Bioeconomy
On May 3, Glatfelter reported its Q1 results. During a conference call with industry analysts on the same day, company management reported the first full-quarter metrics for its new spunlace segment after the recent Jacob Holm acquisition:
- Q1 revenue was about $96.4 million, up from $57.5 million in Q4
- Q1 EBITDA was $1.34 million, up from $355,000 in Q4
- Q1 shipments were approximately 20,736 metric tons, 10% higher than management’s original expectations for spunlace and up from 12,514 metric tons in Q4
- Spunlace shipments are made to the following end-use markets:
- Consumer wipes ~12,300 MT
- Critical cleaning (e.g. aerospace, automotive) ~4,000 MT
- Healthcare ~2,400 MT
- Hygiene ~ 1,000 MT
- All other ~1,000 MT
Ramesh Shettigar, VP ESG, Investor Relations, credited the segment’s volume growth to stronger demand in consumer wipes, which improved results by $800,000.
According to CFO Samuel Hillard, the business was pressured by inflationary headwinds in energy and raw materials that exceeded customer price increases.
However, during the call’s Q&A session, CEO Dante Parrini said he expects a “significant improvement” in spunlace and the segment returning to profitability in Q2, with $1 million coming from pricing-related actions and another $3 million of improvement from operational improvements and synergy delivery. As Parrini explained: “We are turning the corner with this business, as we continue to deliver strong customer orders.”
Management sees operational improvement opportunities in downtime reduction, waste reduction and efficiency drives, as well as synergy opportunities in sourcing and supply chain, according to Hillard during an earlier presentation at the Sidoti Spring Small Cap Virtual Conference on March 24.
In the longer term, management expects to bring in $20 million of annual synergies within two years of the Jacon-Holm acquisition, which was completed on October 29 last year.
When addressing concerns that spunlace performance benefited from the COVID-19 pandemic, Hillard assured the conference audiences that when the Jacob Holm spunlace deal was announced, Glatfelter management already factored in and “stripped out” about $10 million to $15 million of Jacob Holm’s LTM EBITDA due to it being COVID tailwind - masks and wipes - related.
Hillard further also pointed to an acquisition in 2010 in airlaid materials as a reminder of the company’s success in post-acquisition execution. The acquisition had about 6% in EBITDA margin. Under Glatfelter management, it grew to about 18% in 2020. Thus, Hillard is confident that management has a good “playbook.”
The spunlace segment is currently growing at an “elevated” rate compared to the other two Glatfelter segments, at roughly 5% per year, according to Parrini.
Looking forward, Parrini sees this segment focusing on sustainability using plant-based feedstocks. Although half of Jacob Holm’s products already use natural feedstocks, the business has an “accelerated emphasis” to come up with sustainable alternatives for the synthetic portion of the portfolio. In this regard, Parrini emphasized the ability to leverage the “deep institutional knowledge” of the legacy Glatfelter has on plant-based feedstocks.
Responding to a question from Sidoti’s analyst Chris McGinnis about achieving synergy, Parrini pointed to customer overlap in wipes, between the spunlace and airlaid segments, and the ability to “bundle a more comprehensive and diverse portfolio of product solutions and technology offerings.”
Regarding geographic strategic expansion, Parrini believes that the decision needs to be made on a case-by-case basis regarding whether the company should adopt globalization or nationalization as the best path forward.
When asked by McGinnis about EBITDA guidance for the year, Parrini responded that Glatfelter management doesn’t give specific guidance on EBITDA expectations. However, Parrini pointed out that a leading global specialist in the engineered materials business should be able to achieve “mid-to-high teen” in EBITDA margins across its segments. Parrini further pointed out that Glatfelter demonstrated this level of profitability historically in both the Airlaid and the Composite Fibers segments, though he also cautioned that spunlace is a “slightly lower EBITDA business.”
On May 9, BMO Capital analyst Mark Wilde rated the Glatfelter stock as “Outperform” with a total return of 54%. Although Wilde cautioned investors about Glatfelter’s exposure to the Russia-Ukraine conflict in the wallcover, tea and coffee markets, as well as the continuing inflationary pressures, the analyst is confident that the company’s GP Mount Holly airlaid and Jacob Holm spunlace acquisitions create a “EBITDA/FCF runway.”
On Glatfelter’s spunlace outlook, Wilde stated the following:
- Volumes/mix : add $1MM q/q
- Synergies and favorable operations: add $3MM q/q
- Neutral on price/cost
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