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Text: This is Ramesh Shettigar, vice president of ESG investor relations and corporate treasurer.
On the call today to present our fourth quarter results are Dante Parrini, Glatfelter's chairman and chief executive officer; and Sam Hillard, senior vice president and chief financial officer.
These statements speak only as of today, and we undertake no obligation to update them.
Today's earnings call marks the conclusion of a very pivotal year in Glatfelter's transformation as we successfully delivered on our commitment to scale up the company through two sizable acquisitions of leading engineered materials businesses.
At the same time, 2021 was also a very challenging year as we continue to navigate a pandemic that included severe macroeconomic headwinds.
In the first half of the year, our Airlaid segment was negatively impacted by customers destocking while the second half ended with unprecedented energy inflation in Europe and significant raw material price increases that adversely impacted all three segments.
As we closed out the fourth quarter, continued escalation in energy prices in Europe, raw material inflation, supply chain disruptions, and pockets of pandemic-driven labor constraints negatively affected our financial results.
The intensity with which these inflation factors unfolded was not fully anticipated, nor reflected in our previous guidance.
And the timing of these events has handicapped the Jacob Holm acquisition from having the quick and positive start we had expected.
Despite the significant impact of these external factors, we remain confident in the strategic rationale of our two acquisitions.
Mount Holly is in line with our near-term expectations and has the capability to over-achieve our original goals.
And our new Spunlace segment provides scale and further expands our product and technology portfolio, which positions us favorably for the longer term.
Ultimately, our leading positions in the broader non-woven sector will facilitate our ability to deliver meaningful value to our shareholders and customers.
While it is too soon to project when these extraordinary external pressures will dissipate, we are taking swift and aggressive steps to manage through this period of volatility.
I will speak more about this later.
If you go to Slide 3 in the investor deck, provides the key highlights for the fourth quarter.
We reported adjusted earnings per share of $0.04 and adjusted EBITDA of $26 million.
Airlaid materials performance was generally in line with expectations as contractual costs passed through arrangements protected margins from raw material inflation, although energy cost escalation in Europe was a drag on earnings.
This segment had a very good year-over-year profit growth, driven by the addition of Mount Holly and a strong recovery in the tabletop category.
Composite fibers results were much lower than expectations, driven by the unprecedented rise in energy costs in Europe and higher raw material inflation.
Energy prices further spiked to record levels in the fourth quarter, negatively impacting earnings by approximately $4 million versus our prior guidance, which had already reflected about $1.5 million of energy inflation.
To combat this spike in costs, we introduced an energy surcharge in November for customers in all three segments to specifically target the recovery of mounting energy costs.
Volumes were also lower as some price-sensitive customers, predominantly in the low [Inaudible] category, altered their buying patterns in response to the additional pricing actions we implemented.
In our Spunlace segment, results were lower than expectations, driven by higher raw material and energy costs, and a production delay at one of our manufacturing sites caused by a key raw material shortage that impacted shipments.
This is our first reporting quarter for the Spunlace segment since the October 29th acquisition date.
The integration work is well underway as we continue to focus on aligning processes, technologies, and commercial strategies while addressing the external factors impacting near-term results.
I will elaborate more on Spunlace integration in my closing remarks.
Fourth quarter adjusted earnings from continuing operations was $1.6 million, or $0.04 per share, a decrease of $0.18 versus the same period last year.
This was primarily driven by an unprecedented increase in European energy prices and from higher interest expense related to the bond issuance completed in October to finance the Spunlace and Mount Holly acquisitions.
Slide 4 shows a bridge of adjusted earnings per share of $0.22 from the fourth quarter of last year to this year's fourth quarter of $0.04.
Composite fibers results lowered earnings by $0.15, driven primarily by significant inflationary pressures experienced in energy, raw materials, and logistics.
Airlaid materials results increased earnings by $0.04, primarily due to strong volume recovery in the tabletop products category, as well as from the addition of Mount Holly results compared to the prior year.
Spunlace results lowered earnings by $0.02, driven by inflationary headwinds experienced in energy and raw materials and unfavorable operations.
Corporate costs were in line with the same quarter last year.
Interest expense lowered earnings by $0.07, driven by the issuance of the new bond to finance the two acquisitions.
Taxes and other items were $0.02 favorable due to a lower tax rate this quarter from a valuation allowance release of approximately $3 million.
Slide 5 shows a summary of fourth quarter results for the composite fiber segment.
Total revenues for the quarter were 1.3% higher on a constant currency basis, mainly driven by higher selling prices of approximately $9 million.
This was a result of multiple pricing actions taken in 2021 and an energy surcharge in late November.
However, this was not enough to mitigate the extreme prices for energy in Europe during the fourth quarter, and the relentless inflationary pressures in raw materials and logistics.
Shipments were down 11%, or nearly 3,900 metric tons with wall cover accounting for more than 75% of the decline.
Shipments for wall cover in Q4 2020 were very strong as the supply chain recovered from the shutdowns during the pandemic, creating a difficult comparison this quarter.
In addition, our pricing actions in wall cover to recoup the sharp rise in key raw materials such as wood pulp and the cost of energy did alter the buying patterns of some price-sensitive customers.
Prices of energy, wood pulp, and freight continued to escalate in the fourth quarter and negatively impacted results by $16.6 million versus the same quarter last year.
Sequentially from Q3 of 2021, this impact was $5.4 million, primarily driven by rising energy prices in Europe, which escalated even further during the quarter despite the savings provided by our existing energy hedging program.
This was the single largest factor in missing our guidance for composite fibers in the fourth quarter.
We expect input costs, particularly energy prices, to remain relatively high in the near term.
In addition to our ongoing focus on managing costs and operational efficiencies, we are also assessing a variety of mitigating contractual actions with our customers, which Dante will cover in more detail.
Operations were slightly unfavorable by $200,000, and currency and related hedging activity unfavorably impacted results by $900,000.
Looking ahead to the first quarter of 2022, higher selling prices are expected to be fully offset by raw materials and energy prices.
We expect lower volume and market-related downtime to have a cost penalty of approximately $2 million.
Slide 6 shows a summary of fourth quarter results for Airlaid materials.
Revenues were up 48% versus the same prior year period on a constant currency basis, supported by the addition of Mount Holly and strong recovery in the tabletop category.
Shipments of tabletop almost doubled while wipes were 74% higher when compared to the fourth quarter of last year.
Additionally, demand for home care and hygiene products were lower by 2% and 3%, respectively, reflecting changes in buying patterns at year end.
Selling prices increased meaningfully from contractual cost pass-throughs, as well as from price increases, including the 10% price increase action implemented in the third quarter for customers without cost pass-through arrangements.
We also implemented an energy surcharge on all customers served from Europe to offset rising energy costs.
While these actions together helped the segment to offset the higher raw material prices, they fell short of recovering the higher-than-anticipated energy price increases, unfavorably impacting results by a net $1.2 million.
Operations were lower by $1.7 million compared to the prior year, mainly due to higher spending and inflationary pressures.
And foreign exchange was unfavorable by $1.2 million, mainly driven by the lower euro rate.
For the first quarter of 2022, we expect shipments to be 3% higher on a sequential basis with favorable mix, thereby improving operating profit by $1 million.
Selling prices are expected to be higher but fully offset by higher raw material prices.
And we expect energy prices to be fully offset by the energy surcharge, assuming energy does not continue to spike further.
Slide 7 shows a summary of fourth quarter results for the Spunlace segment from October 29th acquisition date until the end of the year.
Revenue for the segment was approximately $58 million in the quarter.
Shipments for the quarter were approximately 12,500 metric tons, which were slightly below our expectation of 13,000 metric tons.
Lower shipments were mainly driven by softer demand in the wipes category due to year-end inventory management by a large customer and from a production delay at one of our manufacturing sites due to raw material and labor availability.
The lower shipments, coupled with unfavorable mix, negatively impacted results by $700,000.
The segment also experienced higher-than-anticipated raw material inflation, particularly on synthetic fibers, as well as higher energy costs at its European sites, lowering profits by approximately $1.5 million.
Operations were unfavorable from lower production, higher-than-anticipated waste rates, and COVID-related labor challenges.
The preliminary purchase price allocation resulted in depreciation and amortization of approximately $1.7 million after including the acquisition step-up to fixed and intangible assets.
For the first quarter of 2022, we expect shipments per month to improve in Q1, slightly outpacing the two-month run rate of ownership in 2021.
We expect higher raw material and energy costs on a sequential basis to outpace price increases and energy surcharges, and we expect improved operations.
However, due to inflationary pressures, we expect a loss for the first full quarter at a similar run rate as the first two months of ownership, equaling approximately $2 million for the first full quarter.
Clearly, this projected loss outlook is being addressed, and Dante will cover several key actions we are taking going forward.
Slide 8 shows corporate costs and other financial items.
For the fourth quarter, corporate costs were mostly in line with the same period last year.
Our corporate costs for full year 2021 of $22.4 million were approximately $4.9 million lower than prior year and mostly in line with our guidance from last quarter.
Costs related to strategic initiatives for the full year were $31 million, mainly pertaining to our two acquisitions and the associated financing.
Interest and other income and expense for the full year was $15 million and in line with our previous guidance.
For 2022, we expect corporate costs to be approximately $27 million higher than 2021, where we had lower overall spending due to COVID, but in line with 2020 costs.
Our tax rate for the full year was 32% lower than our previous guidance of 38% to 40%.
This was largely driven by the release of a valuation allowance of $3 million, reflecting a change in the recovery of deferred tax assets, primarily due to changes resulting from completing the recent Jacob Holm acquisition.
Given the unusual level of volatility in our tax rate components, which is highly dependent upon how much income we generate from within each of our respective jurisdictions, we are limiting our tax guidance to Q1 only rather than providing a full year tax rate projection at this time.
We expect our Q1 2022 tax rate to be between 48% and 50% on adjusted earnings and full year interest and other financing costs to be approximately $35 million, reflecting the recent bond issuance.
Slide 9 shows our cash flow summary.
2021 adjusted free cash flow was lower by approximately $10 million, driven mainly by lower cash earnings and capital expenditures.
We expect capital expenditures for 2022, including Spunlace and Mount Holly, to be between $45 million and $50 million, $7 million to $8 million of which pertains to Spunlace Systems integration costs, which we previously announced as costs associated with generating our targeted synergies.
Depreciation and amortization expense is projected to be approximately $74 million, reflecting a full year of ownership for Mount Holly and Jacob Holm.
Slide 10 shows some balance sheet and liquidity metrics.
Our leverage ratio increased to 4.6 times as of December 31, 2021, versus year-end 2020 of 1.7 times, mainly driven by the Mount Holly acquisition for $175 million and the Jacob Holm acquisition for $302 million.
We successfully executed our previously mentioned $500 million bond offering in October 2021, and we still have ample available liquidity of approximately $260 million.
Our near-term focus will be to successfully integrate Jacob Holm, realize the $20 million of expected annual synergies and actively de-lever the balance sheet.
Looking ahead, 2022 will be a very important year for Glatfelter as we continue our integration efforts and navigate the challenging macroeconomic environment to optimize profitability and cash flow.
We're directing our focus on a short list of imperatives.
Our top priority is to restore Spunlace profitability and drive the overall financial performance of this segment to levels more consistent with our legacy business.
Given its criticality, I have asked our chief commercial officer and 12-year Glatfelter executive, Chris Astley, to take full responsibility for the Spunlace P&L and all integration activities, including synergy delivery.
Chris' former experience as business unit president of the Airlaid materials segment, where his leadership significantly drove growth, accelerated innovation, and boosted profitability will be invaluable as we integrate this new business into Glatfelter.
Chris and his team will focus on driving with greater speed and urgency to achieve more consistent top-line growth and asset utilization, cost reduction, and margin expansion.
Secondly, we're taking actions to reduce the volatility in the composite fiber segment by implementing raw material and energy costs passed through mechanisms like we have within our Airlaid business.
This construct is necessary for us to continue to supply high quality engineered materials to our customers while maintaining stable margins.
Our objective is to move as many customers as possible to a dynamic pricing model with the goal of migrating approximately 50% of the revenue base to this new structure in '22.
While it is likely energy prices will remain elevated in the first half of the year, we will continue to closely monitor price trends and work with our customers to implement additional pricing actions as warranted.
At the same time, we'll step up our cost reduction activities, focus on energy efficiency, and reduction, and continue to monitor the effectiveness of our energy hedging program during this period of dramatic price volatility.
Additionally, we're fully committed to achieving the synergies we announced for the two acquisitions and we'll continue to progress this work throughout the year.
The foundation is set for us to accelerate the profitability of the respective segments and mitigate the challenges of inflation.
In summary, I want to reiterate that we strongly believe in the strategic benefits of expanding and enhancing the Glatfelter portfolio with our recent acquisitions.
As a leading global non-wovens company, we have the most attractive set of manufacturing assets, technologies, and talent to support our customers needs, to bring new, innovative and sustainable engineered materials to market and to deliver meaningful value to shareholders.
While 2021 was a challenging year, it was also a constructive year as we advanced our growth and transformation objectives.
As we look ahead at '22, we're redoubling our efforts to address the impacts of inflation, integrate our new acquisitions, and optimize profitability and cash flows.
This concludes my closing remarks.

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q4 adjusted earnings per share $0.04 from continuing operations.

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