Glatfelter (NYSE: GLT), a global supplier of engineered materials, has reported a significant improvement in its financial performance for the second quarter of 2024. The company highlighted an $8.3 million increase in adjusted EBITDA compared to the same period last year, driven by its Composite Fibers and Spunlace businesses. Despite softer demand in the Airlaid Materials segment, Glatfelter is optimistic about the second half of the year, expecting an increase in Airlaid volume.
The company is also making strides in its proposed merger with Berry's HHNF business, which is anticipated to close later this year and will be named Magnera. Glatfelter's focus on new product innovation within its Airlaid portfolio, positive price cost spread across all segments, and favorable working capital projections were other key points discussed during the earnings call.
Key Takeaways
- Glatfelter's adjusted EBITDA rose by $8.3 million year-over-year.
- Composite Fibers and Spunlace segments reported increased EBITDA.
- Airlaid Materials saw softer demand but is expected to see volume growth in H2.
- The merger with Berry's HHNF business to conclude later this year, forming Magnera.
- Improved adjusted free cash flow and positive working capital outlook were reported.
- The company reaffirms its full-year EBITDA guidance of $110 to $120 million.
Company Outlook
- EBITDA guidance for 2024 remains at $110 to $120 million.
- Expected increase in Airlaid volume in the second half of 2024.
- Positive working capital anticipated for H2.
Bearish Highlights
- Softer demand in the Airlaid Materials segment.
- Net cash flow for the full year projected to be negative $30 million.
Bullish Highlights
- Increased EBITDA in Composite Fibers and Spunlace segments.
- Positive price cost spread achieved in Q2 across all segments.
- All antitrust regulatory approvals obtained for the pending merger.
Misses
- None reported.
Q&A Highlights
- Addressed the time lag of three to six months for customers to adjust to price increases.
- Confirmed capital structure and financing arrangements for the pending merger with Berry's HHNF business.
In the second quarter of 2024, Glatfelter's financial health appears to be on the rise, with improved EBITDA and cash flow indicators. The company's merger with Berry's HHNF business is progressing smoothly, with all necessary regulatory approvals in place. While the Airlaid Materials segment has faced some challenges, Glatfelter remains confident in its ability to innovate and expand its product offerings, which is expected to drive volume growth in the latter half of the year. The company's focus on price increases and cost management strategies has resulted in a positive price cost spread, further bolstering its financial outlook for 2024. Investors and stakeholders can look forward to the completion of the merger and the potential synergies it may bring, as Glatfelter continues to navigate the global engineered materials market.
InvestingPro Insights
Glatfelter's recent financial performance and strategic moves, such as the proposed merger with Berry's HHNF business, demonstrate a company in transition. The InvestingPro data and tips provide additional context to understand the company's current financial health and market position.
With a market capitalization of $75.35 million, Glatfelter is navigating the market with a significant debt burden and weak gross profit margins, as indicated by a gross profit margin of just 9.59% over the last twelve months as of Q1 2024. This aligns with the company's own admission of softer demand in its Airlaid Materials segment. However, the company is trading at a low Price / Book multiple of 0.29, suggesting that the market may be undervaluing the company's net asset value.
InvestingPro Tips highlight that Glatfelter does not pay a dividend to shareholders, which could influence investor decisions, especially for those seeking income-generating investments. Additionally, Glatfelter has been quickly burning through cash, which is a critical factor for investors to consider given the company's negative net cash flow projection for the year.
Investors interested in a deeper dive into Glatfelter's financials and market prospects can explore additional tips on InvestingPro, where 11 more tips are available to provide further insights into the company's performance and potential investment risks or opportunities.
In summary, Glatfelter's optimistic outlook and strategic initiatives, such as the pending merger, are important considerations for investors. However, it's crucial to balance these with the financial challenges the company faces, including significant debt and cash burn. Access to comprehensive analysis through InvestingPro could offer investors a more nuanced view of Glatfelter's potential in the engineered materials sector.
Full transcript - Glatfelter (GLT) Q2 2024:
Operator: Good day, and welcome to the Glatfelter's Second Quarter 2024 Earnings Release Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Ramesh Shettigar. Please go ahead, sir.
Ramesh Shettigar: Thank you, Anna. Good morning, and welcome to Glatfelter's 2024 second quarter earnings conference call. This is Ramesh Shettigar, Senior Vice President, Chief Financial Officer and Treasurer. On the call, to present our second quarter results is Thomas Fahnemann, President and Chief Executive Officer of Glatfelter, and myself. Before we begin our presentation, I have a few standard reminders. During our call this morning, we will use the term adjusted earnings as well as other non-GAAP financial measures. A reconciliation of these financial measures to our GAAP-based results is included in today's earnings release and in the investor slide, both of which are available on our website. We will also make forward-looking statements today that are subject to risks and uncertainties. Our 2023 Form 10-K, which has been filed with the SEC, and today's release, disclose factors that could cause our actual results to differ materially from these forward-looking statements. These statements speak only as of today, and we undertake no obligation to update them. I will now turn the call over to Thomas.
Thomas Fahnemann: Thanks, Ramesh. Hello, everyone, and welcome to Glatfelter's second quarter 2024 investor call. I'm pleased with the continued progress of the proposed merger with Berry's HHNF business during the second quarter as we plan for the closing of the transaction later this year. The team continued to diligently progress the various legal and regulatory activities in preparation for when the business will operate under the name of Magnera, with Curt Begle as CEO, currently President of Berry's HH&S division. For today's earnings call, I will focus on Glatfelter's steadfast second quarter performance, as we position the business to successfully launch Magnera. The highlights of our performance included several meaningful outcomes. We achieved $25.6 million of adjusted EBITDA for an $8.3 million improvement compared to the same quarter last year. The Composite Fibers and Spunlace businesses achieved higher EBITDA of approximately $5 million and $3 million, respectively, compared to the same quarter last year. The results were driven by higher shipments, increased production and rigorous management of price cost gaps. The Airlaid Materials segment continued to experience softer demand and therefore, we adjusted production downward, resulting in a $2 million decline in EBITDA compared to the same period in 2023. When combined, the segment's performance contributed to improved adjusted free cash flow, which was approximately $43 million higher compared to the second quarter of last year. While our markets remain mixed, especially in Europe, I'm pleased with the ongoing contributions and disciplined way of managing our business that resulted from our multi-year turnaround efforts. The improvements we are seeing in the performance of both Composite Fibers and Spunlace are trending in the right direction. I'm particularly pleased that Spunlace has delivered $20 million of adjusted EBITDA on a trailing 12-month basis. Also, we are actively working to expand our Airlaid product portfolio through new product innovation to address continued demand challenges, which I will speak to towards the end of today's call. For these reasons, I remain confident in our ability to contribute for the long-term success of Magnera. I will now turn the call over to Ramesh.
Ramesh Shettigar: Thank you, Thomas. Following-up on the financial highlights Thomas just provided, Slide 5 shows a summary of second quarter results for the Airlaid Materials segment. Revenues were down 14% on a constant currency basis versus the same period last year, driven primarily by lower selling prices of approximately $13 million and 4% lower shipments. Selling prices were lower mainly due to cost pass-throughs, reflecting declines in raw materials and energy costs in Europe and selective price concessions to non-floating customers to regain volume. On a net basis, the price cost gap was favorable to earnings by $1.2 million. Volume was lower year-over-year, primarily due to weaker shipments in Hygiene and Wipes categories. The decline in Hygiene was largely driven by pricing actions taken in 2023 to protect margins and improve our price cost dynamic. Conversely, the decline in Wipes category was related to timing of customer orders, and we expect higher wipes volume in the third quarter. Operations were unfavorable by $2.2 million versus the prior year, primarily due to lower production of approximately 3,800 tons to manage inventory levels. Foreign exchange and related currency hedging negatively impacted earnings by $500,000, mainly due to the weaker euro. And EBITDA margins for the segment improved by 20 basis points versus the prior year quarter. Slide 6, shows a summary of second quarter results for the Composite Fibers segment. Total revenues were down 6% on a constant currency basis, mainly due to lower selling prices of $7.5 million from floating contracts implemented with larger food and beverage customers and targeted pricing actions to preserve volume. Shipments were higher in all categories except Wallcover when compared to the same period last year. Overall, the price cost gap for Composite Fibers remained favorable with prices declining by $7.5 million versus lower prices for key raw materials, energy and freight, which improved earnings by $8.4 million versus the same quarter last year. Operations and other was favorable by $1.7 million, mainly due to higher inclined wire production. Foreign exchange was slightly favorable by $100,000, and EBITDA margins for the segment improved by 450 basis points versus the prior year quarter. Slide 7, shows a summary of second quarter results for the Spunlace segment. Revenues were up 4% on a constant currency basis, driven by higher shipments of 5%, mainly in the Critical Cleaning and Hygiene categories. This was partially offset by lower selling prices of approximately $2 million coming from raw material cost pass-through provisions, primarily in the Hygiene and Wipes categories. Raw material, energy and other inflation were favorable by $4.1 million, resulting in positive price cost gap. Operations were $1.1 million favorable, mainly driven by higher production. Foreign exchange negatively impacted earnings by $400,000, coming from the weaker euro. And EBITDA margins for the segment improved by 410 basis points versus the prior year quarter. Slide 8, shows corporate costs and other financial items. Corporate costs were approximately $1.9 million lower versus the second quarter of last year. This was primarily driven by loss recovery related to a fiber vendor for faulty material supply to Glatfelter in 2022. Strategic initiatives costs were again higher this quarter, driven by our proposed transaction with Berry's HHNF business, which we are expecting to close in the second half of this year. Slide 9, shows our cash flow summary. For the second quarter of 2024, our adjusted free cash flow was approximately $43 million higher versus the same period in 2023. This was largely driven by higher earnings of approximately $8 million and lower working capital usage of approximately $40 million, primarily from accounts payable. Capital expenditures were lower by $2 million, while other operating items lowered cash flow by approximately $7 million, largely driven by fewer vendor rebates this quarter compared to the same quarter last year. Slide 10, shows some balance sheet and liquidity metrics. Our leverage ratio, as calculated under the bank credit agreement was 3.5x as of June 30, and we had available liquidity of approximately $112 million at the end of Q2. This concludes my prepared remarks. I will now turn the call back to Thomas.
Thomas Fahnemann: Thank you, Ramesh. As demonstrated by our first half results, I'm pleased with the underlying performance of our business despite a challenging market backdrop, especially in Europe. Now turning to our efforts in innovation. We have made very good progress on a few key initiatives during the second quarter. One initiative in particular targets [indiscernible] media specialty material to be manufactured within our Airlaid segment in Europe, which should generate a favorable mix relative to our Hygiene portfolio. We have entered into a supply agreement with a new customer for this product, and we will continue to enhance the product to its full potential in the months ahead. Equally exciting for our customer and the team, this product is biodegradable and meets the standards established by the EU single-use plastics directive. In closing today's call, I want to take this opportunity to again thank our Glatfelter employees for their commitment and dedication to the company. As we are now well underway with the third quarter, I commend the entire team for their hard work these past several years and especially this year, having to successfully run the day-to-day business while also preparing for the transition to Magnera. I'm proud to lead this team, and I feel very good about the capabilities of our people and look forward to their continued success for many years to come. I will now open the call for questions.
Operator: [Operator Instructions]. And we'll now take our first question from Mike Ginnings with TPG Angelo Gordon.
Mike Ginnings: Good morning, guys. Congrats on the quarter. Nice progress out of Q1. I guess, maybe starting with some questions on the Airlaid segment. There's typically been a stronger performance in the back half of the year. What are you seeing out of seasonality in the business in the first instance? And then I guess, kind of secondarily, we've been talking about these volume-related issues now for a couple of quarters, primarily in Europe. Any sort of thoughts or visibility on those matters, whether it's either the market itself or the initiatives that you guys have undertaken to find other sales channels?
Thomas Fahnemann: Okay, Mike. Maybe taking the second part of your question first. If we look at the volumes, yes, we have seen some weakness in the market. What we're seeing right now is that North America is clearly healthier than Europe. We are still faced with some issues in Europe. But we are also seeing a little bit of an improvement in Europe. But definitely, North America is much healthier than Europe. What we have done and we mentioned this before, we are really looking in diversifying our product portfolio, and I'm really very happy that we were able to get a new product into the market, filter product, we signed a contract. So that really helps us. And from -- if you look at seasonality, I would also expect that the Airlaid volume, despite all the market challenges will be stronger in the second half of this year than in the first half. And we're already kind of seeing some signs in July.
Mike Ginnings: Excellent. And I guess, Thomas, as we think about how to contextualize that maybe in terms of utilization rate, I know there was some commentary around that last quarter. Any color you can provide on Airlaid in terms of sort of where we are from a utilization perspective in North America and sort of where we are in Europe?
Ramesh Shettigar: Yes, in terms of -- I can take that. So in terms of utilization, Mike, on the Airlaid side, we were roughly around 80% utilization in the first half of 2024. For the second half, maybe slightly higher than that. Going into the second half of this year, we're seeing some demand pickup, as Thomas was mentioning. Historically, when we compare that to the last couple of years; we've been probably in the 85% to 90% range. So you can clearly see that with the softness in Airlaid, we've also had to adjust our production and utilization. So that's naturally come down. In Composite Fibers, utilization for the first half was around 90%, especially in the inclined wire assets. Second half; we're expecting that to be maybe around 80%, 85%. And historically also, we've been in the 80% to 85%. And then in Spunlace, first half was around 70% utilization, and we expect roughly the same going into the second half. And historically, we've been kind of between 60% and 70%, if that helps.
Mike Ginnings: Excellent. That's super helpful.
Thomas Fahnemann: Yes. But coming to the -- maybe one comment to the Spunlace. I think we always mentioned that there's a lot of upside as far as capacity is concerned. And you see now that we are kind of filling this capacity positioning in the market. And again, also, I mean, we delivered $20 million -- a little north of $20 million in EBITDA in Spunlace if I look at the last 12 months. So that's really -- and again, there's still room for improvement there because we have capacity available.
Ramesh Shettigar: Correct.
Mike Ginnings: Excellent. And maybe two last questions if you'll indulge me. I guess, Ramesh, in terms of working capital evolution over the balance of the year, how are you thinking about that?
Ramesh Shettigar: I would say, Mike, expecting favorable working capital, if you look at the entire second half. Third quarter will most likely be a use of cash as we kind of continue to ramp up some production here going into the second half. Fourth quarter, usually, production is a bit lower. We're focused on inventory, working capital and so on. So our fourth quarter is typically our strongest quarter from a cash flow perspective coming out of working capital. But net-net, you've seen we've been a user of cash in the first half of this year, and then we expect that to get unwound here in the second half of 2024. So positive, favorable working capital as we get into the second half of this year.
Mike Ginnings: Great. And then I guess, just lastly, on the closing of the transaction, could you just remind us sort of what items are still left in order to complete the transaction? Any updates on timing on that? And then lastly, just a refresh on kind of the pro forma capital structure, including the guarantees and liens at both kind of the new debt and the amount of new debt and then the existing debt that's not being refinanced will have?
Thomas Fahnemann: Sure. Maybe let me just talk about the regulatory issues, and then Ramesh can talk about the financials certainly. So Mike, we’ve also seen -- we were able to get all the antitrust regulatory approvals done. So we are done with that one. We also received the private letter ruling from the IRS. We're still working on all the filings, which we have to do. This is ongoing. And actually, the thing which we still need to do is our shareholder meeting in order to get approval from our shareholders for this transaction. So as far as timing is concerned, we are still very optimistic that in the second half of this year, we'll be able to really close the transaction. So everything is kind of on time, if you will. There's no big issue right now.
Ramesh Shettigar: Yes. Those are the two key steps, the S-4 filing and then the proxy vote. On the cap structure, Mike, in the financing, I think what has been previously communicated still holds true. New capital raise of about $1.6 billion. This will take into account the pay down of our Angelo Gordon term loan. It will also take into account the pay down of our existing revolver borrowing. So kind of between those two existing pieces of debt, we're looking at about $300 million to $400 million. And if you look at the $1.6 billion capital raise, so we'll have, call it, $1 billion of dividend roughly going up to Berry and then the remaining proceeds will be used to pay off any closing transaction costs. So the instruments as of right now still in the form of a Term Loan B for the $1.6 billion capital raise. Magnera will also have a $350 million asset-based revolving credit facility. And then, coming to our bonds, the $500 million Glatfelter bonds, those will still continue to remain outstanding, but they will become secured at the closing of the deal. And those will also be equally and ratably guaranteed by the same guarantors as the Term Loan B, which is the new financing. So our bonds, while they will remain outstanding, they will become secured. Does that helpful?
Mike Ginnings: Got it. Thanks guys. Yes. No, that was perfect. Appreciate all the time and again, congratulations on the quarter.
Ramesh Shettigar: Thank you.
Thomas Fahnemann: Thank you, Mike.
Operator: We'll now take our next caller, who is Roger Spitz with Bank of America.
Roger Spitz: Thanks very much. I'm glad you confirmed the bond will become ratably secured upon the occurrence of the $1.6 billion term loan. So thank you for that. The price cost spread was positive in Q2 in all three segments. I'm just curious how you -- how were you able to do that during this period of rising pulp price market environment?
Thomas Fahnemann: Okay. Yes, Roger, I mean, again, in general, we have two different types of arrangements, if you will. We have our pass-through customers. So that's more or less an automatic pass-through of raw material or energy price increases, or if the price goes down, we adjust it downwards. You have to think about this, we have a time lag there. So normally, I would say, three months, sometimes even six months for one customer. But normally, there's a quarter time lag. And sometimes it hurts you and sometimes you gain a little bit. But this is one part of the customer. And the other one, and again, this was one of the really focus areas, which we said, because we were kind of caught a little bit in 2022, when we had a huge gap there. We are raising prices. We are with customers and kind of raise prices. And this is actually the result that if I look at, actually, for customers who are not on a pass-through right now, we capture this, and this was actually then the result is that we are still positive. And you should also see more coming in the third quarter based on the raw material increases we are seeing in the second quarter.
Ramesh Shettigar: And this was all part of the turnaround strategy.
Thomas Fahnemann: And that's a part of the strategy where we kind of made it very clear also and our sales people did a good job, and there was a lot of discussion, but yes. So that's kind of these two areas. And again, people who are not on a formula, we can do it relatively fast. There's always a little delay, but we can do it relatively fast. People on pass-through, three months, four months delay.
Roger Spitz: Got it. Thank you for that. And you just spoke a little bit about guidance on working capital. I guess the last two quarters; you haven't sort of updated your original guidance, likely due to the pending merger. But are you able to give any 2024 guidance overall, like the updated guidance for the EBITDA, CapEx, et cetera?
Thomas Fahnemann: Okay. I mean, let me just talk about the EBITDA, Roger. I mean, we have given some guidance, and there's really no change to the guidance. That's why we didn't mention it. And so from that standpoint, we still feel…
Ramesh Shettigar: $110 million to $120 million.
Thomas Fahnemann: $110 million to $120 million. If I look at right now, maybe a little bit of a lower end than the higher end of the $110 million to $120 million, but we feel pretty confident that there's no change to our guidance.
Ramesh Shettigar: And Roger, if you -- I can hit the other elements, like cash interest still around $70 million. CapEx between $30 million and $35 million still holds true. Cash taxes between $15 million and $20 million. Working capital still roughly around break-even, I would say, to maybe slightly positive. And then we've got other cash costs as part of the turnaround strategy, as part of the strategic initiatives and so on of between 20% to 25%. So I would say net cash flow is still walking down to about a negative $30 million for full year.
Roger Spitz: Perfect. Thank you very much, and that’s it from me.
Thomas Fahnemann: Okay. Yes. Happy to do. Thanks so much.
Operator: And that concludes today's question-and-answer session. I'd like to turn the conference back over to Mr. Fahnemann for any additional or closing comments.
Thomas Fahnemann: Okay. Yes. Thank you. Yes. Thank you so much to take the time for our quarter update and the call. I wish everybody a great day, and we'll talk to you later. Thank you.
Ramesh Shettigar: Thank you.
Operator: And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.
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