Glatfelter - Q2 2023

Transcript

Operator (participant)

Good day, and welcome to the Glatfelter'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 Shettigar. Please go ahead.

Ramesh Shettigar (CFO and Treasurer)

Thank you, Allie. Good morning, welcome to Glatfelter's 2023 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 slides. We will also make forward-looking statements today that are subject to risks and uncertainties. Our 2022 Form 10-K 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. I will now turn the call over to Thomas.

Thomas Fahnemann (CEO)

Thank you, Ramesh. Hello, everyone, and welcome to Glatfelter's second 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 second quarter as our results fell below expectations. More importantly, I will highlight the outcomes we delivered during the second quarter with our turnaround strategy to address these challenges. 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 million when combined with machine downtime to manage inventory levels. Second, the team diligently worked to deliver approximately $7 million of earnings through our turnaround strategy, with results attributed primarily to price increases and fixed cost reductions.

We also experienced two fires, one in Fort Smith, Arkansas, and another in our Asheville, North Carolina, facility that resulted in an approximate $3 million loss of earnings during the second 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. Glatfelter has benefited from top-quartile safety performance over many years of benchmarking and refinements to our global safety program, and we remain committed to incorporating even more stringent fire prevention measures in the months ahead. In addition, we had another approximately $3 million negative impact resulting from foreign exchange effects, customer financing, and other items.

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 glassine 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 million in the second quarter.

As I reflect on our performance this quarter, including the positive results we delivered with the turnaround strategy, had it not been for the continued macroeconomic and operational challenges impacting our bottom line, our second quarter results would have been in line with the first quarter 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 million-$110 million in light of the market weakness and accelerated deterioration of Oberschmitten's financial performance following the closure announcement. I will now turn the call over to Ramesh.

Ramesh Shettigar (CFO and Treasurer)

Thank you, Thomas. Slide 3 of the investor presentation provides a summary of our second quarter results. Adjusted EBITDA was $17.3 million, or approximately $10 million lower compared to the second quarter 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 million, mainly related to the fire in Fort Smith that led to downtime and unexpected maintenance costs. Composite Fibers' EBITDA was lower by approximately $6 million, driven by the negative effect of Oberschmitten, weaker demand, and lower production to manage inventory levels. Spunlace demonstrated EBITDA improvement of approximately $1 million, despite the impact of the fire at Asheville. Slide 5 shows a summary of second 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 million 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 arrangements, fully offset the higher cost of raw materials and energy. 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 $2.1 million 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 $5.5 million, as we successfully implemented multiple pricing actions and energy surcharges in 2022 to combat inflation. 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 $3.8 million versus the same quarter last year and were 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 2023. Operations and other was unfavorable by $5.9 million, driven by lower production to manage inventory levels. Of the $5.8 million year-over-year EBITDA decline for the segment, $4.3 million was from Oberschmitten's 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 second quarter results for the Spunlace segment. Revenues were down 19% on a constant currency basis, driven by lower shipments of 22%, but partially offset by higher selling prices of approximately $2 million, coming from actions taken to address inflation.

The volume decline was primarily in the critical cleaning and hygiene categories. 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. Actions taken as part of the turnaround strategy to improve operations and reduce headcount created a year-over-year benefit of approximately $4 million.

These benefits were offset by the fire in Asheville and lower production to control inventory as a result of weaker demand. Slide 8 shows corporate costs and other financial items. For the second quarter, corporate costs were slightly lower versus the same period last year. Slide 9 shows our cash flow summary. In the second quarter of 2023, our adjusted free cash flow was lower by approximately $10 million versus the same period in 2022. Earnings were lower by approximately $10 million, and cash interest was higher by approximately $8 million. These unfavorable items were partially offset by lower cash taxes, as well as from a one-time refund of about $7 million received in Q2, related to the COVID-19 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 3.4x as of June 30th, and we had available liquidity of approximately $145 million at quarter end. Slide 11 shows our 2023 year-to-date EBITDA run rate normalized for certain items outside our control, but those that have been addressed through our turnaround strategy. When adjusting for Oberschmitten's results and the two fires, our first half performance for the year would have been better than as reported. As it relates to Oberschmitten, we are expecting operations to cease in the third 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 million in the second quarter, and we do not expect any costs to carry over into the third quarter.

Slide 12 is a summary of our EBITDA and cash flow guidance for 2023. Q2 EBITDA was below our expectations, largely due to Oberschmitten'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. 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 Oberschmitten 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 million-$110 million.

Regarding cash flow items, we expect the following: cash interest of approximately $60 million, which includes the latest projection of interest expense from the refinancing completed in the first quarter. Capital expenditures to be between $30 million and $35 million, or approximately $5 million lower than our prior guidance. We expect approximately $50 million of cash usage from working capital and turnaround strategy cash costs combined. This is approximately $20 million higher than our prior guidance and is driven by the expected severance costs related to the Oberschmitten shutdown and adverse accounts payable impact from shorter payment terms as a direct result of our credit rating downgrade last year. Finally, cash taxes are expected to be between $15 million and $20 million, or approximately $5 million lower than our prior guidance. This concludes my prepared remarks. I will now turn the call back to Thomas.

Thomas Fahnemann (CEO)

Thank you, Ramesh. As we look forward to the remainder of the year, there are a few highlights that are important to shaping our overall performance in the five remaining months of 2023. First, I'm pleased to share that Boris Illetschko has officially joined the company on August first, as senior vice president, chief operating officer. We previously announced Boris's decision to join Glatfelter 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 Glatfelter. Boris' arrival is significant as this completes the establishment of our newly expanded senior executive team. With Boris, we will have an additional talented leader whose sole focus will be to further integrate our global supply chain, commercial, and innovation functions.

He will strengthen our new product management function in its early formation to drive improved financial performance. Given Boris's extensive background 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. Second, 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 is to demonstrate an uncompromising partnership with our customers without foregoing profitable margins.

This requires us to act with intensity when executing the six key initiatives of our turnaround strategy, which the team continues to do exceptionally well. 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 where 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 real-time market insights.

As I approach my one-year anniversary with Glatfelter, I continue to believe the company's full potential has not yet been realized, and I remain very excited about the prospects of this business as our markets improve over time. 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 (participant)

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is released to allow your signal to reach our equipment. Again, it is star one if you'd like to ask a question, and we'll pause just for a moment to allow everyone an opportunity to signal. We'll go ahead and take our first question from Josh Wool with Carlson Capital. Please go ahead.

Josh Wool (Analyst)

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

Thomas Fahnemann (CEO)

Good morning.

Ramesh Shettigar (CFO and Treasurer)

Good morning, Josh.

Josh Wool (Analyst)

I, I want to start with a few questions on volumes and the destocking headwinds, 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 Oberschmitten closure. But starting with volumes, how did your volume performance vary by month in Q2, or at least entering the period versus exiting it? What picture is emerging of where inventories sit throughout the channel, both at your customers and if you have the visibility at the end, retailers as well?

Thomas Fahnemann (CEO)

Okay. Yeah, I think I 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. There, where we're still seeing destocking is going on. In the other areas, I would say it really has slowed down, and it's more demand issue. Now, if I look at and go through the single segment, feminine hygiene, the volumes month-to-month is pretty much flat. If I look at April versus June, it's pretty much the same. And here, the weakness in Q2 was really a combination of destocking and also, one of our biggest customer had his fiscal year end in June.

That's always then a little bit of a weaker, weaker quarter. adult incontinence, it's kind of the same picture. If we look at the really yearly volume, we have one big customer, and there's also still destocking going on. That was a big kind of 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. Also here, month-over-month is pretty much flat. If I go to the next segment, tabletop food services, I would say that, I mean, if we look at the month-to-month volume development, it's increasing. From April to May, we saw an increase. From May to June, we saw an increase.

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... So we are seeing that now, and the volume is really increasing. What we're not seeing, there's a lot of destocking. 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 wipes business, also the wipes volume month-to-month is relatively stable. There's no real, I mean, ramp up, relatively flat. If I go to the home care area here, we are seeing a little decline from month-to-month.

Again, it's very difficult now to predict what Q3 will bring. If I look at July, I mean, it's not, it's not substantial. This business had substantial growth during COVID, because a lot of people were more concerned and sensitive about hygiene and all this. This business is really from a volume standpoint, from 2020 to 2021, and now if I look at 2023, it's going down. Coffee, the coffee area, overall demand is the same. What we are seeing is a little bit of a shift from pads to filter coffee because it's cheaper, this is mainly happening in Europe. I would also say for the coffee, the destocking effect, I think, should be done in Q2. We don't expect anything there in Q3.

However, the pad production, it's down because more filter coffee and people are more price sensitive, and they're moving more toward the filter coffee. Tea, if we look at the tea bags, here, we really saw some major inventory build up in 2022 because the concern of inflation, curtailment for, and energy. Here we are still in the middle of destocking activities. That's probably still continuing on into Q3. 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. I mean, a lot of do-it-yourself projects and all this, and this market has really declined.

If I go to the next segment, wallcovering, I mean, the only influence there is really the sanctions imposed on Russia. 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. Electrical and pasting paper. The thing here is also, we don't think there's a lot of destocking going on. I think that's already taken care of in Q1 and early Q2. This is really the underlying demand, what 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. We are seeing first successes here. The last business, I would say, yeah, metallized business. Sorry, George. The metallized business has been relatively stable month-over-month, but overall demand is down in, in, in a big way.

Josh Wool (Analyst)

Okay.

Thomas Fahnemann (CEO)

That's kind of, this is... Question is, are they using a different product? 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. And, and, and we are hit as well. This hopefully... Sorry for, but I think you really have to look at it-

Josh Wool (Analyst)

No, no.

Thomas Fahnemann (CEO)

In the segments, so.

Josh Wool (Analyst)

... It's, the color's actually helpful, and I know the, the destocking has been an industry-wide phenomenon from everything from food to, you know, essential consumable products, like what you sell. maybe two more brief questions on the volume side. How much of, 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. Then the second question is: how much has the mix of private label changed over the last, let's call it, year, year and a half? And how has this impacted your margins, if at all?

Thomas Fahnemann (CEO)

Yeah. Okay, to your first question, Josh. Yeah, I mean, what we are seeing is raw material prices are coming down. The, the energy prices are kind of, I would say, normalizing, although they are not back to where we were pre-inflation. Customers are sure looking at the following quarter, where we have quarterly pricing, and said, "I mean, what's happening in the next quarter?" Absolutely. I mean, this is happening, but this is not a lot of volume, so we are catching up, and it's always a question of how to kind of schedule and all this. Yeah, I mean, absolutely right. Customers said, "I'll wait until July, because I'm expecting July prices will be lower than June prices." That, that's, that's, that's very clear. Your question on branded business.

What we're seeing right now, and is that the US is mainly unchanged. The branded business in the US is pretty much where what it was. The same with the, with the, white label business. 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 US.

Josh Wool (Analyst)

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

Thomas Fahnemann (CEO)

Correct. Correct. Yes.

Josh Wool (Analyst)

Okay.

Thomas Fahnemann (CEO)

No, no impact.

Josh Wool (Analyst)

Okay, and then moving over to, to the margin side, I mean, I guess, I'm gonna give you kind of the big picture, before I give you my detailed questions. I'm trying to kind of understand the core margin performance and the trend, you know, exiting the second quarter. 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 say $52 million 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, you know, 6.7%. Very similar margin, and maybe destocking was $7 million, so that would be, you know, a 1% impact.

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

Thomas Fahnemann (CEO)

Yeah, Josh, I would like to maybe look at it from a different way. If, if you look at our second quarter performance and the $7 million I mentioned, which is really market driven, the weak market. This $7 million, just the loss of volume, was around about $3 million, but the fixed cost absorption, which we had, was $4 million, okay? Which we didn't have actually in last year. If you add that up, I mean, that's $7 million, and this is the biggest issue, which we're really impacting our, our, our, our earnings here, plus the one time or non-recurring issue or issues we have addressed, like Oberschmitten, the, the vendor financing, we have addressed all that.

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 million, we had to take in order to manage our working capital and our cash. To answer your question, I think it's a little bit higher than that.

Ramesh Shettigar (CFO and Treasurer)

It's getting there, Josh.

Thomas Fahnemann (CEO)

It's getting there.

Ramesh Shettigar (CFO and Treasurer)

You know, you're right. We have said that, you know, in, in, in ideal situation, a business in the nonwoven space with the portfolio that we have, should be operating between 10% and 15% EBITDA margins. We've been in that ZIP code before. We're clearly challenged because of spunlace and because some of the market dynamics that we've seen here recently. Yes, we're, we're, we're making our way up there very gradually. What you may have seen, you know, 7% last year, could very easily translate to, you know, 8%, 8.5% this year.

Then continue to make progress as we take more cost out, as the turnaround strategy traction kicks in, as we have, you know, eliminated some of these one-off distractions, whether it's OBE or the, the Oberschmitten fire, or the Oberschmitten topic or the fires and so on. This should help become accretive to our EBITDA margin profile going forward.

Josh Wool (Analyst)

Okay. so maybe, you know, let's start from that kind of 8-8.5% level. As we think about the cost trends going forward, over the last 6 months...

Ramesh Shettigar (CFO and Treasurer)

Yeah

Josh Wool (Analyst)

... you know, softwood pulp prices, fluff pulp prices, have declined substantially, I think both in, in North America and Europe. Remind us how much of your cost of sales is raw materials, or even pulp, if you can be that specific? When do you expect to see the full impact?... of lower pulp in both, you know, as it comes into your inventory, but also as it gets reported into your cost of sales. 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 gonna come in Q3. Kind of remind us what we should expect across both the airlaid and, or maybe more composite fibers, where you don't have the pass-throughs.

Ramesh Shettigar (CFO and Treasurer)

Okay. I mean, if I look at, at pulp, softwood, and fluff pulp, and it depends a little bit on the product, but the raw material is around about 50%-55% of COGS, cost of goods sold, okay? An average across the segments. One of the issues is, and we have seen that, I mean, absolutely, wide 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 fluff pulp is coming down more, but this was a little bit of a time lag.

Normally, what we have is, when prices are coming down, you can say it takes us probably 2-3 months because of our raw material inventory, which we have to keep in, in, in all of our sites, to really see the real impact. I would say it's probably 8-12 weeks, then we see it as well. Okay. Question on the pass-through. Yeah, I mean, we have round about, be precise, in Airlaid, round about 30% is not on the pass-through, and this is mostly the smaller tabletop customers, where we don't have a contract, but they're buying from us.

They are very price sensitive, and 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. To answer your question, around about 30% is not on a, on a, on a pass-through in Airlaid and around about 50% in CF. Yeah. Where we have to manage-

Josh Wool (Analyst)

Okay.

Ramesh Shettigar (CFO and Treasurer)

Month by month.

Josh Wool (Analyst)

Maybe similar question on, on energy. Maybe first, the percentage of your cost of sales that is energy. I think years ago it was, call it, 8%-10%. That was before the, the squeeze in, in Europe gas prices in 2021. What is it today?

Thomas Fahnemann (CEO)

Mm-hmm.

Josh Wool (Analyst)

When do you expect the recent declines in energy to phase into margins? For instance, will you get the full impact in Q3, or will it be Q4?

Thomas Fahnemann (CEO)

I mean, if you look at, at, at Glatfelter as a whole, 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, we were around about at 8%. We went all the way up to 11% during the height 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. More importantly, if you look at CF, 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, but still, today, in today's world, at 14%-15%, despite the fact that energy prices came down.

and, and we were before, historically, in the range of 11%-12%, and we are still at 15%. Last year, we peaked at round about 17%, almost 18%. Again, we are going in the right direction, but we are by far not way back to pre-infla- inflation levels.

Josh Wool (Analyst)

Okay. And then maybe kind of stepping back, considering both the, 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, you know, in 2024 and beyond, while also meeting some customer expectation of relief on their cost of sales, which seems to be, you know, more of an imperative, just listening to, to some of the, the brand owners today, even versus a couple quarters ago?

Thomas Fahnemann (CEO)

Okay. Yeah, we have taken all the, 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. I would say we are, we are really, really there. The biggest problem we have and what it takes is the market weakness right now. Whenever the volume comes back, and it will come back, it's just a question of time. Again, I can just say the volume, loss of volume cost us, from a customer standpoint, round about $3 million, and fixed cost absorption, $4 million. We're talking about $7 million just in Q2. Whenever that comes back, the margins will be where they need to be.

Even now, if you look at the details in, in one of the things, I mean, even with some losses, we overcompensated this with pricing. Okay. Sorry, Josh, I didn't want to interrupt you.

Josh Wool (Analyst)

You're no, perfect. I'm, I don't want to dominate the call. I have one final question just around cash flow. Given that your guidance for working capital 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, in the second half, or, or I guess maybe said differently-

Thomas Fahnemann (CEO)

Yeah.

Josh Wool (Analyst)

Slide 9, you have the cash flow bridge. I think if you combine working capital and other, it's around $63 million of cash usage in the first half. Should I compare that to your guidance of $40 million-$50 million, you know, with the implication being that working capital will be a $15 million-$20 million source of funds in the second half? Is that, is that kind of the right analysis?

Ramesh Shettigar (CFO and Treasurer)

Yes. Yep. Yes, 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. Like I said, the, the, the two 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 million hit. You know, $10 of that is coming from the Oberschmitten shutdown, and $10 of it is coming from just AP headwinds because of payment terms. Setting that aside, the, 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 correct.

Josh Wool (Analyst)

Perfect. Okay, well, I'm gonna get back in the queue, but definitely appreciate all the color and I know it was a difficult quarter, but you know, keep on focusing on the things you can control. I appreciate it, guys.

Ramesh Shettigar (CFO and Treasurer)

Thank you.

Thomas Fahnemann (CEO)

Thank you.

Operator (participant)

Our next question will come Mike Ginnins with Angelo Gordon. Please go ahead.

Mike Ginnins (Partner in the Credit Solutions Group)

Morning, Thomas and Ramesh.

Ramesh Shettigar (CFO and Treasurer)

Morning, Mike.

Thomas Fahnemann (CEO)

Good morning, Mike.

Mike Ginnins (Partner in the Credit Solutions Group)

Look, I think a lot of the points you raised on destock are fairly similar to what we've heard from, from materials peers more broadly. I, I guess I want to contrast that with, you know, recent commentary from consumer products companies, which seem to suggest that after the last 2 years of kind of, price-led, top-line growth, that, that there's gonna 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, where we're hearing, you know, and again, this is primarily related to the airlaid material side. What kind of visibility do you guys have looking out, you know, back half of the year into 2024 on volume recovery off of, you know, putting aside any destock or restock?

Thomas Fahnemann (CEO)

Yeah, I, I mean, I would, I would, I would tend to agree with you, Mike. We are also seeing some market improvements sequentially. We have, and then talk about Airlaid, we expecting volumes in the second half being more and bigger than in the first half. 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, in, in our CF business, it's, it's, it's really important, which product are you selling, because they're different margin profiles.

We think our inclined wire products are more profitable, and have a much better fixed cost absorption than wallcovering or the metallized products. We are also seeing and expecting that the inclined wire products are improving in the second half compared to the first half. For us, to be honest, right now, it's really the, the biggest focus for us is the taking all the inflationary pressures aside, we need to really go back, like I mentioned with, with Josh's question, we need to go back to pre-inflation margins. We are now on our way down, with energy prices coming down, raw material prices coming down, and we are gonna leverage this because we need to also make sure that we are not missing the boat here.

We need to also be on our toes to make sure we hit the right price. You're absolutely right, it'll be a volume game and not a price game.

Mike Ginnins (Partner in the Credit Solutions Group)

Okay.

Thomas Fahnemann (CEO)

Yep.

Mike Ginnins (Partner in the Credit Solutions Group)

Perfect. Thank you. Then, maybe one follow-up. I just wanted to make sure I understood your response correctly to one of Josh's questions. When we were talking, when he was asking about the branded versus unbranded, what is the impact to us of a customer? You know, this trade-down effect that we're seeing in the market, if any?

Thomas Fahnemann (CEO)

To be honest, for us, it's, it's, it's, it's almost nothing because we are, we are serving both sides of the equation. We are serving customers which are providing their products to the to the branded business, and we are serving customers who have the non-branded business. There's no big impact for us.

Mike Ginnins (Partner in the Credit Solutions Group)

Perfect. Thank you.

Thomas Fahnemann (CEO)

No problem.

Mike Ginnins (Partner in the Credit Solutions Group)

I'll hop back in the queue.

Thomas Fahnemann (CEO)

Okay. Okay, thank you.

Operator (participant)

As a reminder, it is star one to ask a question. We'll go ahead and take our next question from Roger Spitz with Bank of America. Please go ahead.

Roger Spitz (Research Analyst)

thanks very much. regarding the, the benefit-

Thomas Fahnemann (CEO)

Go ahead.

Roger Spitz (Research Analyst)

of lower pulp price, lower pulp prices, will you, you know, see, I mean, eventually see all the benefit, or has there been any change in sort of your contracts with some or of your customers, where you will not be able to see that benefit as pulp prices fall?

Thomas Fahnemann (CEO)

We'll see the benefit. There are no changes or to the negative in our contracts, we will see the benefit, but as I mentioned, there's a little bit of a time lag. Other than that, we will see the full benefit of that.

Roger Spitz (Research Analyst)

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 million-$50 million of working capital and cash restructuring. There are no other cash items, which then implies at the midpoint of the range, OCF plus CapEx is? -$50 million? Is that the right way, or are there other cash items?

Ramesh Shettigar (CFO and Treasurer)

That is, no, you, you, you have it. Yep, you have it exactly right, Roger. It, it would be a negative $50 of a net cash flow.

Roger Spitz (Research Analyst)

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

Thomas Fahnemann (CEO)

Yeah, sure. Sure. Sure. Number one, I mean, again, at that point in time, we were trying to really divest Oberschmitten. As Ramesh mentioned, and I mentioned earlier, we, we got pretty close, but unfortunately, it didn't work. 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 Oberschmitten. The market is now even getting worse, this, this makes no sense, so to wait. There's another business where we might think about it, but today is not the right market to do that, to be quite honest. We are not under pressure, so we would like to really make sure that we are not rushed into anything. We have another asset, and again, very minor, not changing kind of the overall company.

It's, it's really some assets on the, on the.

Ramesh Shettigar (CFO and Treasurer)

On the periphery.

Thomas Fahnemann (CEO)

on the periphery of our business. It's not really core, but right now, to be honest, is not the right time to do that, and that's why we kind of put these activities to pause. Whenever the market comes back, we'll be back on there and working on that.

Roger Spitz (Research Analyst)

Got, got it. In terms of the Oberschmitten, the, the lingering cash impact. Now, maybe some of that's in your revised EBITDA guidance, maybe some of that is in your.

Ramesh Shettigar (CFO and Treasurer)

Yeah

Roger Spitz (Research Analyst)

The working capital and other cash flow item outflow of $40 million-$50 million. You gave the Q2 number. What do you expect to see in the next few quarters, dollar-wise for that wind down of Oberschmitten?

Ramesh Shettigar (CFO and Treasurer)

Yeah, I mean, so Roger, yes, you're right. The total impact of the cash costs related to the shutdown is reflected in our, in that working capital and turnaround strategy cash cost guidance. You know, this is the point we're trying to make, which is we had, you know, call it $4.3 million worth of, or you know, roughly $4 million worth of negative earnings coming from Oberschmitten in the second quarter. We're going to be in a wind down here for, you know, the next quarter or so. We're hoping to cease operations in, by the end of the third quarter. We still have, you know, not just the losses coming, but then as part of the wind down, a monetization of the assets.

you know, there are some water wells there, there's inventory and all of that, that we need to clear out and try and monetize to reduce the, the net financial impact from this deal. We're hoping that with ceasing operations here in the third quarter, we can stop the bleeding, you know, along the lines of what we saw in the, in the second quarter, and then by the fourth quarter, we're just finishing up any last orders, and then we shut the place down.

Roger Spitz (Research Analyst)

Got it.

Ramesh Shettigar (CFO and Treasurer)

Still, still, still a bit of a moving target, Roger, I will say. We're taking all of that into account when we are bringing down our overall guidance for the year. You can kind of do the math, right? If year to date, we've lost about $6 million from Oberschmitten, and I'm bringing down my guidance by 10, that should give you a rough idea of how much more is left to go on the P&L side, in our view.

Roger Spitz (Research Analyst)

Okay, that's probably all of the sort of shutdown costs, I should say net shutdown costs, because you have some assets and inventory to sell. Best way to think about-

Ramesh Shettigar (CFO and Treasurer)

Yeah

Roger Spitz (Research Analyst)

the costs of shutting this down.

Ramesh Shettigar (CFO and Treasurer)

Yeah.

Roger Spitz (Research Analyst)

Okay. Well, that's good. Great. That's it. Thank you very much.

Thomas Fahnemann (CEO)

Okay. Thanks.

Ramesh Shettigar (CFO and Treasurer)

Thanks.

Operator (participant)

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

Mike Ginnins (Partner in the Credit Solutions Group)

Hey, guys, just one last point on the fires. You know, first, glad to hear there was no injuries. Was there any damage to the facilities or 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?

Thomas Fahnemann (CEO)

No, no, nothing, Mike. I mean, what, what happened, I mean, it's, it's, it's bad that it happened, but thank God we have systems in place. We had a couple of little damage. We had downtime and all that, but it's all done. This is the $3 million.

Ramesh Shettigar (CFO and Treasurer)

Yeah.

Thomas Fahnemann (CEO)

No spillover, no insurance, all that. It was below the deductible, and, and all that. That's all taken care of, and there should, you should not see anything there.

Ramesh Shettigar (CFO and Treasurer)

We have fire suppression systems and so on.

Thomas Fahnemann (CEO)

Yeah, yeah.

Ramesh Shettigar (CFO and Treasurer)

Mike, there's no damage to the facility.

Thomas Fahnemann (CEO)

Yeah. It's all repaired.

Ramesh Shettigar (CFO and Treasurer)

Yeah.

Thomas Fahnemann (CEO)

It's all done.

Mike Ginnins (Partner in the Credit Solutions Group)

Excellent. Thank you.

Thomas Fahnemann (CEO)

Okay.

Operator (participant)

It appears there are no further telephone questions. I'd like to turn the conference back over to our presenters for any additional or closing comments.

Thomas Fahnemann (CEO)

Well, thank you for participating on our second quarter earnings conference call. We'll speak with you again next quarter.

Thank you.

Operator (participant)

Once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.