Magnera Corporation (MAGN) Earnings Call Transcript & Summary

Thank you. Thank you for standing by and welcome to Magnera's Third Fiscal Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Robert Weilminster, EVP, Investor Relations. Please go ahead.

Thank you, operator, and thank you everyone for joining Magnera's Third Fiscal Quarter 2026 Earnings Call. Joining me are Magnera's Chief Executive Officer, Curtis Begle, and Chief Financial Officer, James Till. Following our prepared remarks, we will have a question-and-answer session. [Operator Instructions] A few things to note before handing over the call. On our website at magnera.com, you can find today's press release and earnings call presentation under Investor Relations. You can also go directly to ir.magnera.com to review the investor presentations from our recent conference attendance. Our annual report and proxy statements with the SEC can be found on our website under Investor Relations. As referenced on Slide 2 during the call, we will be discussing certain non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measures in our earnings press release and in the appendix of the presentation available on our website. Additionally, a reminder that we will make certain forward-looking statements. These statements are made based upon management's expectations and beliefs concerning future events impacting the company and, therefore, are subject to risks and uncertainties. Actual results or outcomes may differ materially from those expressed or in our forward-looking statements. Some factors that could cause the results or outcomes to differ are in the company's latest SEC filings and our news releases. These statements speak only as of today and we undertake no obligation to update them. I will now turn the call over to Magnera's CEO, Curtis Begle.

Thank you, Robert. Good morning, and thank you for joining our call. This quarter's strong performance reflects the organizational transformation initiatives we executed following our merger, as well as the proactive initiatives taken by our global teams. Magnera leadership set high expectations for action-oriented execution, operational rigor, and performance guided by our purpose, promise, and beliefs. And the team continues to deliver against those expectations despite a volatile macroeconomic backdrop. I am pleased to report that we produced our strongest earnings quarter as Magnera, driven by focused execution. For the quarter, revenue was $857 million with adjusted EBITDA of $99 million. Earnings grew 9% with a 70-basis-point improvement versus the prior-year quarter. Continued investment in differentiated products supported strong growth in our global wipes and infrastructure businesses, enabled by our commercial excellence discipline. Based on our performance this quarter and our outlook for the full fiscal year, we are reaffirming the free cash flow guide and moving adjusted EBITDA to the lower end of the previous guidance range. Jim will cover the details later in the call. Our earnings performance and strategic investments in essential mission-critical products continue to advance targets, our scale, and financial targets. As I reflect on the quarter's results, I'll start with focused execution. Three strategic pillars continue to drive our business: improving our cost position to create a leading global competitive chassis, winning with customers through product leadership and innovation, and strengthening commercial excellence. Our synergy and Project CORE transformation programs delivered strong savings globally. I appreciate our team's disciplined, action-oriented approach, including the difficult decisions required to drive this earnings improvement. We are also investing strategically in product lines and higher growth end markets that require product expertise. Our wipes portfolio grew across all 4 key end market applications: disinfecting, personal care including baby, moist toilet tissue, and specialty industrial. A highlight of the quarter was the launch of our new Universa product line, which I will discuss shortly. In infrastructure, we experienced growth in house wrap and accessories as we strategically expanded our national supply partner network in North America. Outside North America, infrastructure grew with continued strength in cable wrap and sustained growth in air and liquid filtration. At Magnera, the strength and resilience of our businesses are grounded in the deliberate balance we have built across our consumer solutions and personal care portfolios. Our products span tea bags, coffee filters, wipes, dryer sheets, filtration, baby diapers, adult incontinence, and medical garments, categories anchored in everyday non-discretionary consumer demand. This balance is by design. It reflects a broad platform of 44 global manufacturing facilities and technology capabilities that position Magnera as a global leader supplying critical materials for customers' products in key end markets. When 1 end market faces cyclical pressure, the resilience of the broader portfolio provides ballast, supporting stable earnings, diversified customer exposure, and the flexibility to invest through the cycle. Our leading polymer and fiber technologies, backed by an extensive patent portfolio, provided a broader range of and greater customer choice, strengthening our reach in both developed and emerging markets. The culmination of this balance will drive stable cash flows, volume growth, and earnings improvement. Universa is a strong example of this balance. We have 1 of the broadest portfolios of sustainable wipes solutions globally, including several leading products enabled by proprietary technology. In June, we launched Universa to deliver performance across a wide range of customer needs. Our core offerings are designed for daily maintenance, facilities cleaning, and janitorial applications where fast absorption and operational efficiency are essential. Universa Plus, using our proprietary spin-lace technology, delivers a strong, absorbent, cloth-like feel for industrial and general purpose cleaning tasks. Universa Max provides low-linting and superior abrasion resistance for demanding environments that require durability and reliability. This consolidated range of industrial wipers brings together the trusted performance of our existing Chicopee and Sontara brands. Before I turn the call over to Jim, I want to briefly recap the progress we have made since Magnera was created less than two years ago. In our first year, we set out bold ambitions to better the world with possibilities made real. We built a world-class team, launched our new brand, established a foundation for an integrated organization, and continued to provide mission-critical products to our customers. We will exit our transition services agreement, including migration off the legacy Amcor ERP systems, before the end of the calendar year 2026. Since inception, we have closed a complex merger transaction, integrated swiftly, and focused on the priorities we can control: synergy delivery, footprint improvements through Project CORE, sales mix improvement, and strengthening our balance sheet with our strong free cash flow generation. Our demonstrated ability to execute against these priorities reinforces Magnera's positive trajectory as a durable, proven business positioned to create shareholder value. I will now turn the call over to Jim for a comprehensive financial update.

Thank you, Curtis, and good morning, everyone. Turning to our financial results on Slide 11. We delivered a solid third quarter that was generally in line with our expectations. This quarter represents the first period in which we realized the full run rate benefits for both Project CORE and our merger synergies. Those benefits were partially offset by continued inflationary pressures across key raw material inputs. Even with these headwinds, our results demonstrated our disciplined operational execution that has been a hallmark of our organization since the merger. Over the past two years, our teams have remained focused on integrating the business, simplifying our operating model, and driving sustainable cost efficiencies despite a highly dynamic macroeconomic environment. Their execution has positioned us well to navigate inflationary pressures while continuing to strengthen our long-term earnings power of the company. For the quarter, net sales was $857 million. Solid performance across our wipes and infrastructure product categories drove organic sales growth of 1%, reflecting stable customer demand and effective commercial execution. As we discussed in our previous call, raw material inflation accelerated meaningfully during the quarter. Our commercial organization responded quickly by implementing pricing actions across the portfolio. While these actions substantially offset the increase in input costs, there was naturally some timing lag, particularly in our Rest of World operations, where the price realization slightly trailed the Americas segment. We expect those pricing actions to continue flowing through as we move into the fourth quarter. Despite these external cost pressures, adjusted EBITDA increased to $99 million, representing a 9% improvement compared to the prior-year quarter. This performance reflects the benefits of Project CORE, synergy realization, disciplined cost management, and the resilience of our operating teams around the globe. Turning to cash flows, free cash flow for the quarter was negative, as expected, but came in better than our internal forecast. Throughout the quarter, our teams proactively reduced working capital levels by managing inventories, receivables, and purchasing activities to help offset the impact of higher raw material costs. These actions demonstrated both our agility of the organization and our continued focus on disciplined cash management during periods of elevated volatility. Moving now to our segment performance, beginning with Americas on Slide 12. Revenue was essentially flat in Americas compared to the prior year. Organic volume growth of 1% led by continued strength in our infrastructure product categories, together with higher selling prices implemented to recover raw material inflation, was largely offset by planned portfolio and product mix actions associated with Project CORE. Adjusted EBITDA Americas increased an impressive 16% to $71 million. The improvement reflects several factors, including full run rate realization of Project CORE benefits, continued merger synergy capture, improved manufacturing efficiencies, and the recovery from the winter storm disruptions that impacted our second quarter results. Overall, the Americas business continues to execute well with strong operational performance and disciplined commercial management. Turning to the Rest of World segment on Slide 13, revenue increased modestly compared to the prior year as higher selling prices and continued strength in both our wipes and infrastructure categories was more than offset by demand softness across Europe, where macroeconomic conditions remain challenging. Adjusted EBITDA declined slightly year-over-year. Continued operational improvements and merger synergies were more than offset by inflationary pressures that moved through the region faster than the pricing actions could fully recover during the quarter. While Europe remains a dynamic operating environment, our regional leadership teams have continued to respond decisively. They're implementing pricing initiatives, strengthening customer engagement, optimizing manufacturing operations, and maintaining a disciplined cost control to preserve profitability while positioning the business for improved performance as market conditions stabilize. Now, turning to our guidance, based on our performance year-to-date and our current outlook, we are reaffirming our free cash flow guidance of approximately $90 million to $110 million for the full year. Cash generation remains a key priority for the company, and we remain confident in our ability to deliver on that commitment. With respect to adjusted EBITDA, we now expect results to finish toward the lower end of the previously communicated guidance range. While operational execution remains strong and synergy capture continues to track ahead of our expectations, we believe the updated outlook appropriately reflects the persistence of inflation pressures and continued macroeconomic uncertainty. We ended the quarter with approximately $575 million of available liquidity, providing us with significant financial flexibility to support our strategic priorities. Our balance sheet continues to strengthen, and our liquidity position enables us to continue investing in the business while maintaining a disciplined capital allocation framework. Looking ahead, our priorities remain unchanged. We will continue executing on Project CORE, drive operational excellence, generate strong free cash flow, and strengthen our balance sheet. Although the external environment remains uncertain, we believe the actions that we have taken over the last two years have created a stronger, more efficient company that well positioned us to deliver sustainable long-term value to our shareholders. With that, I'll turn the call back over to Curtis.

Thank you, Jim. This quarter's performance was a result of focused execution globally. While the demand environment remains muted, consumers continue to spend, favoring products that combine value with proven performance. Our company has demonstrated resiliency through the unpredictable and challenging times and we will continue to embrace every opportunity to improve the company's performance. With that, we are happy to answer your questions. Operator, please open the line for questions.

Yes, sir. [Operator Instructions] Our first question comes from the line of Gabe Hajde of Wells Fargo. Your line is open, Gabe.

Robert, good morning. Had a little bit more of a short-term question, and I'd say congratulations on the quarter, given all the volatility, especially on the raw material side. Just maybe to the extent you're comfortable commenting on sort of order patterns and cadence as the quarter progressed, and I'm just trying to understand delayed purchases or weather disruptions that kind of got pushed into the June quarter. And then from a seasonal perspective, what we kind of expect or what you're seeing maybe in July into the final quarter of your fiscal year, if there's any abnormalities or anything that you're observing from, like I said, a customer order pattern demand standpoint.

Hey, Gabe, thanks for the question. Good to hear your voice. Very consistent with what we experienced going into Q3, is what I would say, which is, again, order steady. We've been working closely with customers, and particularly those in certain geographies that had challenges receiving product due to the nature of challenges related to the war, particularly in the Middle East. But in terms of what we see from a demand outlook for the quarter, we see it to be very, very consistent. Our inventory levels are in a very good position, especially from a production standpoint. So we expect to see kind of more of the same this quarter that we saw in Q3.

Okay. And then maybe 1 medium, longer-term question. In the press release, you kind of give us this pro forma question, $405 million of adjusted EBITDA, which layers in the final synergies and Project CORE contribution. I think at the onset, that number had been closer to $445 million. I'm just, and again, I appreciate a lot's changed in the backdrop, but just maybe how you're thinking about the medium-term prospects for the business and maybe a timeframe to get to that $405 million. I appreciate you're not giving us '27 guidance, but just how to think about maybe under-recovered price cost in fiscal '26, and then residual Project CORE and or synergies. I mean, you said this was the first quarter that we kind of hit full run rate. So maybe we've got that $405 million in our sights over the next 18 to 24 months so we don't get any sort of exogenous shocks to the system.

Yes. Gabe, thanks for the question. What I would say is the teams did an excellent job in terms of going out with pricing and mirroring our flow through. Our flow through is pretty quick. Particularly in Americas, I would say that that was a net neutral for us. Now there is a couple million, as we highlighted in the commentary, in Rest of World that will flow into the fourth quarter in terms of the lag catch-up was part of your question. And then as we're looking, you know, we're not going to give 2027 guidance, but what I would say is I think we've told folks we're anticipating kind of $20 million floating over from those run rate synergies and CORE into 2027, and that remains our, we still believe that that's the case.

Okay, thank you. I'll call back and thank you. Okay.

Thank you. Our next question comes from the line of Kevin McCarthy of Vertical Research Partners. Please go ahead, Kevin.

Yes, thank you, and good morning. I was wondering if you could compare and contrast your price experience in the Americas versus the Rest of World. I think you made a comment in the prepared remarks that maybe there are some lag effects on the ROW side. And so just wondering if you would expect to catch up fully or not, or perhaps more than that in the fourth quarter.

Yes, Kevin, thanks. Thanks for the question. Good to hear from you. Yes, so what I would say is it was a very collaborative exercise with sort of all customers globally in Asia and in the Americas. We were able to push those through. So it was sort of net neutral in terms of cost versus price, which was what our intent was and was our goal in the Rest of World in Europe. As you had highlighted, there is a couple million dollars that will float into the fourth quarter as there was a bit of a lag in terms of getting those prices adjusted to reflect those increased costs.

Great. And then secondly, for Jim, perhaps, I think you affirmed your free cash flow target range, which if my memory is correct, was $90 million to $110 million. And so with, you know, 1 quarter left, would appreciate your updated thoughts on how to get there from here, you know, kind of what you're thinking about in terms of working capital, other moving parts to achieve that range.

Yep. Thank you for the additional question. It's a good question. So we obviously moved to the lower end of the range on EBITDA. The easiest offset to that will be CapEx. So we originally guided roughly $80 million. We're rolling in around $15 million a quarter, so our natural run will be around $60 million. There was a working capital use this quarter as anticipated because of the inflation. The teams did a nice job of offsetting a good portion of that. It wasn't quite as much as we anticipated because of the efforts the teams did on inventories. But what I would say is there's still work to go there in the fourth quarter. And we knew we moved on very quickly on the impacts to EBITDA, and we knew that the working capital pieces, it was going to take us the entire back half to sort of offset those increases. And so I would say it's still work to go on the working capital, but we feel comfortable with initiatives that we have in place that we'll be able to get that back in order here in the fourth quarter.

Great. Thank you so much.

Thanks, Kevin.

[Operator Instructions] Our next question comes from the line of Edward Brucker of Barclays. Your line is open, Edward.

My first one, just on these pricing actions that you've taken that seems like you've reduced the lag, you know, on these raw material pass-throughs, is that something that you worked with your customers to do that's permanent? So, we should expect that are these shorter-term lags going forward, or would you say that they would revert back over time.

Thanks, Edward. You know, as we talked about in the last call, traditionally, historically, index moves were set up for, you know, a little bit in times of just kind of steady normalization, normal shades of business. And in cases like what we experienced coming into Q3 with the rapid inflation that we were experiencing, going to customers and working with them on short-term moves to the monthly pass-through was really critical in order for us to ensure that we were neutralizing negative impact. And so, you know, there will be some cases with customers that we would keep that in a consistent basis. But, you know, we would expect in the coming, you know, coming months, quarters, years that in a more normalized environment you would revert back to quarterly index moves or bimonthly. But I would say at the very least we've shortened overall those ranges, but we're very efficient in our pass-throughs in general. It's just the amount of the increases were so significant that customers, working with customers, understood that. And we would look to, you know, if there's big drops down, that we'd work with customers on providing that, you know, that ride back with them. So again, I would say, you know, overall, as we renegotiate new contracts, our intent would be to shorten the lag up even more, but in general, I would say for us, we're extremely efficient. It's just this was unprecedented times in terms of the spike in raw materials.