go through the balance of the year.

Mark Wilde - Deutsche Bank

Can you give us kind of order of magnitude and how much volumes involved?

John Jacunski

Well, the carbonless increases are about – finance increases were about 6% and our carbonless products are on the order of 20% of the business unit. Engineered products it’s a little bit harder to categorize fully, because there are so many different products in that segment, but generally speaking we get typical increases at around 3% or so I would say.

Mark Wilde - Deutsche Bank

Okay, alright. And then Dante moving over to Advanced Airlaid 6.8% EBIT margin, how happy are you with that?

Dante Parrini

Well, clearly we have high expectations for all parts of Glatfelter. This is our third year of steady improvements with that business. And as you can all appreciate when growing businesses and striving for sustainable improvement it’s not always a straight line up. And so we’ll continue to make investments in new products and new customers and the next level of continuous improvement for this part of Glatfelter and the aggregate investment in those activities in Q1 was about $500,000. And some of these costs will carry over into Q2, but we definitely expect to see the benefits of the new products, the new customers and the continuous improvement initiatives to have a positive impact on our profitability as 2013 plays out.

And as John mentioned we have some very targeted rifle shot investments in projects across all parts of our business including the Advanced Airlaid Materials business from a continuous improvement point of view to bottleneck, help us and create some incremental capacity and address things like a winder that will free up capacity that will have a return, but we need to get the work done. And with CI it’s an ongoing journey and we’re investing in training more people and getting down to the shop floor and we’re very excited with the preliminary results we’re seeing across the span of Glatfelter with these initiatives. So, there is a bit of a timing related issue as it pertains to investing in our future growth and profitability.

Mark Wilde - Deutsche Bank

Okay. And then over in Composite Fibers, I think John mentioned that food and beverage volumes were flat year-on-year and I’m just – I’m curious is to whether we need to read anything into that in terms of whether that’s flowing down is it growth for us?

Dante Parrini

No, I wouldn’t read too much into that. I would stick with the fundamentals, which is Consumer Staples continued to grow and our estimate for the global tea market is about 3% annual growth. We estimate single-serve coffee to continue to grow at double-digit rates are on 12% per. year Glatfelter expects in 2013 to grow at market rates at a minimum. And we also expect to see contributions from some of these new products in our technical specialty areas as well. So, yeah I think it’s a point in time, so I’d go back to the fundamentals we have leading share positions, we have strong relationships with customers and Consumer Staples continued to grow in demand.

Mark Wilde - Deutsche Bank

Okay. And then finally as John highlighted you come out of the Dresdner transaction with your balance sheet still on great shape. I am just curious given that you are going to be incorporating Dresdner and that you are going to be ramping up that new machine at Gernsbach, would you be willing to kind of tackle anything else over the next two or three quarters or do you really need to just focus on those two initiatives?

John Jacunski

Well, I think you’re going to see the same thing that you have seen from us over time which in my opinion is a very thoughtful, methodical and disciplined approach to running our business. So, we’re not looking for quick hits here, we’re looking for sustainable progress. And I think John mentioned that from a cash flow standpoint CapEx will be $90 million to $100 million this year. But I also think you’re getting into maybe the executional risk of biting off more than you can chew at anyone point in time. So, we definitely have a keen focus on the key success factors for Glatfelter this year. We’ve made some substantial investments, we’re very much all over the fact that we know what we need to do to realize the return on these investments and to continue to maintain the progress that we’ve created for the company and the trusting credibility that we have across all of our stakeholder groups. At the same time I think you’ve also observed that we aren’t shy about executing our strategy when we see the convergence of a great opportunity and we feel we are prepared. And financial discipline is the home work of Glatfelter, and we are going to continue to keep an eye in our balance sheet and make sure that we don’t get too far ahead of ourselves.

Mark Wilde - Deutsche Bank

Okay, got it. Good answer Dante. Good luck to both of you and the rest of the company through the balance of the year?

Dante Parrini

Thank you.

Operator

(Operator Instructions) And there appears to be no further questions at this time. I will turn the call back over to Dante.

Dante Parrini - Chairman and Chief Executive Officer

Okay. Well, I’d like to thank everybody again for joining us today. And we look forward to speaking with you again next quarter. Have a great day.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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Glatfelter Co (GLT): Q1 EPS of $0.40 beats by $0.02. Revenue of $405.2M misses by $7.25M. (PR)