Glatfelter Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

Key Takeaways

  • The company faced severe macroeconomic headwinds in North America and Europe, including customer destocking and machine downtime, resulting in a roughly $7 million negative earnings impact in Q2.
  • Turnaround initiatives delivered approximately $7 million of earnings improvement in Q2, driven primarily by price increases and fixed-cost reductions.
  • Two fires at the Fort Smith and Asheville facilities caused about $3 million of lost earnings, although safety protocols prevented any injuries or lasting facility damage.
  • Following an unsuccessful sale process, the Oberschmitten site closure led to $4 million of operating losses, elevated employee absenteeism, and ongoing wind-down costs.
  • Glatfelter lowered its 2023 adjusted EBITDA guidance to $100 million–$110 million due to continued market weakness and accelerated underperformance at Oberschmitten.
AI Generated. May Contain Errors.
Earnings Conference Call
Glatfelter Q2 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good day, and welcome to the Gaffelter's Q2 2023 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to hand the call over to Ramesh Suttigar. Please go ahead.

Speaker 1

Thank you, Ali. Good morning, and welcome to Glatfelter's 2023 Second Quarter Earnings Conference Call. This is Ramesh Shethigarh, Senior Vice President, Chief Financial Officer and Treasurer. On the call to present our Q2 results is Thomas Farnamann, President and Chief Officer of Glatfelter and myself. Before we begin our presentation, I have a few standard reminders.

Speaker 1

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 2022 Form 10 ks filed with the SEC And today's release are available on our website, 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.

Speaker 1

I will now turn the call over to Thomas.

Speaker 2

Thank you, Ramesh. Hello, everyone, and welcome to Glatfelter's 2nd quarter conference call for 2023. It's a pleasure to be with you today. Throughout today's call, I will take the opportunity to provide context on several key challenges the business faced during the Q2 as our results fell below expectations. More importantly, I will highlight the outcomes we delivered During the Q2 with our turnaround strategy to address these challenges.

Speaker 2

First, The prevailing market headwinds and overall macroeconomic environment in both Europe and North America, Along with continued customer destocking resulted in lower sales volume and negative earnings impact of approximately $7,000,000 when combined with machine downtime to manage inventory levels. 2nd, The team diligently worked to deliver approximately $7,000,000 of earnings through our turnaround strategy with results attributed primarily to price increases and fixed cost reductions. We also experienced 2 fires, 1 in Fort Smith, Arkansas and another in our Asheville, North Carolina facility that resulted in an approximate $3,000,000 loss of earnings during the 2nd quarter. I'm thankful for the quick actions of our employees at each site That fortunately resulted in no personal injury or long term damage to either facility. Blachfelder has benefited from top quartile safety performance Our many years of benchmarking and refinements to our global safety program, and we remain committed $3,000,000 negative impact resulting from foreign exchange effects, customer financing and other items.

Speaker 2

Finally, as part of our portfolio review, we announced the closure of our Oberschmitten site in May, Following a lengthy but unsuccessful sale process against the backdrop of poor site profitability given the weak Glasene and Electrical markets. Since that time, the team has been working to fulfill remaining orders, while negotiating the balance of interest and social plan With the site's Economic Committee and Works Council, all while preparing to decommission the site. Since announcing the closure, customers have been working to secure alternative suppliers, And we are experiencing high rates of employee absenteeism and turnover. While we continue to manage the operations in this Turbulent environment, we have incurred operating losses of approximately $4,000,000 in the 2nd quarter. As I reflect on our performance this quarter, including the positive results We delivered with a turnaround strategy.

Speaker 2

Had it not been for the continued macroeconomic and operational challenges impacting our bottom line, Our Q2 results would have been in line with the Q1 of 2023. The turnaround actions That we are taking are now setting the stage for improved profitability as sales volumes return. While our business fundamentals remain quite sound, we are lowering our annual guidance to $100,000,000 to $110,000,000 in light of the market weakness and accelerated deterioration of Oberschmittens' financial performance following the closure announcement. I will now turn the call over to Ramesh.

Speaker 1

Thank you, Thomas. Slide 3 of the investor presentation provides a summary of our 2nd quarter results. Adjusted EBITDA was $17,300,000 or approximately $10,000,000 lower compared to the Q2 of last year. As Thomas just described, the primary drivers were Oberschmitten underperformance and negative impact from the 2 fires. Airlaid Materials EBITDA was lower by approximately $2,000,000 mainly related to the fire in Fort Smith that led to downtime and unexpected maintenance costs.

Speaker 1

Composite Fibers EBITDA was lower by approximately $6,000,000 driven by the negative effect of Woberschmitten, weaker demand Lower production to manage inventory levels. Spunlates demonstrated EBITDA improvement of approximately $1,000,000 despite the impact of the fire at Asheville. Slide 5 shows a summary of 2nd quarter results for the Airlaid Materials segment. Revenues were up 5% on a constant currency basis versus the same period last year, mainly driven by higher selling prices of approximately $12,000,000 on lower volume. The higher prices from contractual cost pass through arrangements as well as price increases and energy surcharges initiated for customers without such Fully offset the higher cost of raw materials and energy.

Speaker 1

Volume was lower by 4% year over year, primarily due to weaker shipments in the feminine hygiene category from customers' inventory destocking, which was partly offset by improved shipments in tabletop, wipes And Home Care. Operations were unfavorable by $2,100,000 versus the prior year, primarily due to the fire at Fort Smith, Leading to downtime and unexpected maintenance costs. Foreign exchange and related currency hedging positively impacted earnings by $900,000 primarily from the strengthening of the euro. Slide 6 shows a summary of second quarter results for the Composite Fibers segment. Total revenues were up 1% on a constant currency basis due to higher selling prices of $5,500,000 As well as successfully implemented as we successfully implemented multiple pricing actions and energy surcharges in 2022 to combat inflation.

Speaker 1

Volume was higher by 3% versus the same quarter last year, but mix was unfavorable, negatively impacting both revenue and margin. Demand was soft in almost all product categories, reflecting challenging market conditions and some negative reaction to our pricing action taken in late 2022. Higher prices for energy, key raw materials and freight lowered earnings by $3,800,000 versus the same quarter last year and we're more than offset by the pricing actions. On a more positive note, inflation on raw materials and energy improved on a sequential basis and we expect This trend to continue in the second half of twenty twenty three. Operations and other was unfavorable by $5,900,000 driven by lower production to manage inventory levels.

Speaker 1

Of the $5,800,000 year over year EBITDA decline for the segment, $4,300,000 was from Oberschmittens underperformance as this site is now slated for closure as previously announced in May. Foreign exchange was unfavorable by $500,000 driven by hedging gains from last year. Slide 7 shows a summary of 2nd quarter results for the Spun Lace segment. Revenues were down 19% on a constant currency basis, driven by lower of 22%, but partially offset by higher selling prices of approximately $2,000,000 coming from actions taken to address inflation. The volume decline was primarily in the critical cleaning and hygiene categories.

Speaker 1

Critical cleaning shipments were lower in Europe, mainly due to market softness, While North America volume was more impacted by production constraints experienced on the converting side by our customers. In hygiene, most of the decline was in the European market where our customers have access to lower cost alternatives as well as cheaper imports from Turkey and China. We are continually exploring options to improve our cost competitiveness and asset utilization in Europe as these are critical to the segment's profitability. Raw material, energy and other inflation were favorable $400,000 driven by lower energy prices. Operations, FX and other items were net $300,000 favorable.

Speaker 1

Actions taken as part of the turnaround strategy to improve operations And reduced headcount created a year over year benefit of approximately $4,000,000 These benefits were offset by the fire And lower production to control inventory as a result of weaker demand. Slide 8 shows corporate costs and other financial items. For the Q2, corporate costs were slightly lower versus the same period last year. Slide 9 shows our cash flow summary. In the Q2 of 2023, our adjusted free cash flow was lower by approximately $10,000,000 versus the same period in 2022.

Speaker 1

Earnings were lower by approximately $10,000,000 and cash interest was higher by approximately $8,000,000 These unfavorable items were partially offset by lower cash taxes As well as from a one time refund of about $7,000,000 received in Q2 related to the COVID-nineteen ERC tax credit recovery program. Slide 10 shows some balance sheet and liquidity metrics. Our bank covenant leverage ratio as calculated under the new credit agreement was 3.4 times as of June And we had available liquidity of approximately $145,000,000 at quarter end. Slide 11 shows our 2023 year to date EBITDA run rate normalized for certain items outside our control with those that have been addressed through our turnaround strategy. When adjusting for Oberschmitten's results and the 2 fires, our first half performance for the year would have been better than as reported.

Speaker 1

As it relates to Oberschmidten, we are expecting operations to cease in the 3rd quarter and any shutdown costs to be excluded from adjusted earnings thereafter. The EBITDA impact from the fires in Fort Smith and Asheville was approximately $3,000,000 in the 2nd quarter and we do not expect any cost to carry over into the 3rd quarter. Slide 12 is a summary of our EBITDA and cash flow guidance for 2023. Q2 EBITDA was below our expectations largely due to Oberschmitton's accelerated underperformance that we did not anticipate earlier in the quarter. We were in the final stages of a several months long process to sell the site operations to a prospective buyer with an anticipated close at the end of May.

Speaker 1

However, all interested party negotiations stalled in mid May due to market weakness and we announced the site closure decision at the end of the month. As a result, the ongoing operations to wind down over Schmitten will have a continued negative financial impact when compared to our previously stated guidance. Therefore, we are lowering our EBITDA guidance to now be between $100,000,000 $110,000,000 Regarding cash flow items, we expect the following: Cash interest of approximately $60,000,000 which includes the latest projection of interest expense from the refinancing completed in the Q1 Capital expenditures to be between $30,000,000 $35,000,000 or approximately $5,000,000 lower than our prior guidance. We expect approximately $50,000,000 of cash usage from working capital and turnaround strategy cash costs combined. This is approximately $20,000,000 higher than our prior guidance and is driven by the expected severance costs related to the Oberschmidt shutdown And adverse accounts payable impact from shorter payment terms as a direct result of our credit rating downgrade last year.

Speaker 1

And finally, cash taxes are expected to be between $15,000,000 $20,000,000 or approximately $5,000,000 lower than our prior guidance. This concludes my prepared remarks. I will now turn the call back to Thomas.

Speaker 2

Thank you, Ramesh. As we look forward to the remainder of There are a few highlights that are important to shaping our overall performance in the 5 remaining months of 2023. First, I'm pleased to share that Boris Iletchko has officially joined the company on August 1 as Senior Vice President, Chief Operating Officer. We previously announced Boris' decision to join Clubfair in early April. And while he honored his termination notice period with his prior employer, He was successful with accelerating the start of his employment with Glatfelder.

Speaker 2

Boro's arrival is significant as this completes The establishment of our newly expanded senior executive team. With Boris, we will have an additional talented leader working globally in both operations and commercial functions and having personally worked with Boris in the past, I'm confident he will hit the ground running and I look forward to his contributions. 2nd, we must remain focused on managing the ongoing price cost gap And striking an effective balance between product price, mix and volume as the challenging economic headwinds Impacting our markets prevail. This is particularly important as we face growing competition, including regions in the world That may not value the same level of commitment that Glatfelter is making to achieve truly sustainable products, while improving our overall operations. Our single most important business imperative It's to demonstrate an uncompromising partnership with our customers without foregoing profitable margins.

Speaker 2

This requires us to act with intensity when executing the 6 key initiatives of our turnaround strategy, Which the team continues to do exceptionally well. Then finally, but perhaps most importantly, As a leadership team, we are prepared to make any remaining difficult decisions that will improve the trajectory of our financial performance in the months ahead. Actions such as further curtailing operations were needed to balance inventory levels, driving out additional fixed costs, Growing sales volume, achieving additional pricing actions that are imperative for us to reach sustainable margins for the long term And continuing to assess and shape our overall product portfolio and innovation pipeline with a greater level of financial rigor combined with As I approach my 1 year anniversary with Glapsalder, I continue to believe the company's full potential has not Meanwhile, we must stay the course with a disciplined approach that comes with our turnaround plan and adjust our real time actions to confront the Current realities of our markets and the industry we serve. My team and I remain committed to doing just this. I will now open the call for questions.

Operator

Thank We'll go ahead and take our first question from Josh Woll with Carlson Capital. Please go ahead.

Speaker 3

Thomas Ramesh, good morning. Thanks for taking my questions.

Speaker 2

Good morning. Good morning, Josh.

Speaker 3

I want to start with a few questions on volumes and the destocking headwinds and then I have a few more questions around margins in the quarter, especially trying to flesh out the fundamental performance excluding the impact of the fires and the over Schmitt enclosure. But starting with volumes, how did your volume performance vary by month in Q2 or at least entering the period versus exiting it? And what picture is emerging of where inventory sit throughout the channel, both at your customers and if you have the visibility at the end retailers as well?

Speaker 1

Okay. Yes, I think I

Speaker 2

have to go a little bit into detail because it really varies by segment. Maybe if I look at the destocking, the destocking is still going on in the Feminine Hygiene and in the Adult Incontinence segment. So there, where we're still seeing destocking is going on. In the other areas, I would say, it really has Slow down and it's more a demand issue. Now if I look at and go through the single segment, Feminine Hygiene, the volumes month to month is pretty much flat.

Speaker 2

So if I look at April versus June, it's pretty much the same. And here, the weakness in Q2 was really a combination of the And also, one of our biggest customer had a fiscal year end in June. So that's always Then a little bit of a weaker quarter. Adults incontinence, it's kind of the same picture. And If we look at the really yearly volume, we have one big customer and there's also still destocking going on.

Speaker 2

That was Big Gunner when the product was launched back in 2018, 2019, Huge volume and it's going a little bit down, but there's still some destocking going on. But also here, month over month, it's pretty much flat. If I go back to the next segment, tabletop food services, I would say that

Speaker 1

I mean, if we look at

Speaker 2

the month to month Volume development is increasing. So from April to May, we saw an increase. From May to June, we saw an increase. And that's kind of also a little bit of seasonality, which we have in this business, because with warmer temperature, it's outdoor dining, barbecues, and then and so we are seeing And the volume is really increasing. What we're not seeing there is a lot of destocking.

Speaker 2

I think that's done. I think we are probably in that area. This is what we are the volume we are seeing right now is the real underlying demand. If I go to the wipes Business, also the wipes volume month to month is relatively stable. And there's no real, I mean ramp up relatively flat.

Speaker 2

And if I go to the Home Care area here, We are seeing a little decline from month to month. And again, it's very difficult now to predict What Q3 will bring, but if I look at July, I mean, it's not substantial. And But this business had substantial growth during COVID because a lot of people were more concerned and sensitive about hygiene and all this. So and this business is really From a volume standpoint, from 2020 to 2021, and now if I look at 2023, it's going down. Coffee, in the coffee area, overall demand is the same.

Speaker 2

What we are seeing is a little bit of a shift from Perhaps to filter coffee because it's cheaper, and then this is mainly happening in Europe. And I would also say for the coffee, effect, I think, should be done in Q2. We don't expect anything there in Q3. But however, the pad production, It's down because more filter coffee and people are more price sensitive and they're moving more towards the filter coffee. Tea, if we look at the tea bags, here we really saw some major inventory buildup in 2022 because The concern of inflation, curtailment for energy.

Speaker 2

So here, we are still in the middle of destocking activities. And so that's probably still continuing on into Q3. Then the composite laminate area, this is not an inventory issue. This is really a demand issue. Consumers are just not spending a lot of money for home improvement, as they did during the COVID.

Speaker 2

A lot of do it yourself projects and all this, and this market has really declined. Then to go to the next segment, wallcovering, I mean, the only influence there is really the sanctions imposed on Russia. And Western European market is also, I would say, on a relatively low level right now. And this is In line with our composite laminate area, I mean, there's not a lot of renovation or new builds going on. Then Electrical and Pasting Paper, the thing here is also we don't think there's a lot of de Stocking going on.

Speaker 2

I think that's already taken care of in Q1 and early Q2. So this is really the underlying demand that we're seeing right now. Consumer Wipes business is relatively stable. Critical cleaning, we increased our volume there, but this is probably based on our initiative, Which I mentioned in our Q1 call that this is the focus we have. So we have seen we are seeing first successes here.

Speaker 2

And the large business, I would say, our metallized business sorry, George, the metallized business Has been relatively stable month over month, but overall demand is down in a big way. So that's kind of this is Question is, are they using a different product? But if I also look at the base paper industry, they're also Suffering because of the labeling business. I mean, the labeling business is also down. So and we are hit as well.

Speaker 2

So this hopefully Sorry, but I think you really have to look at the segment.

Speaker 1

No, no,

Speaker 3

no. The color is actually helpful. And I know the destocking has been an industry wide Phenomenon from everything from food to essential consumable products that you sell. Maybe 2 more brief questions on the volume side. How much of the destocking in some of your channels is driven by customers wanting to buy at lower raw material prices Because you obviously sell some products that are pulp based, pulp prices have been coming way down, so strategic decisions On the part of customers to wait.

Speaker 3

And then the second question is, how much has the mix of private label changed over the last, let's call Year, year and a half. And how has this impacted your margins, if at all?

Speaker 2

Yes. Okay. To your first question, Josh, Yes. I mean, what we are seeing is raw material prices are coming down. The energy prices are kind of, I would say, normalizing, although they are not back to where we were Pre inflation, so customers are sure looking at the following quarter where we have quarterly pricing and said, I mean, what's happening in the next quarter?

Speaker 2

Absolutely. I mean, this is happening, but this is not a loss of volume, so we are catching up and it's always a question of how to kind of schedule and all this. But yes, I mean, Customers said I wait until July because I'm expecting July prices will be lower than June prices. So that's very clear. Your question on branded business, what we're seeing right now is that the U.

Speaker 2

S. Is mainly unchanged. The branded business in the U. S. Is pretty much what it was, the same with the white label business.

Speaker 2

In Europe, however, We are seeing a shift. Branded business is losing and non branded is picking up. And that's probably based on price consciousness of the European consumers, but we haven't seen that yet in the U. S.

Speaker 3

But I guess your volumes are relatively unchanged by that because you're selling into both Channels, but does it have an impact on your the profit margin?

Speaker 2

Correct. Correct. Yes.

Speaker 3

Okay.

Speaker 1

No impact.

Speaker 3

Okay. And then moving over to the margin side, I mean, I guess, I'm going to give you kind of the big picture Before I give you my detailed questions, but I'm trying to kind of understand the core margin performance and the trend exiting the second quarter. And maybe the way I'll ask the question is, if I look at Slide 11 and I give you credit for that bridge, which is theoretical and I $52,000,000 of run rate EBITDA, it's around a 7% implied margin. If I look back to the first half of last year, I think the margin was around, call it 6.7%. So very similar margin and maybe destocking was $7,000,000 so that would be 1% impact.

Speaker 3

So are we kind of running at 8%? Is that the level we should think about exiting Q2 and entering Q3? And just to have context, if we were at 7% last year We're trying to get back to 10% plus to call it historical levels. Are we at 8% or Are there other things in that bridge that you would point me to?

Speaker 2

Yes. Josh, I would like to maybe look at it from a different way. If you look at our Q2 performance and the $7,000,000 I mentioned, which is really market driven, the weak market. So this $7,000,000 just the loss of volume was roundabout3,000,000 But the fixed cost absorption, which we had was $4,000,000 okay, which we didn't have actually in last year. So if you add that up, I mean, that's $7,000,000 And this is the biggest issue, which were really impacting Our earnings here plus the onetime or nonrecurring issue or issues we have addressed like Uber Schmitten, the vendor financing, we have addressed all that.

Speaker 2

But This is actually you have to take this into consideration that the fixed cost absorption, which we had to this is a hit of 4,000,000 We have to take in order to manage our working capital and our cash. So to answer your question, I think it's a little bit higher than that.

Speaker 1

And it's getting there, Josh. So you're right, we have said that in an ideal situation, A business in the nonwoven space with the portfolio that we have should be operating between 10% 15% EBITDA margins. Now we've been in that zip code before. We're clearly challenged because of Spunlase and because some of the market dynamics that we've seen here recently. But yes, we're making our way up there Very gradually.

Speaker 1

So what you may have seen, 7% last year could very easily translate to 8%, 8.5% this year and then continue to make progress as we take more cost out, as the turnaround strategy traction kicks in, As we have eliminated some of these one off distractions, whether it's OBE or the Oberschmitten fire or The Oberschmidt topic or the fires and so on, this should help become accretive to our EBITDA margin profile going forward.

Speaker 3

Okay. So maybe let's start from that kind of 8%, 8.5% level. But as we think about the cost trends going forward, Over the last 6 months, softwood pulp prices, fluff pulp prices have declined substantially, I think both in North America and Europe. So remind us how much of your cost of sales is raw materials or even pulp, if you can be that specific? And when do you expect to see the full impact of lower pulp and both as it comes into your inventory, but also as it gets reported into your cost of sales.

Speaker 3

And again, just because Some of the tissue producers that are reporting are starting to see some of that in their margins as recently as this quarter. And I think More of that is going to come in Q3, but kind of remind us what we should expect across both the Airlaid and maybe more Composite Fibers where you don't have the pass

Speaker 2

Okay. I mean, if I look at pulp, softwood and fluff pulp, and it depends a little bit on the product, but The raw material is roundabout 50% to 55% of COGS, cost of goods sold, okay, on average across the segments. And one of the issues is and we have seen that, I mean, absolute dry prices are coming down. Unfortunately, I also have to say the gap between fluff And softwood is widening, but it's now also under pressure and also flat pulp is coming down more, but this was a little bit of a time lag. And normally what we have is when prices are coming down, you can say it takes us probably 2 to 3 months because of our raw material inventory, which We have to keep in all of our size to really see the real impact.

Speaker 2

So I would say it's probably 8 to 12 weeks, then we see it as well. And a question on the pass through. Yes, I mean, we have Roundabout, be precise, in Airlaid, roundabout 30% is not on the pass through. And this is mostly the smaller tabletop customers, Well, we don't have a contract, but they're buying from us. And so we have and we are very price they are very price We are price sensitive and this is exactly what you were mentioning before and they are sometimes waiting from June to July and all this.

Speaker 2

But to answer your question, around about 30% is not on a pass through in Airlaid and around about 50% in CS, Well, we have to manage it month by month.

Speaker 3

Okay. And then maybe similar question on energy, maybe first the percentage of your The sales that is energy, I think years ago it was call it 8% to 10%, but that was before the squeeze in Europe gas prices in 2021. So what is it today? And when do you expect the recent declines in energy to phase into margins, for instance, so you get the full impact in Q3 Or will it be Q4?

Speaker 2

I mean, if you look at Glatfelter as a whole, and then I want to go into the different segments because there you see a big difference. I mean, when we started before the inflation, I mean, you're absolutely right, you were around about 8%. We went all the way up to 11% during the hype of the inflation as a company, and we are down to 9%. We're in the middle. We are not back on where we were.

Speaker 2

But more importantly, if you look at CF and we have most of our assets are in Europe, Where we have much bigger exposure to the higher energy price, I mean, we are up right still Today, in today's world at 14% to 15%. Despite the fact that energy prices came down And we were before historically in the range of 11% to 12%. And we are still at 15%. Last Yes, we peaked at around about 17%, almost 18%. So again, we are going in the right direction, but we are by far not Way back to pre inflation levels.

Speaker 3

Okay. And then maybe kind of stepping back considering both the pulp side as well as the energy side. Assuming that these declines we've seen continue or at least don't reverse, how comfortable are you With the raw material and energy cost levels today in terms of supporting your goals to restore historical margins Yes. In 2024 and beyond, while also meeting some customer expectation of relief On their cost of sales, which seems to be more of an imperative, just listening to some of the brand owners Today even versus a couple of quarters ago.

Speaker 2

Okay. Yes. Josh, we have taken All the pricing initiatives back in September, October, November to bring the prices based on the raw material cost at that time To the level which we need. So and I would say we are really, really there. The biggest problem we have and what it takes is the market weakness right now.

Speaker 2

So whenever the volume comes back, and it will come back, it's just a question of And again, I can just say the volume loss of volume cost from a customer standpoint, around about $3,000,000 and fixed cost absorption, $4,000,000 So we're talking about $7,000,000 just in Q2. So whenever that comes back, the margins will be where they need to be. But even now, if you look at the details in one of the things, I mean, even with some losses, we overcompensated this with pricing. Okay. Sorry, Josh.

Speaker 2

I didn't want to interrupt you.

Speaker 3

Perfect. I didn't I don't want to dominate the call. So I have one final question just around cash flow. Given that your guidance for working capital It includes both the working cap as well as the turnaround cash costs. It would be helpful to know what your guidance implies For working capital spend or generation in the second half or I guess maybe said differently, Slide 9, you have the cash flow bridge.

Speaker 3

I think if you combine working capital and other, it's around $63,000,000 of cash usage in the first half. Should I compare that to your guidance of $40,000,000 to $50,000,000 with the implication being that working capital will be a $15,000,000 to $20,000,000 source of funds In the second half. Is that kind of the right analysis?

Speaker 1

Yes. I think you can think about it that way because Generally, the second half of the year for us is a source of cash and working capital. But then like I said, the 2 additional headwinds that We're calling out this time around in our guidance, which is why this number has gone from 20 to 30 to 40 to 50, which is a 20,000,000 hit. 10 of that is coming from the Oberschmitten shutdown and 10 of it is coming from just AP headwinds because of payment terms. So, but holding setting that aside, the way you're thinking about working capital for the second half of the year versus what you're seeing now in the first half is

Speaker 3

Perfect. Okay. Well, I'm going to get back in the queue, but definitely appreciate all the color. And I know it's a difficult quarter, but keep on focusing on the things you can control. I appreciate it, guys.

Speaker 2

Thank you. Thank you.

Operator

Our next question will come from Mike Jennings with Angela Gordon. Please go ahead.

Speaker 4

Good morning, Thomas and Ramesh.

Speaker 1

Good morning, Mike. Good morning, Mike.

Speaker 5

So look, I think

Speaker 4

a lot of the points you raised on destock are Similar to what we've heard from materials peers more broadly. I guess I want to contrast that with recent commentary from consumer products companies, which Seems to suggest that after the last 2 years of kind of price led top line growth that there's going to be a bit of inflection of volume led over the next 2 years. How do you what's the visibility like on those volumes where we're hearing and again, this is primarily related to the Airlaid Materials side. What kind of visibility do you guys have looking out back half of the year into 2024 on volume recovery off of putting aside any destock or restock?

Speaker 2

Yes. I mean, I would tend to agree with you, Mike. I mean, we're also seeing some market improvements sequentially. We have and then talk about Elliott. We're expecting volumes in the second half being More and bigger than in the first half.

Speaker 2

We're already seeing this a little bit in July. Also has a little bit to do with one of our biggest customer has this Financial year end in June. And so historically, July, August is a little bit better. And We also and that's really important more for our CF business that we are also expecting a better mix in Q3. I mean, in our CF business, It's really important, which product are you selling because they have different margin profiles.

Speaker 2

So We think that and our inclined wire products are more profitable and have a much better fixed cost absorption Then wallcover or the metallized products. So and we are also seeing and expecting that the inclined wire products are improving in the second half compared to the first half. And for us, to be honest, right now, it's really the biggest focus for us is the Taking all the inflationary pressures aside, we need to really go back like I mentioned with Josh's question, we need to go back to Pre inflation margins, so we are now on our way down with energy prices coming down, raw material prices coming down, and We are going to leverage this because we need to also make sure that we are not missing the boat here. So we need to also be on our toes to make sure that we are That we hit the right price. And you're absolutely right.

Speaker 2

It will be a volume game and not a price game.

Speaker 4

Perfect. Thank you. And then maybe one follow-up. I just wanted to make sure I understood your response correctly. I don't want to Josh's questions.

Speaker 4

When we were talking when he was asking about the branded versus unbranded,

Speaker 5

what is the impact to us Of

Speaker 4

a customer this trade down effect that we're seeing in the market, if any?

Speaker 2

To be honest, for It's almost nothing because we are serving both sides of the equation. So we are serving customers which are Providing their products to the branded business and we are serving customers who have the non branded business. So there's no big impact for us.

Speaker 4

Perfect. Thank you. I'll just hop

Speaker 2

back in the queue.

Speaker 1

Okay. Thank you.

Operator

We'll go ahead and take our next question from Roger Spitz with Bank of America. Please go ahead.

Speaker 5

Thanks very much. Regarding the benefit of lower pulp prices, Will you see I mean eventually see all the benefit or has there been any change in sort of your contracts with Some of your customers where you will not be able to see that benefit as pulp prices fall?

Speaker 2

We'll see the benefit. No changes are to the negative in our contracts. We will see the benefit. But as I mentioned, there's a little bit of a time lag. But other than that, we will see the full benefit of that.

Speaker 5

Perfect. In terms of the cash flow guidance, I just want to make sure, so the 2023 cash restructuring and closure costs Are all in the $40,000,000 to $50,000,000 of working capital and cash restructuring, which and there are no other cash items, which then implies at the midpoint of the range, OCF less CapEx is negative 50. Is that the right way or are there other cash

Speaker 1

items that are currently there? You have it exactly right, Roger. It would be a negative $50,000,000 of net cash flow.

Speaker 5

Perfect. And can you last call you spoke about Potential divestiture or monetization of any non core assets that might be coming sooner rather than later. Perhaps you mentioned in the prepared remarks that I didn't hear, but can you give us any update if you haven't mentioned it?

Speaker 1

Yes, sure.

Speaker 2

Sure. Number 1, I mean, again, at that time, we were trying to really divest Oberschmitten. And as Ramesh mentioned and I mentioned earlier, we got pretty close, but unfortunately, it didn't work. And that's why we had to kind of make the decision to Shut the operations down because this is for a long time losing money in Oberschmitt, and the market is not even getting worse. So this makes no sense So there's another business where we might think about it, but today it's not the right market to do To be quite honest, we are not under pressure.

Speaker 2

So we would like to really make sure that we are not rushed into anything. So we have Another asset and again, very minor, not changing kind of the overall company. So it's really some assets On the periphery of our business is not really core. But right now, to be honest, It's not the right time to do that, and that's why we kind of put these activities to pause. And whenever the market comes back, we'll be back on there and working on that.

Speaker 5

Got it. And in terms of the Oberschmidt and The lingering cash impact, now maybe some of that's in your revised EBITDA guidance, maybe some of that is In your working capital and other cash flow item outflow of $40,000,000 to $50,000,000 but you gave the Q2 number. What do you expect to see in the next few quarters dollar wise for that wind down of Oberschmitten?

Speaker 1

Yes. I mean, so Roger, yes, you're right. The total impact of the cash cost related to the Shutdown is reflected in our in that working capital and turnaround strategy cash cost guidance. This is the point we're trying to make, which is We had, call it, dollars 4,300,000 worth of roughly $4,000,000 worth of negative Earnings coming from Wurbur Schmidt in the second quarter. We're going to be in a wind down here for The next quarter or so, we're hoping to cease operations in by the end of Q3.

Speaker 1

And we still have Not just the losses coming, but then as part of the wind down, a monetization of the assets, There are some water wells there, there's inventory and all of that that we need to clear out I am monetized to reduce the net financial impact from this deal, but we're hoping that with Ceasing operations here in the Q3, we can stop the bleeding along the lines of what We saw in the second quarter and then by the 4th quarter, we're just finishing up any last orders and then we shut the pace down. Still a bit of a moving target, Roger, I will say. And we're taking all of that into account When we are bringing down our overall guidance for the year. So you can kind of do the math, right? If year to date, we've lost about $6,000,000 from Oberschmidt and I'm bringing down my guidance by $10,000,000 That should give you a rough idea of how much more is left to go on the P and L side in our view.

Speaker 1

Okay.

Speaker 5

So that and that's probably all of the sort of shutdown costs or net I should say net shutdown costs because you have some assets and inventory to sell. Best way to think about the cost of shutting this down. Yes. Okay. Well, that's good.

Speaker 5

Great. And that's it. Thank you very much.

Speaker 1

Okay. Thanks, Chris.

Operator

We'll now take a follow-up from Mike Jennings with Angelo Gordon.

Speaker 4

Hey, guys. Just one last point on the fires. 1st, glad to hear there was no injuries. Was there any damage to facilities or there could be any knock on impact in Q3 or future quarters, be that either Positive from insurance proceeds or negative from kind of increased impact on sales or repair costs?

Speaker 2

No, nothing, I mean, what happened, I mean, it's bad that it happened, but thanks, Scott. We were we have systems in place. So we had a couple of little damage. We had downtime and all that, but it's all done. And this is the $3,000,000 No spillover, no insurance, all that.

Speaker 2

It was below the deductible and all that. So this is all taken care of and you should not see anything there.

Speaker 1

And we have fire suppression systems and so on. Yes, Mike. There's no damage to the facility. Yes. Then it's all repaired.

Speaker 2

It's all done.

Speaker 4

Excellent. Thank you.

Operator

It appears there are no further telephone questions. I'd like And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.

Powered by Quartr