P.H. Glatfelter's CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: Glatfelter (GLT)

P.H. Glatfelter Company (NYSE:GLT)

Q1 2014 Earnings Conference Call

April 29, 2014 11:00 AM ET

Executives

John Jacunski - SVP and CFO

Dante Parrini - Chairman and CEO

Analysts

Steve Chercover - D. A. Davidson & Company

Debbie Jones - Deutsche Bank

James Armstrong - Vertical Research Partners

Operator

Good morning. My name is Kayla and I will be your conference operator today. At this time, I would like to introduce John Jacunski.

John Jacunski

Thank you, Kayla. Good morning and welcome to Glatfelter’s 2014 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 2013 Form 10-K filed with the SEC and today’s release, both of which are available on our Web site, 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 morning’s call. You may access the slides on our Web site 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

Thanks John. Good morning and thank you for joining us to discuss our earnings for the first quarter of 2014. Earlier today we reported net income of $14.6 million or $0.33 per share for the first quarter. After excluding non-core business items, we earned $0.32 compared to $0.40 in the year ago period. Results for the first quarter were impacted by the pulp mill production issues at our Ohio facility as well as severe winter weather conditions that affected our Ohio and Pennsylvania operations. We will speak to both of these items in more detail during today’s call.

Economic conditions were bumpy during the first quarter due to the severe weather conditions in the United States, slowing growth in China and the crisis in Ukraine. Despite these conditions our key markets continued to perform pretty well. Net sales during the quarter increased 12.5% and totaled $456 million. Excluding the Dresden acquisition, net sales increased 2.3%. Net sales for composite fibers excluding the Dresden acquisition grew 5% driven by growth in tea, single-served coffee and technical specialties. Dresden delivered another strong quarter and when combined with solid operating performance this business unit generated record quarterly profits of $19.3 million, 65% higher than the first quarter of last year.

We also have strong growth in the advanced airlaid materials business with shipping volumes increasing 5% and revenue growing 8%. Our leadership positions in the growing hygiene and specialty wipes markets continue to provide growth opportunities for this business. This growth led to a 30% improvement in operating profit during the quarter to $5.9 million.

As we discussed in our prior call, specialty papers began experiencing serious pulp production issues at its Ohio facility during the fourth quarter of 2013. These issues continued into the first quarter and the associated cost penalties from these issues together with the severe weather conditions created a very difficult operating environment for this business and led to a substantial drop in its first quarter operating profit. We have resolved the pulp production issues at the Ohio facility and have been producing at expected levels since early March. I am confident these issues are now behind us and I am optimistic that this business is positioned to capitalize on improving pricing conditions in its markets.

So with this brief overview, I ask John to provide a more in-depth review of our first quarter results, and then I will offer some additional perspectives on our business. John?

John Jacunski

Thank you, Dante. For the first quarter we reported adjusted earnings of $14.1 million or $0.32 per share compared to adjusted earnings in the year ago quarter of $17.4 million or $0.40 per share. Slide 4 shows a bridge of adjusted earnings per share from the first quarter of last year to this year. Composite fibers added $0.14 per share reflecting the Dresden acquisition which net of interest cost was $0.12 accretive to earnings during the first quarter. Advanced airlaid materials results increased earnings per share by $0.02 in the comparison, reflecting increased shipping volumes. Specialty papers results reduced earnings per share by $0.28 reflecting the Ohio pulp mill issues and the cost related to the severe weather, and lower pension expense and a lower tax rate increased earnings per share by $0.06.

Slide 5 summarizes a record quarter for the composite fibers business. This business generated revenue of $158.6 million in the first quarter, up 42% over last year, reflecting the Dresden acquisition and organic growth of 5%. Excluding the Dresden acquisition shipping volumes declined 2.2%. However, our mix improved. Food and beverage shipments increased 4% the single-serve coffee market remains strong with shipments up 11% while shipments of teabag products were up 2%.

Shipments of non-woven wall cover products rebounded from the weak fourth quarter increasing 27% on a sequential quarter basis. Shipments of technical specialties products were also strong increasing 11% year-over-year driven by growth in the electrical market. As expected composite laminate shipments were down 12% reflecting strategic initiatives to expand our inclined wire capacity and improve our mix by exiting the lower end of this segment and shipments of metalized products declined 10%. Demand for wet glue label products remains weak in this segment and competition is increasing.

We had a strong operating quarter with improved productivity and record low waste levels. This led to an 18% increase in inventories which we will reduce over the balance of the year. Operating profit for composite fibers was a record $19.3 million during the quarter up 65% compared to a year ago and EBITDA margins expanded by 240 basis points to 16.9%. The Dresden acquisition continues to meet expectations contributing $8.5 million to operating income this quarter.

For the second quarter of 2014 we expect continued strong market conditions for tea and single-serve coffee and improved shipments of non-woven wall cover and metalized products. So overall we expect shipping volumes to be up about 5% compared to the first quarter. However, we expect the benefit of these higher shipments to be offset by lower capacity utilization as we reduce inventories.

Advanced Airlaid Materials results are summarized on Slide 6. This business generated record quarterly profit in the first quarter with net sales of $71.3 million. This was up 8% compared to the first quarter of last year. Shipping volumes increased 5% led by increases in adult incontinence and specialty wipes. Our leadership positions in the key markets of feminine hygiene, adult incontinence and specialty wipes continue to provide growth opportunities for us. Operating profit for Advanced Airlaid Materials totaled $5.9 million in the first quarter up 30% compared to the first quarter of last year, this was driven by volume growth and include $600,000 of cost net of insurance recoveries related to the fires in 2013. The cost associated with these fires is not complete.

For the second quarter we expect shipping volumes to be in line with the first quarter with slightly higher selling prices and raw material cost.

Slide 7 provides a summary of specialty papers results during the quarter. As we indicated during our fourth quarter call, the Ohio pulp mill issues, significantly impacted specialty papers results for the first quarter. Together with costs associated with severe weather during the winter months these factors led to a $15.9 million decline in operating profit in the year-over-year comparison. Our ability to sell electricity to the grid from our facility in Pennsylvania helped to offset some of the severe weather impact as rates spiked in the first quarter driven by the weather.

I would now like to turn to Slide 8 to provide an update on the pulp production issues at our Ohio facility before returning to Slide 7 to further discuss the results for the quarter. On our previous call we discussed the pulp mill production issues related to excessive scaling in the evaporators at the pulp mill in Ohio. The excessive scaling led to a 16% reduction in pulp produced at our Ohio facility in the first quarter compared to the year ago period resulting in cost penalties totaling $9.4 million. We have determined the root cause and implemented changes to improve liquid chemistry in addition to making a process change and these changes have resolved the issues. As shown in the upper left hand chart on this slide, pulp production has been stable since early March and has returned to historical levels.

Returning to Slide 7, from a top-line perspective net sales decreased $1.3 million or 1% during the quarter. Selling prices improved $1.7 million compared to the year ago quarter and we’re up $2.1 million compared to the fourth quarter. Shipping volumes were flat and much better than the broad free sheet market that was down 7%. We continue to grow in key product lines to offset the impact of the broader market decline. During the quarter shipments of the non-carbonless forms products were up 18% engineered products increased 7% and envelope increased 5%.

Shipments of book publishing products were down 14%, based on projected demand we expect book publishing shipments to return to more normal levels in the second quarter. Shipments of carbonless products declined 13% compared to a year ago which is a bit higher than the long-term market decline. For our shipments for all of 2013 were down only 5%, so we believe this is just near-term market volatility. We expect our broad product line, flexible assets and excellent customer service to allow us to continue to outperform the broad free sheet market and run our facilities at capacity. For this business unit in the second quarter we expect shipping volumes to be flat compared to the first quarter with higher average selling prices adding $2 million to $3 million to operating profit as we continue to implement price increases announced late last year and early this year.

In addition we will complete our normal annual maintenance outages during the second quarter. These outages are estimated to cost $28 million this year, compared with $22 million in the second quarter of 2013 reflecting an expanded scope of work.

Slide 9 shows corporate cost and other financial items for the quarter. Overall corporate cost declined compared to last year. This is largely due to $1.8 million of acquisition and restructuring cost incurred last year, which are excluded from adjusted earnings, together with a $2.4 million decline in pension expense. The sales of our pension plan is shown on Slide 10, our qualifying plan remains well funded, we have not had to make contributions to our qualified plans for quite some time and we do not expect to for the foreseeable future. With respect to pension expense considering the impact of higher discount rates and the improved funded status, we expect full year 2014 expense of approximately $6.2 million compared with $14.2 million for 2013.

Slide 11 shows our free cash flow. During the first quarter we used cash from operations of $10.2 million compared with generation of $15.8 million in the first quarter of 2013. The decline in cash flow from operations was driven by higher use of cash this year for working capital and higher cash tax payments. In addition Dresden used its cash in the cash quarter for the payment of customer incentives earned in the prior year and we did not have this business in the first quarter of last year. Capital expenditures for the quarter declined compared to last year due to the completion of the composite fibers capacity expansion project. For the full year we expect capital expenditures of $80 million to $90 million.

Finally Slide 12 shows some balance sheet and liquidity metrics. Our balance sheet remains in good shape with leverage on a net debt basis of two times at March 31. We finished the quarter with $74.8 million of cash and $199 million available under our revolving credit facility. We believe this provides ample liquidity to continue to execute our growth strategies.

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

Dante Parrini

Thanks John. The results of the past two quarters did not reflect the true earnings and cash flow power that we have in our business. The impact of the pulp production issues at our Ohio facility and the severe weather in the Northeast had a significant impact on our profitability and cash flows. With the pulp mill issues resolved way behind us and the realization of announced price increases, I am confident that the building blocks are in place to deliver improved operating performance in specialty papers.

In our growth businesses composite fibers and advanced airlaid materials our leadership positions in key consumer markets such as tea, single-served coffee, hygiene and non-woven wall cover continue to look strong and position us for longer term growth. As I look further into 2014 I believe our strategy will continue to serve us well and we are poised to continue generating solid results in our businesses. Our Board of Directors demonstrated its confidence with its action in February to increase our dividend by 10% following the 11% increase in 2013.

In addition to an attractive dividend, we are repurchasing our stock under our previously authorized $25 million share buyback program. Throughout the year we will remain focused on successfully executing our strategy for building a larger, more global and more profitable specialty business. We remain committed to maintaining a strong balance with the capacity to fund growth initiatives and return the value to shareholders. So I am enthusiastic about these opportunities and believe we are well positioned to continue to drive earnings growth and healthy free cash flows.

At this point I’d now like to open the call for any questions you may have.

John Jacunski

Kayla?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Steve Chercover.

Steve Chercover - D. A. Davidson & Company

Just a couple of quick questions please, first of all on the pulp issue, can you elaborate how the chemistry got out of balance I mean were there any changes late last year that precipitated the imbalance?

Dante Parrini

Yes Steve, this is Dante. So, as you might imagine we have a number of factors that can influence these things I’ll try not to get too technical. But it was a compounding effect of a handful of issues such as things like salt molar ratio and residual alkali steam temperature and vacuum control that when combined with the evolving product portfolio and the species mix of softwood and hardwood pulp production create this chemistry imbalance. And so we did get to root cause, we have resolved it through some chemistry changes, some process changes some equipment changes and now we have very good leading indicators to assess performance going forward.

Steve Chercover - D. A. Davidson & Company

Okay. So the main benefit is you’re going to be on top of this and it is unlikely to recur. Do the process changes or the expanded scope of your CapEx, do they provide any productivity benefits going forward?

John Jacunski

No Steve and there were really very little in the way of investments necessary for these process changes and the chemistry changes was again no sort of capital cost it is reflected obviously in the $9.4 million of cost penalties we had so it’s not going to lead to improvement over our historical production levels but we certainly don’t expect this will occur again.

Steve Chercover - D. A. Davidson & Company

Great. And then switching gears to composite fibers, it does look like your pricing was down about 6% in the quarter which I think conflicts with the previous guidance. Is that a mix issue or can you elaborate on that please?

John Jacunski

If you seeing on our Slide 5 we show what our selling price movements were year-over-year so we had no selling price net change so any changes through the average selling prices for the whole business units reflect mix and remember that we did not have the non-woven wall cover business a year ago and that’s now in our results.

Steve Chercover - D. A. Davidson & Company

Okay. And you’re coming up on the anniversary of the Dresden acquisition. Is it safe to assume that you’re looking for the next one?

Dante Parrini

Well yes this is Dante. So, we don’t comment on any specific targets or timing as you can appreciate but we’ve been very consistent about articulating our strategy for value creation. We worked hard to transform this business and shape our portfolio such that two of our three business units now have compelling organic growth opportunities and we have leading share positions and we have invested in organic growth but at the same time we’ve demonstrated an ability to identify niche businesses that fit our strategy well that we think we can value correctly, acquire and integrate. So I think we’ll continue to move along a multi-dimensional path of value creation but I can’t give any specifics at this point in time.

Steve Chercover - D. A. Davidson & Company

Okay. Thanks for taking my questions.

Operator

Your next question is from Debbie Jones.

Debbie Jones - Deutsche Bank

Hi. Good morning.

Dante Parrini

Hi Debbie.

Debbie Jones - Deutsche Bank

I was wondering if you could discuss your exposure to Russia and the Ukraine and your thoughts on how the current economic and political situation might impact your business going forward.

Dante Parrini

Sure, annually we have about $125 million of revenue exposure in Russia, Ukraine and its related to the non-woven wall cover business, our tea bag business and metalized products, essentially we do have some technical specialties because it’s not very material. And from a receivables point of view it is about 19 million of 55 days. So far there has been no impact on our business and the sanctions that have been enacted and large part have been focused more toward individuals. So we’ll continue to monitor the situation as you might imagine, but again to reiterate we have not had any impact on our business to-date.

Debbie Jones - Deutsche Bank

So the weakness in metalized products was not specific to that?

Dante Parrini

No it was more specific to the wet glue label shipments in Europe.

Debbie Jones - Deutsche Bank

Okay.

Dante Parrini

Yes.

Debbie Jones - Deutsche Bank

Okay. And then on, for airlaid can you just remind me of your mix of business there between adult incontinence, specialty wipes and feminine care and kind of discuss the anticipated industry growth rates over the next few years and whether or not Glatfelter can achieve those and how you characterize your current capacity situation in airlaid?

Dante Parrini

Sure, so feminine hygiene is still the largest component of our mix, it’s well over 80%, 82% essentially. Specialty wipes and adult incontinence are single-digit percentages of our portfolio. In terms of industry growth rates we see anywhere in the 5% to 6% across most of the categories for our airlaid products. And we fully expect and will give our very best effort to continue to develop products and service offerings to meet the needs of our existing customers in fem care and support the emerging growth and adult incontinence as well as thin baby diapers and our specialty wipes, which is a nice growing sub-category as well.

In terms of outset or capacity utilization this business unit is operating in the mid 90s, so our Gatineau, Quebec Canada facility is essentially running at full capacity the Falkenhagen Germany facility does have some available capacity. So we’re continuing to invest in our continuous improvement initiatives to look for ways to debottleneck and create incremental capacity while at the same time forming a point of view on the market development and how we may choose to support the ongoing growth of our segments and our customers.

Debbie Jones - Deutsche Bank

Okay. That’s helpful. And just last quick question. I was just wondering can you elaborate on the power sales benefit in the quarter and I am sorry if I missed this, but I just wanted to know how to think about that going forward?

Dante Parrini

John.

John Jacunski

Yes our power sales if you look at on a year-over-year basis, the power sales were up about $4.6 million and that was largely because of the spike in pricing in the first quarter related to weather, there were also some generation units that were offline so as there was very cold weather and demand increase it forced a spike up in the rates. And we did take the opportunity to make sure we generate the maximum amount of energy we could to continue to sell that market. So if you look at the Slide 7, will show when we combine that with our renewable energy credit sales we were up $4.1 million over the first quarter of last year. And we expect that to go down in Q2, certainly there is not a premium price in the market today, so we would expect that to get back to a more normalized level.

Debbie Jones - Deutsche Bank

Okay, thanks that’s helpful I will turn it over.

Dante Parrini

Sure.

Operator

Your next question is from James Armstrong.

James Armstrong - Vertical Research Partners

Good day. Thanks for taking my question. First can you update us, what you think your full year tax rate will be at this point, is 30% still a good number?

John Jacunski

I think 30% going forward for Q’s 2, 3 and 4 are the appropriate benchmark, obviously we’re a little bit lower than that in Q1 for a couple of reasons, but 30% is the right level going forward.

James Armstrong - Vertical Research Partners

Good. And then on maintenance expense, was there any besides the evaporator issues, was there any specific maintenance done in the first quarter?

John Jacunski

Nothing out of the ordinary, no.

James Armstrong - Vertical Research Partners

Okay. And lastly, should the full price increase that’s announced in the market be affected and how much would your average realizations per tonne change in specialty paper from Q1 levels?

Dante Parrini

So we have two announced price increases in the uncoated free sheet market, so the first one which was announced last October, we are realizing at normal rate in the 60% type range. And then the second one is still in the process of being implemented and we have several conversations ongoing with various customers and would expect that this one would come in at or just below the realization rate of the first one.

James Armstrong - Vertical Research Partners

But as you look across your portfolio, is it across the entire specialty papers portfolio or just a subset of it?

John Jacunski

That’s related to generally speaking our white papers so that applies to about 0.5 million tonnes of our business on an annual basis.

James Armstrong - Vertical Research Partners

Okay, that helps. Thank you.

Operator

(Operator Instructions) And there are no more questions at this time. Now, we will have closing remarks from Dante Parrini.

Dante Parrini

Thank you. I just like to thank you again for joining us today and we look forward to speaking with you next quarter. Have a good day.

Operator

This is the end of today’s call. You may now disconnect.

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