Magnera Corporation (MAGN) Earnings Call Transcript & Summary

[Audio Gap] packaging as well as the chemical sectors at Bank of America and I'm pleased to host -- actually presentation and fireside chat with Magnera and have with us CEO, Curtis Begle in the audience. We'll probably get them to stand up here and CFO, Jim Till and Corporate Development and Strategy Investor Relations, Robert Weilminster. So Magnera, as most of you probably are aware, is a leader in polypropylene and fiber-based nonwovens used in wipes, diaper, tea bags, coffee pods, among many other end markets. So Magnera was separated from Berry, merged with Glatfelter.

Are we on the webcast...

Exactly. So if you have questions, if you can wait for the microphone so that everyone on the webcast can also hear. So but first, I'm going to hand over to Curt, who's going to go through some slides, and then we'll go into Q&A.

Well, thanks, Roger. We certainly appreciate not only the -- we're able to participate this year. We're a little over a year old. So the magnificent new era of materials on November 4, 2024 when we rang the bell and it's been quite a journey and quite a ride. We [indiscernible] on what a reverse stock spin-off of us and then what it means to be a public entity. And so it's been a lot of good work by the teams as we bring in the cultures together and really driving toward One Magnera culture and finding ways to drive shareholder value. I thought today, because many people in this room may or may not know what nonwovens are and what exactly it is that we do, I think once you have a chance to digest a little bit and hear our story, you'll realize that what we do are essential to everyday life. And for us, the diversification of the portfolio, not only geographically, but more importantly with our customer base and end markets really opened a lot of eyes in terms of how essential we are. So I'm not going to take a whole lot of time on the slides. We can open up to Q&A. But -- there's our legal disclaimer. Everybody talks about, guys, you're a global player, you're the largest player in the nonwoven space, so what? The big thing for us, not only is scale, scale is important from a procurement standpoint. So having the access and the flexibility of being able to qualify other raw materials with other vendors is a big part of our synergy expectation and what we've been able to begin to realize now just with the procurement power of the combined entities, both in polyolefins and also on the fiber-based products. If you think about our input costs, roughly 60% of our costs are made up of raw materials. And so that's an important thing. Now the other part of this is actually having the continuity of business supply for our customer base. So having access to vendors across the world and flexibility within our network to be able to utilize those, we really were able to shine during the COVID pandemic. And most recently, even with the onslaught of tariffs and the uncertainty of where products may go, various disruptions that happen overseas, we're able to pivot quickly and support our customers whenever they're in need of quick response. So we take great pride in that. It's a great responsibility that we have. And it gives us that stickiness that we have with our largest customers across the globe and having that continuity of business supply globally is really important to us. We are in all major geographies. So we have a heavy footprint. I'll show a slide here in a little bit in the Americas and our Rest of World segment is made up of Europe and Asia. Just a snapshot, and again, this continues to evolve and something we're very proud of. So when we established the 2 organizations together, the one thing that we wanted to make sure that we did is put the materials together that were digestible for the investor, right? So we don't want to lose anybody in the forest with all of the different applications, we mentioned a few. We do touch many different end markets and many different solutions within our customer base. We split it into 2 segments. So we have our Consumer Solutions, which now represents 53% of our total portfolio and then our Personal Care segment. Again, these are global businesses, very complementary of the 2. And if you look at where we're broken out, Americas representing close to 60% of our overall revenue. The U.S. is our largest market, and then we have a nice presence in Latin America between Mexico and then South America. Rest of world, we have a small position, and you can see that bottom right-hand corner. In Asia, we have 2 really contemporary state-of-the-art facilities that serve both personal care and the health care space and we sell to the major branded customers, U.S.-based companies as well as local supply of various family-owned businesses in the Asia region. If you look at the bottom left-hand pie chart, again, just a breakdown of where we've segmented the larger buckets of what we do. On the right hand -- top right-hand side, 20% being baby in the personal care segment. That's anything from baby diapers, for instance. So if you look at the components of baby diaper, many people don't know this, there's 12 components that make up that diaper. We make 11 of them. So 11 of the 12 solutions that go into a finished good is something that we're able to offer our customer base. And that's an important thing whenever they're looking to innovate, they're looking to find new filters and benefits within those components. We're the innovation partner to help pull those through. And that could be anything as simple as an outer cover, just a nonwoven rolled goods to some of the most specialized components of that diaper where we have laminate and elastomerics for form fit and function. Now the interesting thing as it relates to baby, it really is translatable to adult. And what we've experienced in the adult incontinence arena really post COVID, the adoption rates are up significantly. And so very strong growth figure within that segment that's offsetting any decline that you would see in baby, which is a nice balance of the portfolio. And as we look to mix up with the adoption rates that are happening and the discretionary metrics that we put in with these packages, it's becoming a little bit more comfortable for people to utilize them. And then on the left-hand side, wipes is a large franchise of ours. We do both dry wipe goods. So we have our own branded dry wipes between Chicopee and Sontara. Those are sold through distribution channels for janitorial and sanitation purposes. We also sell them into things like aerospace. So we have dry wipe disinfected wipes and then also just high polish lint-free wipes in that space. And the other large component of this is on surface disinfectant wipes. So if you think about Clorox disinfected wipes, glycol or even the private label, we're heavily into that. We have a proprietary technology called our Spinlace technology that is preferred by the consumer and very effective. And then we have just the consumer personal wipes. So many people think baby wipes just go for babies. Now how many people in here have grabbed a baby wipe and used it for something else. You see the growth there. And so that historically has had a very strong CAGR and something we're very proud on having a large scale. Infrastructure is something we're starting to highlight a little bit more because as people are trying to understand exactly what we do. Within this space, yes, we have very strong brand with our TYPAR brand in North America. That's building construction wraps. You see that multifamily homes, residential expansion, big commercial buildings. But we also have nice add-on products to give total solutions to the contractors. So it's anything from flashing tape branded under the TYPAR brand. And then we have things like soil and erosion control protection, which you see heavily in Europe, and we do some of that in the U.S. as well. So as you see the DOT going and trying to build new bridges and expansion, we work hard with all of them to make sure that we have our products front and center. Home, food and bevs, a big part of that came from the Glatfelter acquisition, heavily into tea bags, coffee filters, particularly in the single-serve coffee filtration use. We've been able to combine that with some of our technology on the polyolefin side and have high-end filtration units going into things like air cabin filtration, pool and water filtration, some blood filtration. So that's a nice growth category for us in the overall portfolio. And then I mentioned health care a little bit earlier. Health care is anything that you would see in the surgical suite. So as you look at historically washable textiles moving to more sanitary purposes with our nonwovens. We have barrier gowns and drapes to prevent from things like Ebola. We have AAMI Level 3, AAMI Level 4 gowns, which -- what does that mean? American Accreditation of Medical Device Instruments. These are some things that we really pride ourselves on being the fall and having some know-how in that space. Look, everything I talked about the essential nature of the products that we manufacture and that we sell. It is mission-critical products that we pride ourselves on, the parameters and the sensitivities that most of our customers demand and should expect. When you talk about the intimate nature of what our products actually do and the purpose that they're met with, there's quite a bit of qualifications and quality scrutiny that goes along with this. So adding machine and just trying to get into the market is not as easy as it seems within particular spaces. And that's something that we take a great deal of responsibility and pride of. So as we look to grow with our customers, it's finding those solutions not only to give them better performance characteristics, but to also identify areas that they can improve the product. So over time, you're developing the next generation of materials. Just to highlight a little bit in terms of our areas of focus and where we're looking to grow. Differentiation is a big part of our play, and it's finding those niche applications that have not only barriers to entry, but give us a leg up with our customers to go win in the marketplace and providing them with new solutions every year. So we keep the innovative pipeline pretty strong. But from overall growth dynamics, the long-term growth dynamics in both of these spaces, you have some more developed countries that are going to be the low single-digit margins and then you have some of the larger -- the emerging markets that are going to have high singles, low teen growth margin -- growth expectations for the space. So the how do all these space grows, albeit certain segments have longer supply-demand position just because of some of the investments that took place. We are very well suited and very well positioned with our customers from a geographic standpoint and a know-how standpoint. The history and the relationship we have with our customers is extremely -- so we take great pride in that. But again, as we continue to pivot that portfolio of identifying the areas where we want to win, where we choose to invest, where we choose to have that differentiation, that's been a big focus of our capital allocation. A couple of innovation highlights. Again, these are things that we look for singles, doubles and triples throughout the year. And what we work on today will be commercialized later on. So as I mentioned before, we're doing the filtration media that goes inside of the Keurig K-Cups. We also have compostable options lidding foam. So we're working with customers on that. Some of the exciting things we have in the automotive section is the need for more insulation and sound barrier, sound proofing, some of the acoustic materials. These are the areas that we're really focusing on of innovating, getting spec-ed in, once you get spec-ed in with major accounts. These are the small cost of the -- the total cost of a finished good product. So that's a big area of focus that we've recently launched some of our thermal insulation products. I mentioned the surgical suite. We have our ElastiPro Elastic materials. Again, think about that stretching material that has memory to it, but also is laminated with nonwoven in the outside for form and function. Again, a great application in the health care space and also in the personal care space. And yes, we make sustainable diapers. So if you're looking for the ability to throw it away in a compostable heap and have it break down over time, we have some options for our customers. And we are the leader in nonwoven materials for sustainable solutions. I believe we're the leader. I think I got to caveat that from a legal standpoint. But the team continues to develop and innovate, and we are the trusted partner for our major customers. I won't spend a whole lot of time here. I think the key takeaway is each of these sites, again, has some uniqueness to them. Some of them are very duplicative in terms of the footprint, which is important for our customers to have business continuity. So if one geography of the world is maybe struggling with getting material or getting product, we have the levers to be able to pull from our global network. We also have that lever to pull from global vendors for our materials to have that surety of supply, which is extremely important to us. But heavy footprint in North America, a nice footprint in Latin America and then, of course, Europe and a couple of facilities in Asia. We have -- we spent the first part of 2025, we're on a fiscal calendar really is to put the organizations together and stabilize the organization and start to realize the synergy benefit and the execution strategy behind it. So we've now finished that phase of it. And as we work into this optimization phase, that's a big part of the lift, the year-on-year lift in our earnings outlook for 2026. And then ultimately, everything we work on today from an innovation standpoint outside of the cost innovation needs that we work on, it's new product development that establish us in a good position to grow. And so we announced Project CORE last quarter or 2 quarters ago. We've been fully engaged in taking capacity out, essentially taking 5% of our global capacity out, taking actions within certain facilities, permanently shut down to narrow that long supply-demand dynamic, but more importantly, make sure that we are in the best cost position we possibly can be when that demand curve turns. And so we are well positioned today. We're taking actions on that, also part of our lift going into 2026. Just a last slide here. I think this is the last slide or near the last slide. In terms of our capital allocation, we set out deleveraging is essentially agreeable with all our major investors at this point. And so that's something that we continue to focus on, and that's paying down our debt. We recently went out with $50 million debt reduction in our term loan. So we'll continue to be opportunistic and find the best yield for us to make those debt repayments as we continue down the journey. But the free cash flow walk is here. I won't spend a whole lot of time on this slide. But in terms of our ability to generate cash, I think we've been able to prove that. We feel very comfortable with our CapEx spend in the environment we're in today. The businesses have been well invested over time and so we are still investing in growth, albeit upgrades to existing lines, not major capacity adds for at least the near term that we see. And with that, that was pretty good.

Yes. Thank you very much for that go through. So maybe I'll start it off. So you had a strong Q4 -- fiscal Q4, your stock and bonds, both up significantly from going into earnings. So it feels like the market is saying you've really begun to drive your business forward, which brings me to the first question. So since the earnings call, I'm sure you've spoken to a lot of investors, what was the feedback that you received from the investors that were pointing to drive up your stock and bonds? Was it something in the Q4 performance was you raised your 2026 guidance from -- at least from what I think was looking for it, synergy capture, free cash flow, EBITDA to free cash flow generation. What do you think investors are pointing out to say, this is why we took up your stock and your bonds?

Well, you'll need a silver bullet on that. I think there may have been a sigh of relief or at least a show -- we understand we're showing a story, right? And the ability to do what we said we were going to do and we updated and that we provided. The one thing, Roger, we didn't come off of was our initial outlook on the free cash flow guide. So we did exceed that. The team did a really nice job on procurement side of really getting some terms improved in a time frame that we didn't expect. But more importantly, I think the deleveraging initiatives and our discipline that we put in the business is starting to resonate and hopefully being rewarded and people at least looking and recognizing who we are or at least taking the time to understand who we are. But in general, I think that was part of the look that we have for the business and the confidence in the actions that we're taking. Again, a year under our belt, well on our way of exiting the TSA relationship that we have with now Amcor on the IT side, and we've been able to stand up our procurement team who has done a very nice job of execution. So again, I'd love to tell you there's a silver lining. I would have loved to have an open window of being able to buy at the levels it was at one point. But we certainly feel good about where we sit today and proud of the team for what we're able to execute in this range.

And with your -- at the midpoint, your EBITDA guidance for '26 fiscal is up 9%. Can you bridge sort of the breakdown of how that's coming through about from -- between cost savings, price/cost spread expansion, et cetera? And which are the most volatile that gets you from the bottom to the top of that range?

No, it's a great question. So [indiscernible] finished at $362 million. We have roughly $25 million of the synergy capture that will benefit us going into 2026. A lot of that work, as you can recall, was the qualification of the raw materials and the procurement practices and efficiencies inside of the facilities. So working through those inventories, having a collaboration with our customers, giving us flexibility in our network and then realizing those savings as a component of it, along with -- we've done a really good job from an SG&A standpoint of being able to offset stand-alone costs. So proud of the team there. The other part of it, we communicated Project CORE. It's roughly $15 million to $20 million of the savings that we'll experience this year. Part of it is just the timing of the negotiations with the works councils. Essentially, we're taking -- we announced one plant closure. We are taking actions in a number of facilities in terms of rightsizing those sites, taking lines out and reducing some of our labor and some of the fixed costs inside of those facilities. So that's gives bridge view in terms of where you get to the mid point now. We put that on flattish volumes globally. And what we did on the range essentially was plus/minus 4%. So if we were to experience continued sluggishness in consumer demand in certain geographies, that would drive it down it's the lower end of the range that we provided and the upside would be the positive side on the volume front. All the other inflationary metrics that we experienced in the year with wage inflation, et cetera, those are simply offset with productivity inside of the facilities outside of Project CORE.

Got it. And so in fiscal '25, your volumes -- pro forma volumes were down. I think you said 4%, 4.5% or something around there. Is there any insight on how that splits among wipes, baby, adult, infrastructure and home food and bev?

The easiest way to break that down is per geography. So the one impact that we had -- North America was positive. The big impact we had in '25 was the import pressure that we experienced in South America, which was far exceeded what we had originally anticipated. And so that pulled our overall number down for the Americas. We'll be lapping that in Q2 and we feel good about the back half of 2026 as it relates to the contract negotiations that were taking place right now in that region. Europe was roughly 4%-ish. Asia was slightly positive. So those were kind of the breakdowns of the various regions. We saw strength and continue to see strength in certain wipes categories, particularly in surface disinfecting. And then we did experience, again, a couple of nice growth categories in the beverage space, but more importantly, in infrastructure. And we typically do see that a little bit, but with some of the new innovative products can be a benefit to us.

Got it. And then South America, is that -- was the pressure mainly on diapers and wipes, the legacy polypropylene nonwoven side you came with.

So historically, that region has been primarily baby. And what we've been able to experience now is that shift a little bit more to the adult incontinence side, but we're also seeing growth in home care in South America, which traditionally had been using [indiscernible]. And so we've been experiencing some growth in the category as well. Wipes is pretty small for us in South America. It's not as large of a segment as you would see in North America and Europe.

So in terms of '26 volumes, what you were saying is flat, plus or minus, depending. It sounds like you're saying you've anniversaried the Chinese import pressure in LatAm. But are there pockets of volume growth in North America elsewhere for certain applications that you're hoping to achieve that upside on the volume growth?

Look, part of it is going after and being very intentional of where we have the right to win. The product management team that we built out is spending quite a bit of time using the right analytics, but where we have the right to win and where we have true differentiation. And so as we've been prioritizing the awards and filling up the lines of the business that we want to run first, that's been the priority. And the big thing, Roger, it's always a dangerous kind of analysis is contribution margin can feel good at the time, but that contribution margin when goes like that is not a good business. And so we've not only looked at do we have the lowest cost position and we've done everything to give this business the right to win to achieve, but it's more of how do we mix up within those lines. And so the primary focus really is how do I maximize my earnings, how do I generate the most amount of cash in this environment and continue to pay down debt, albeit while being in a position to be opportunistic where a competitor may fail or I can be very responsive to a customer who looks for something unique.

So why was LatAm more exposed to the Chinese polypropylene nonwoven imports this past fiscal year versus, say, the prior year?

Yes. Historically, it's been a pretty disciplined space. And we have, again, a long-standing relationships with our customers in that region. We enjoy the relationships of the business that we have. There was quite a bit of product that was moving around out of Asia. And again, for lack of better term, you saw some dumping. We're able to see those prices come in, the landed costs are -- and there's only so much of a premium that you can with the customers, which we do command a premium as we should. But this was a year that we simply didn't think that it was going to be at the level that it was. Now since then, it's easier said than done on executing, bringing that product in, getting it through your supply stream and not having the ability to have your vendor be responsive in a short period of time. If you have 6 to 8 weeks on the water, you work through logistics, you're not carrying a lot of inventory. That's where our position being local, having the history, having the knowledge and the responsiveness is giving us at least more productive dialogue with our customers going into 2026. The worst thing that can happen to our customers and the worst thing we can do is to not get them product when they need it, to convert on their line and to get it on the store shelf. And so as we continue to work with them and identify areas that we can bring them up a little bit, it's just proving how much more competitive angles can be used to help them win, but more importantly, keep them in supply.

Can we feel comfortable that the imports won't occur in the North America like they did in South America?

Well, North America certainly had historically tariffs have been in some of the -- you say that you're still seeing some finished goods come in. So actual full converted diapers that will come in the States even with the high tariffs, which we keep a close eye on. Our customers obviously do as well. But in terms of do we see any major disruption in the future, at this point, we wouldn't necessarily see that. And I would say that in terms of Mexico, similar story, and that's more of a port issue. I think just the overall logistics of getting products. Again, as I go back to the worst thing that can happen to a buyer is to have their plant manager call and say, where is my product. And so it's something, again, we take a great deal of pride in being able to supply our customers consistently.

Got it. And for fiscal '26, you guided working capital flat, if I'm not mistaken. So you've got at the midpoint flat volumes. Pulp prices sort of continue to fall. It looks like polypropylene prices are also falling. Given that, is there a potential working capital inflow and you're just being a little cautious on working capital being flat?

We assume flat for the year whenever we establish those targets. So again, we think happen throughout the year. So we -- it's the best line of sight that we have at this point. But yes, deflation is a good thing for all the consumers as well because those are going to get passed through to the customer, customer then in turn can pass that through on the store shelf, and we encourage everybody to buy more and change more. Change the diapers more. At your breakfast drink more coffee, drink more tea. But yes, go to the operating room as much as you can.

Okay. Look, I know you're managing an integrated business and want to get an integrated way. But can you speak about the legacy Glatfelter business, which was going into the transaction, a little bit challenged. And I don't know when you got in there, it was just to really get in there. Can you talk about what you found, what you've been able to do with some of those businesses?

Yes. Look, jumping into the combination, we weren't completely familiar with all the things that Glatfelter did because we didn't completely found in a broader sense. And so as we built the one thing that I was really excited about early on was the level of talent, not only technical talent inside of the sites, know-how and operational excellence, but talent within some of the back office, IT systems, human resources, legal, finance. We have a really strong group of individuals that built this business coming from the spin-off from Berry, have a stand-alone organization and not have to go -- now we have staff to get off the TSA, but the talent level was really strong that we felt good about. We felt that there was also some real opportunities from a procurement standpoint of having a little bit stronger balance sheet and a little more vigor in terms of going out and qualifying other vendors and leveraging the relationships that we had with them. That was important. We found that the relationships with the customers were very strong from the Glatfelter side. They were able to get dependent on. And while there is some concern about the financial condition of the organization, they needed Glatfelter. They needed the products that they were providing and services. And so that was a nice benefit of combining the 2. But more importantly, how can we use both technologies, fiber-based business, polyolefin business and come up with new hybrid technologies that will create some solutions for our customers. Look, we've found some real gems inside of the combination and really excited about the group that we picked up and the sites that we picked up as well.

Great. Actually, we are out of time. Curt, Jim, Robert, thanks for coming up here. Thanks for coming to the conference. We very much appreciate it.

Thanks for having us.