P.H. Glatfelter CEO DiscussesQ3 2010 Results - Earning Call Transcript

| About: Glatfelter (GLT)

P.H. Glatfelter Company (NYSE:GLT)

Q3 2010 Earnings Call

November 2, 2010 11:00 am ET


Glenn Davies - IR

George Glatfelter - Chairman and CEO

John Jacunski - SVP and CFO

Dante Parrini - EVP and COO


Paul Mammola - Sidoti & Company

Christopher Chun - Deutsche Bank

Phil Kenny - Nomura


At this time, I would like to welcome everyone to the Glatfelter’s 2010 Third Quarter Earnings Release 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. Mr. Davies, you may begin your conference.

Glenn Davies

Thank you. Good morning and welcome to Glatfelter's third quarter earnings conference call. My name is Glenn Davies and with the Company’s Corporate Finance Group, Here with this morning are George Glatfelter, our Chairman and Chief Executive Officer; Dante Parrini, Executive Vice President and Chief Operating Officer; and John Jacunski, our Senior Vice President and Chief Financial Officer.

Before we begin our presentation, I need to make a few standard comments. First, I would like to remind you that when our presenters use the term “adjusted earnings,” it is a non-GAAP financial measure, as it excludes from our GAAP based results, certain items that we do not consider to be part of our core business operation. A reconciliation of adjusted earnings to our GAAP based results together with a discussion of why we use this measure is included in today’s earnings release.

Second, any statements made today concerning our expectations about future trends or performance are forward-looking statements. I would ask you to refer to our 2009 Form 10-K filed with the SEC and available on our website for factors that could cause 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.

And finally, as we’ve done for the past several quarters an investor slide presentation is available both on our website and through this morning’s webcast provider. You may want to refer to the presentation to enhance your understanding of our results.

Thank you and I’ll now turn the call over to George.

George Glatfelter

Thank you, Glenn. Good morning, everyone. Earlier this morning we published our third quarter earnings and. I hope you’ve had an opportunity to review the release. I’m pleased to report that we had another strong quarter with adjusted earnings increasing 24% compared to the same quarter of 2009 and free cash flow generation of $33 million.

Among other things, these results reflect a very strong performance from the Composite Fibers business unit as well as the continuing strength of our value-added Specialty Papers business unit.

It’s also clear that performance of our Advanced Airlaid business was below expectations for the quarter. During the call, we’ll address the changes we are making to drive improvements in this aspect of our business.

Adjusted earnings, which exclude gains from cellulosic biofuel credits and integration costs, were $16.7 million or $0.36 per share in the third quarter compared with $13.1 million and $0.29 per share a year ago.

Consolidated net sales were $379 million, that’s a 21% increase compared with $312 million for the third quarter of 2009, reflecting favorable market conditions for Composite Fibers and Specialty Papers as well as the top line contributions of the Advanced Airlaid Materials business unit. Organically and on a constant currency basis, net sales increased by nearly 6%.

We were able to successfully translate these top-line performance in to bottom line growth. The Composite Fibers business unit generated $9.7 million in operating income, its best quarter ever, reflecting improved market conditions, the quality and breadth of its product base and efficient operations.

Specialty Papers also delivered improved year-over-year results as operating income totaled $23 million. That’s a 10% increase compared to the third quarter of 2009.

The strength of results showed these two business units more than offset the performance of the advanced Airlaid materials business unit, borne through the acquisition Concert Industries earlier this year.

This business was challenged by a continuation of rising input costs that outpaced increases in selling prices and was hampered by some operating deficiencies that we are aggressively addressing.

I want to emphasize we firmly we believe this business is well-positioned for profitable growth and value creation over the long-term and we are actively taking the actions needed to ensure we maximize it full potential.

We know it needs to be done and we are in the process of doing it. We are here to encounter any challenges that we have not successfully addressed in previous acquisitions we have integrated in to the Company.

We continue to be disciplined with the use of cash and as a result generated substantial free cash flow during the quarter. Also our balance sheet remains strong and at the end of the quarter we had ample liquidity which affords the flexibility to operate our business as well as provide returns to shareholders.

In addition to our strong financial performance during the quarter and throughout the year, three things continue to standout about the Glatfelter, the breadth and diversity of our sales portfolio; the effectiveness of our continuous improvement methodology and culture; and the innovative focus we bring to new product and new business development opportunities; that has enabled to constant reinvigorate of our product base.

These factors continue to be important elements of a business model that has proven to be both sound and resilient over of an extended period of time.

Let me stop there and turn the call over to John to provide more in-depth comments on the third quarter financial results. John?

John Jacunski

Thank you George. This morning, we reported third quarter earnings of $39.4 million or $0.85 per share. When adjusted to exclude the benefit from the cellulosic biofuel credits and acquisition and integration costs we are on $16.7 million or $0.36 per share.

As shown on slide four, the primary changes in adjusted earnings per share in a year-over-year comparison were higher operating income from this Specialty Papers business unit, increased earnings per share by $0.04; higher operating income from the Composite Fibers business unit, increased earnings per share by $0.07; operating income from Advanced Airlaid Materials business unit added $0.02; increased net expense primarily related to Concert acquisition reduced earnings per share by $0.04; and a higher effective tax rate net of other items reduced earnings per share by $0.02.

Looking at the performance of each of our business units this quarter, Specialty Papers operating profit was $23 million compared with $20.8 million in the same quarter of 2009.

Slide seven presents a waterfall chart of the improved results, which were driven by $12.4 million benefit from higher selling prices slightly offset by the net impact of lower volumes shipped and mix changes.

High raw material and energy costs hurt operating results by $5.8 million and we incurred approximately $5.6 million of higher operating and maintenance costs, primarily related to the unplanned interruption and lost production caused by an equipment failure at the Chillicothe facility and as planned more major maintenance projects in comparison.

In the Composite Fibers business unit, operating income totaled $9.7 million a 67% increase in year-over-year comparison. As shown slide this unit’s improvement was a result of our continuous improvement initiative, driving significant cost reductions and improving efficiency.

Volume shipping increased 14.2% in comparison reflecting strong demand across all market segment served, which together with the elimination of market-driven downtime provided a $2.5 million benefit to operating profit. Foreign exchange rates negatively impacted operating income by $1.3 million.

Advance Airlaid Material shipping volumes increased 9.7% compared with the second quarter 2010 and operating profit totaled f $1.2 million this quarter, which was lower than we were expecting.

Selling prices increased in the third quarter compared to the second quarter, which increased operating profit by $1.3 million. However, as George mentioned this business continued to be impacted by the rate and timing of increases in key raw materials, still we fought well and by foreign currency exchange rate changes, which in total negatively impacted operating costs during the quarter by $1.2 million.

Although a significant portion of this businesses sales contracts include cost pass-through arrangements, there is a lag in the timing of passing on certain cost increases. As a result, even though we’re able to capture increased selling prices in the third quarter, related to in the cost pass-throughs, our margins were lower than expected due to further increases in the cost of key raw materials during the quarter that wouldn’t be reflected in selling prices until the fourth quarter.

Now, turning to our consolidated view of the company; our effective tax rates on adjusted earnings during the third quarter this year was 25.9% compared with 19.7% in the year ago earlier quarter. The high effective tax rate is primarily due to the expiration of research and development tax credits at the end of 2009.

During the third quarter, we generated free cash flow of $32.9 million and for the first nine months of 2010, we’ve generated a free cash flow of $100 million. We again expect solid free cash flow in the fourth quarter, which will be aided by the cellulosic biofuel credit.

In connection with the filing of our 2009 federal income tax return, we claimed $23.1 million after-tax of cellulosic biofuel credits. And we expect to receipt approximately $15 million of this amount, with the cash refund during the fourth quarter.

Capital expenditures were $7.8 million this quarter and we expect CapEx for all of 2010 to be approximately $40 million. Total depreciation expense for 2010 is estimated at $68 million.

Overall, we continue to feel very good about the health and strength of our balance sheet, which has $63.3 million in cash and $218.3 million available under our revolving credit agreement.

As of September 30th, we had net debt of $233.1 million, which represents an increase of $176 million from year end, reflecting the Concert acquisition, but offset by strong cash flow generation in the first three quarters.

This concludes my comments on our financial results. Dante will now provide comments about our business unit performance. Dante?

Dante Parrini

Thank you John and good morning. As you just heard, a strong performance this quarter was led by record performance at Composite Fibers and another resilient quarter delivered by Specialty Papers.

Looking at each of the business units, I will start with Specialty Papers. This unit’s operating income improved over 10% compared with the third quarter of 2009. Although volumes shipped by Specialty Papers declined approximately 2% due to the unplanned outage at our Chillicothe, Ohio facility, net sales increased primarily as a result of higher selling prices.

As has been our track record, volume growth in uncoated specialties and envelopes largely offset the decline in Carbonless and Book.

Shipments of envelope and converting products were almost 6% higher in the third quarter of 2009 and uncoated specialties were higher by nearly 11% in the same comparison.

Carbonless rolls were off approximately 3.5%, which is below the market decline rate, due to the continued success of our new business development efforts. And as expected carbonless sheets were off in the year-over-year comparison by17% as coated free of 2009 represented the build up of stock for a major new sheet customer. As a result our mix of products sold was unfavorably impacted.

Book Publishing paper shipments decreased by13.5% compared to a year earlier to a shifting our mix away from less profitable commercial printing and other book publishing grades and some customer downgrading.

Finally volumes for Engineered Products were off about 3.5% as we took the opportunity to allocate capacity to other higher margin uncoated specialties.

Selling prices were higher that a year ago in each market segment with increases ranging from 2% to 9%. Operationally this quarter was significantly impacted by the unplanned outage caused by a press roll failure on the largest paper machine at our Chillicothe, Ohio facility.

Although this outage led to loss of production and unfavorable spending, results were further impacted due to the inefficient operations as we used smaller runs on less optimized machines to minimize the disruptions to our customers. Otherwise our facilities ran well and once again at capacity.

From an outlook perspective as we commented in this mornings release we expect shipment to our Specialty Papers business to be approximately 5% less than the third quarter levels as a result of normal seasonality and planned maintenance downtime associated with the end of the year. Selling prices and input cost on balanced are expected to remain substantially unchanged.

Now let’s turn to Composite Fibers. This unit’s results meaningfully improved compared with the third quarter of 2009, a continuing trend seen throughout much of 2010. The result reflects stronger demands from each of the market served, excellent operating performance and the impact of our cost reduction and continuous improvement initiatives.

Overall shipping volumes for Composite Fibers increased more than 13% this quarter compared to the third quarter of 2009. As a result this business units facilities experienced no market downtime title this quarter, which was not the case in the year ago quarter.

Shipments in Food & Beverage increased approximately 13% year-over-year as a result of improved demand and share growth in key regions like Russia and the Americas. Metallized shipments increased 14% and Technical Specialties increased 17% as a result of successful new business development and improving demand.

Composite Laminates increased nearly 12%, reflecting again on success in new business development, strong recovery Central and Eastern Europe and some capacity rationalization among industry players. Overall average selling prices were down slightly compared to the year ago quarter primarily as a result of customer mix.

Operationally Composite Fibers facility had an outstanding quarter and our continuous improvement initiatives generated $2.8 million of cost savings in the areas such as material usage, waste, and yield.

From an outlook perceptive, for the fourth quarter of 2010 we expect Composite Fibers’ shipping volumes, selling prices and input costs tor all remain in-line with the third quarter. However, we do expect higher energy costs and a slight extension to our normal December outage to manage the use of working capital as the close of 2010 approaches.

And finally a few comments on Advance Airlaid Materials. The integration of this newly acquired business is ongoing. And while we have made good progress in the integration process, the efforts of our team are not yet reflected in the business unit’s results. As Gorge said in his opening remarks the performance to-date has been less than what we had expected and is not acceptable.

This performance gap is largely due to significant raw material price increases and a contractual lag associated with the pass through of these increases. The impact of machine downtime taking in the period and operating inefficiencies primarily at our Gatineau, Quebec facility.

Therefore we are actively engaged in implementing a number of improvement initiatives to ensure we maximize the opportunities presented by this acquisition. Example of improve our project include, executing detailed continuous improvement in projects to reduce waste, increase uptime efficiency and standardize quality specifications between facilities, focusing on reducing inefficiencies and performance volatility.

At the Gatineau facility accelerating new business development and innovation to more fully loaded machines, implementing aggressive cost control measures and then following rigorous strategic pricing and mix management processes, similar to those successfully used in our other business units.

From an outlook prospective, for the fourth quarter of 2010, we expect Advanced Airlaid Materials shipping volumes to be approximately 5% lower than the third quarter. We also believe that raw material price trends influence significantly by fluff pulp will be generally in-line with Q3 levels.

Higher selling prices should benefit operating income by approximately $1.4 million in the fourth quarter as we contractually pass on the impact of hire input costs from prior periods.

Given the slower progress realized to-date, we now anticipate this business will be approximately $0.15 per share accretive to earnings in 2011. We believe this entity is positioned for profitable growth and value creating over a long-term.

Given our ability to create value from acquisitions, coupled with the attractiveness to the Airlaid markets, we are confident in our ability to maximize the potential expected from this business units.

As I look ahead, I remained very excited about what this business provides Glatfelter and its global growth potential. My excitement for this business is matched by my confidence in our team and its demonstrated track record of installing the business practices needed to ensure our operations are efficient.

This concludes my remarks, I will turn the call back to you, George.

George Glatfelter

Thank you, Dante. Before I make my concluding remarks, I would like to turn the call back to Dorothy to open the line to address your questions. Dorothy?

Questions-and-Answer Session


(Operator Instructions) Your first question comes from the line of Paul Mammola from Sidoti & Company.

Paul Mammola - Sidoti & Company

Is it fair to call the operational inefficiency here in Airlaid in the quarter around $1 million is at about right?

George Glatfelter

Yes. That’s very close, I would say it is just under that but, that’s a good estimate.

Paul Mammola - Sidoti & Company

Okay. And so you gave good color in terms of road map and why you need to go but it sounds like price cost is still the biggest factor in 3Q. Now contractually this will go in to 4Q. Would you say that price is kind of caught up to material cost or does that take until 1Q?

George Glatfelter

I think for the most, Paul that is caught up in Q4 and we expect and as Dante mentioned, we expect that raw material input will be largely in line with Q3. So we would expect that profit and income will be improved and most of that price utilization will fall through.

Paul Mammola - Sidoti & Company

Okay. That’s fair and just to clarify, in your guidance for fourth Q, energy sales are $1million. Is that the Delta relative to 3Q or they will be a $1 million?

George Glatfelter

That is the Delta.

Paul Mammola - Sidoti & Company

Okay. And then finally, in Composites, I mean it seems like you’ve finally seen that good jump in sales that I think some of us expected over the past couple of months. But as we look at 2011, do you see that business recovering maybe a bit faster as those markets improve or is it in-line with that kind of 5% annual growth you have typically expected in the business?

Dante Parrini

Hi, Paul, this is Dante. I would say it varies by market segments. But the recovery is rather consistent across all segments and with minor exception of the US market, which is still more fragile.

So generally speaking, we see Central and Eastern Europe, Latin America offering strong and meaningful growth and recovery. And I think it speaks our ability to leverage our market leading positions in relationships with our blue chip customers and the impact of our ability to accelerate innovation and new business development, new product development and participating in inventory build back, which I think is now at normalized levels. And I also see a more balance between supply and demand across the board and our markets in general, so we feel pretty optimistic about 2011 for Composite Fibers

Paul Mammola - Sidoti & Company

Okay. And then finally on publishing, can you just comment on what you see in that end market for the rest of the year and in to 2011. I guess am curious if the mix change in the quarter partially hurts sales and may be that change going afford?

George Glatfelter

I just want to clarify your question, you said publishing, do you mean our Specialty Papers business unit or one of our segments in particular?

Paul Mammola - Sidoti & Company

Within Specialty, the publishing end market, I think its round 30% compared to last year.

George Glatfelter

Yes. So we remain the leader in the prominent free sheet type of paper space and we also continue to focus on overall mix management for the business unit, which by design decreased our exposure to some of the more commodity types of white book papers. And we think one of our distinct advantages in North America is the flexibility of our asset base and our ability to rather quickly adjust to market dynamics to optimize our mix.

So we feel that we have got a good nucleus of repeat business in our core segments to give our customers confidence that we are committed to our leadership position and addressing their needs while at the same time finding ways to either offset the impact of unfavorable market changes or take advantage more quickly of opportunities that we see and looking to optimize our P&L results and I think the last number of years have demonstrated that.


(Operator Instructions) Your next question comes from line of Christopher Chun with Deutsche Bank.

Christopher Chun - Deutsche Bank

Good morning guys. I was just wondering in Specialty Papers you saw $5.6 million of excess operating costs in 3Q?

To what extent are those operating issues resolved or will they resolve by the start of the fourth quarter and if not how long do you think it will take?

Dante Parrini

Chris, this is Dante. The issues will resolve by the start of Q4.

Christopher Chun - Deutsche Bank

Okay. So from that standpoint in the Specialty Papers the Q3 to Q4 sequence should look better than normal because of that right?

Dante Parrini

Well you got a few things, clearly we are not going to have the negative impact of the equipment failure. We do have the season of slowdown and we expect 5% of weaker demand of volume shipment in Q4 versus Q3 on a sequential basis and by and large we see pricing and costs somewhat in line.

Christopher Chun - Deutsche Bank

Okay. And then now with this new Airlaid business, can you remind us what’s your overall market pulp opposition is.

George Glatfelter

Chris, does is this meaning how much how much pulp do we use in the Airlaid business?

Christopher Chun - Deutsche Bank

Yes, I am just wondering on a net basis how much pulp you buy or sell in the market?

George Glatfelter

Okay. We’re using in the order of 60,000 tons of fluff pulp per year in that business. And then in the other parts of our business, we use about a 125,000 tons of wood pulp. So, the total would be on a order of 185,000 tons of pulp.

Christopher Chun - Deutsche Bank

That is you are a net buyer?.

George Glatfelter


Christopher Chun - Deutsche Bank

Okay. And then in terms of the accretion that you’re expecting from the Airlaid business, the original guidance for accretion was $0.20 to $0.25, if I’m recalling correctly. Right?

John Jacunski

That’s correct.

Christopher Chun - Deutsche Bank

Now, with that being trimmed for next year to $0.15, do you see the rest of it coming in 2012 or how do you see that playing out?

George Glatfelter

Chris, at this point, I think we’re most comfortable providing guidance for 2011 and focusing on good solid execution to meet the expectations that we’ve just set forth today.

Christopher Chun - Deutsche Bank

Okay. How about on the CapEx front, what’s the good number you use going forward?

John Jacunski

Going into 2011 that would model about $60 million of o $65 million of CapEx and that’s higher than what we’ve ran this year, driven largely by maintenance and compliance type projects. We will provide some more details once we do our Q4 release but, I think 60 to 65 million is the expectation result.

Christopher Chun - Deutsche Bank

Okay. Do you think that’s a good run rate of the net for futures as well?

George Glatfelter

Yes. I’d say its a little bit on the higher side. But, for the next couple of years that’s probably reasonable assessment.

Christopher Chun - Deutsche Bank

Okay. And the tax rate?

John Jacunski

For Q4, we’d expect around 30% although if the recession development credit is reinstated late this year then that will be a benefit to us perhaps and that I would say in the 30 to 32% range we would expect that going forward next year as well.

Christopher Chun - Deutsche Bank

Okay. Then in terms cellulosic biofuel credit, are you getting any incremental benefit there?

George Glatfelter

Well, as we discussed earlier when we filed our 2009 federal tax return during the third quarter, we claimed $23 million of credit fund in an after tax basis and that the cellulosic biofuel credit provision was for 2009 and it expired at the end of year. So we have filed the return and claimed that and so at this point I wouldn’t expect any significant additional upside.


Your next question comes from the line of Phil Kenny with Nomura.

Phil Kenny - Nomura

I am just trying to understand how the Airlaid business is going to get back to the $29 million of EBITDA to that business did in 2009. If you are running about 32 and you say you get about [one-four] price sequentially in the fourth quarter and there is a just under a $1 million of operational efficiencies, even at that point here you are below that $29 million run rate and I am just wondering what the gap is and how you’re going to get back to that $29 million level.

John Jacunski

Sure just want quick one thing the 2009 EBITDA was $25 million. So that was a actual performance in 2009. I think Dante had outlined a number of different factors around volume growth and our continuous improvement initiatives that we expect will improve our performance and pulps position and we also would expect the fluff pulps prices will moderate somewhat as we go through the first half of 2011.

So those items should allow us to improve the EBITDA performance and achieve I think of increasing what Dante mentioned.

Phil Kenny - Nomura

And can give a bit of hold price if fluff pulp prices fall or your prices contractually can actually going to come down.

John Jacunski

They wont contractually come down but they would have the same lag on the down that they have on the way up. So if fluff pulp prices fall we should have a short-term benefit, which is similar to the short- term penalty we had in 2010 as input costs were rising.

Phil Kenny - Nomura

Okay and then on Book Publishing business it looks like volume is down over 13%. What can we expect going-forward in terms of the secular decline you expect in that business.

Dante Parrini

Phil, this is Dante. I am sure we given any type of guidance for that part of our business but I would say that there are a number of factors that we take into consideration as we formulate our approach for this market, one is maintaining our leadership position in the permanent free sheet trade book segment, which we will continue to do.

There has been fair amount of talk about I things like e-substitution, e-readers and I don’t see that as making a meaningful impact right now. If anything a sort of mix management strategies that may affect the year-over-year performance and to the extent that there are some downgrading of products traditionally used for certain types of books may also affect shipments for us.

But I will go back to the headline which is we envision running our North American assets, our Specialty Papers business at full capacity, leveraging our flexible assets and our new business development capabilities to continue to outperform the broader market which we have done since 2005.


(Operator Instructions) There are no further questions at this time, I would turn the call back over to Mr. Glatfelter for closing remarks

George Glatfelter

Okay, Dorothy, thank you. I would like to close it down with just a couple of brief remarks. First of all thanking everyone again for joining us on a busy day; busy day of earnings and elections and I hope you can tell from the discussion we held this morning we had a very good quarter, led by record operating in Composite Fibers and continued resiliency in Specialty Papers.

As we mentioned we move into our final quarter of 2010 we are very pleased with the momentum we continue to build for the company and we are excited by our long-term outlook for sustained and profitable growth, through execution of their strategic plans leading positions in key global markets and the financial impact of continuous improvement programs, Specialty Papers and Composite Fibers are well positioned to generate strong earnings and free cash flows in the futures.

Likewise I am equally confident in our Advanced Airlaid Materials business. We understand how well the work and the determination required to successfully integrate new business. We have done it before. I know our team will take the steps necessary to maximize the potential of this key long-term growth business.

In conclusion, as I suspect most of you know, this is my last earnings call. And while this is a bit of a bitter sweet moment for me, I must tell you that I look back on the last 12 years with certain amount of pride in the things we’ve accomplished.

Starting with an indelible commitment to change anything and everything in the business that no longer create a value, the management team and I’ve been on a journey to differentiate Glatfelter from others in the paper industry. And although this journey is far from complete, certainly we’re much different company today with a future filled with opportunity.

In my last public comment as CEO, I’d like for you to know two things. First, I firmly believe that Glatfelter’s well-positioned to generate substantial value for our shareholders in the future.

And, secondly, I have complete confidence in Dante and the next generation of Glatfelter leaders to deliver that value. The best days of this company are the ones ahead.

I thank you for your support over the years and I thank you today for your questions and your continued interest in Glatfelter. Have a good day. Good bye.


This concludes today’s conference call. You may now disconnect.

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