Earnings Call Transcript - MAGN Q3 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Magnera Third Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Robert Weilminster. Please go ahead.

Robert Weilminster, President

Thank you, operator, and thank you, everyone, for joining Magnera's Third Fiscal Quarter 2025 Earnings Call. Joining me, I have Magnera's Chief Executive Officer, Curt Begle; and Chief Financial Officer, Jim Till. Following our prepared remarks, we will have a question-and-answer session. To allow everyone the opportunity to participate, we ask that you limit yourself to one question with a brief follow-up then fall back in to the queue for any additional questions. 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. 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 implied 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, Curt Begle.

Curtis L. Begle, CEO

Thank you, Robert. Good morning, everyone, and thank you for joining us. During our previous quarterly updates, we spent time describing Magnera's unique position in advanced specialty materials enabled by a global position as an innovative leader with scale and a favorable geographic footprint. Last quarter, we discussed our plans to win in the market as we expand our product penetration in chosen areas of consumer experiences. Our value creation is simple: accelerate attractive revenue growth through innovation pipelines, execute targeted optimization initiatives, and deliver on our synergy commitments. We are confident in our ability to drive long-term sustainable growth. Moving to the third quarter headlines. We are pleased to confirm our original free cash flow guidance as well as the range of adjusted EBITDA communicated during our second quarter earnings call. Our team was able to deliver sales of $839 million and an adjusted EBITDA of $91 million in the quarter. Looking forward, we remain steadfast in our strategic priorities. Central to our outlook is the ongoing shift towards a growing mix of high-value differentiated products. This strategy is designed to deliver an improved margin profile and strengthen our competitive differentiation as we enhance utilization rates across our manufacturing footprint, ultimately leading to improved operational efficiency and a more cost-effective chassis. As we optimize the company for earnings growth, we have evaluated the business thoroughly and determined additional structural cost actions are appropriate to support sustainable profits. We have launched Project CORE, a Capacity Optimization and Resource Efficiency program, which will accelerate capacity rationalization plans including operational consolidation to more cost-efficient platforms. Jim will provide more details on the actions we're taking and the net financial impact targeted in executing Project CORE. Before I turn the call over, I'd like to review some key highlights on our progress in the first 9 months as Magnera. First, the dedication and spirit of teamwork displayed by Magnera team members have resulted in great outcomes in integration, commercial excellence, and cost synergies. Additionally, we have made meaningful strides in the strategic evaluation of our enterprise and solidifying priorities for our future state. The commercial excellence plan was centered on our go-to-market foundation by leveraging our wide array of product solutions versus our peer set. Through these efforts, the team has already captured some great wins, including successfully leveraging a 20-year relationship with a core hygiene account. By introducing the full suite of our airlaid feminine care solutions, we achieved a new 2026 business award. A second example comes from the expansion of our food and beverage offerings by developing an advanced food protection solution increasing the shelf life of the final product. My last example is tied to another long-term U.S.-based global customer where we have been trusted to expand our wipes business with them in Europe. We continue to build momentum in our combined commercial and innovation team to drive strategic portfolio growth. Our information technology system migration, led by our CIO and cross-functional teams, are executing the required conversions to exit our transition service agreement on schedule. In fact, there are areas of this effort already completed for certain tasks. The focus of a seamless conversion is our guiding light. We have not wavered from our net synergy commitment of $55 million in savings through 2027. Our procurement and operational task forces continue to make progress in executing alternate raw material qualifications with a priority to build flexibility in our supply base. We expect procurement and operations to deliver value this year and further accelerate cost reductions in 2026. A thorough product portfolio evaluation with a focus on identifying the technologies and product offerings that support our long-term right to win and grow profitable share is underway and will cement the appropriate actions required to enhance value creation. It will serve as a foundation for our longer strategic plan. By actively engaging with our customers in supporting their supply requirements and leaning in with our innovation efforts, we are better aligned to meet their desired product enhancement requirements. Operating with agility to navigate the near-term challenges of macro demand uncertainty and tempered consumer spending will be key to delivering long-term sustainable growth. Now I will turn it over to Jim, who will review Magnera's financial results. Jim?

James M. Till, CFO

Thank you, Curt. Before we dive deeper into the results, I want to take a moment to remind everyone that when we present our performance in comparison to the prior year quarter, we adjusted prior period figures on a constant currency basis to eliminate the impact of exchange rate fluctuations. In addition, our prior year results incorporate the full-year impact of our merger. For those interested in the detailed breakdowns, the reconciliations between the adjusted EBITDA and reported results can be found in the appendix of our earnings presentation. Turning now to Slide 12. As Curt highlighted earlier, our total sales for the June quarter reached $839 million. Notably, we experienced consistent demand in our Americas consumer solutions and Asia's personal care segments. Areas where strategic investments and innovation efforts continue to deliver positive results. These results validate the effectiveness of our targeted product development and customer engagement strategies, which continue to create differentiated value for our customers. While we faced headwinds in our South America region and general softness in our European markets, reflecting ongoing macroeconomic uncertainty, the overall performance demonstrates the resilience of our portfolio in an otherwise complex global environment and challenging economic backdrop. Our adjusted EBITDA for the quarter was $91 million, a reflection of disciplined execution and synergy capture. This figure benefited from continued contributions stemming from our merger-related synergies, recent acquisitions, and rigorous cost reduction initiatives implemented across the business, which were offset by pressures due to softer volumes and unfavorable product mix. Moving to the operating segments in greater detail as outlined on Slide 13. The Americas division delivered year-over-year revenue of $473 million. Within the division, volumes in our consumer solutions category remained stable, highlighting the ongoing demand for our core offerings in North America. However, competitive pressures from imports continue to impact our South America operations. We have responded proactively by implementing strategic pricing actions and enhancing our customer engagement and focusing on operational efficiencies to mitigate these pressures. Adjusted EBITDA in the division declined by $9 million for the quarter. This decrease was primarily driven by volume and product mix challenges, most notably in South America. Nonetheless, we remain confident that our ongoing improvement initiatives and synergy realization efforts will contribute to margin recovery over the coming quarters, supported by our commitment to continuous operations. Shifting our attention to Slide 14, our Rest of World division encompassing our European and Asian operations reported revenue of $366 million. Despite general demand softness, the division delivered flat adjusted EBITDA, a testament to the proactive measures taken within the region which include the recovery of elevated inflation, operational efficiencies, and rigorous cost reduction programs. The stable profitability underlines the resilience of our business model and the effectiveness of our global operational discipline. Expanding on Curt's comments regarding our capacity rationalization plans, we expect Project CORE to generate annual cost savings of approximately $20 million as we enter fiscal 2026. This program represents a significant step forward in optimizing our global capacity cost reduction and positioning us to deliver improved financial performance over the medium to long term. As we closed the quarter, the net debt to pro forma adjusted EBITDA was 3.9x and approximately $570 million of available liquidity providing a solid financial foundation to support our strategic initiatives. In the near term, we will continue to prioritize strengthening our balance sheet, preserving liquidity, and maintaining operational agility. These priorities are critical as we navigate an evolving global market landscape characterized by both uncertainty and opportunity. We confirmed our post-merger adjusted free cash flow and our adjusted EBITDA range which reflects a prudent and realistic assessment of the near-term environment. This confidence is driven by our intense focus on capital expenditure management and rigorous working capital initiatives, both of which continue to yield positive results. Our teams have demonstrated outstanding commitment and discipline to integrating the business and driving cost efficiencies. We are proud of the progress made to date, encouraged by the pipeline of further cost reduction programs that will support sustained performance improvements. This concludes my financial review, and I'll hand it back over to Curt.

Curtis L. Begle, CEO

As Jim highlighted in the 2025 year-end outlook, we will remain action-oriented and disciplined to deliver long-term shareholder value by prioritizing repayment of debt with a target to reduce our leverage to approximately 3x. In summary, our path to success is underpinned by the actions of right now in the categories to stabilize, optimize, and grow. Our #1 imperative is working safely, followed by servicing our customers with mission-critical products. We will continue to leverage our scale, unique value proposition, and reliability to deliver for our stakeholders. I will finish my comments by extending my appreciation to all 9,000-plus Magnera employees for their passion, tenacity, and accountability. Operator, please open the line for questions.

Operator, Operator

Our first question comes from the line of Gabe Hajde from Wells Fargo.

Gabrial Shane Hajde, Analyst

I wanted to start with an easier question. There's quite a broad range in the guidance. I'm assuming that the EBITDA guidance for the year is between $360 million and $380 million. We are just over a month into the quarter, and we have a $20 million range. I understand there’s some uncertainty. Could you provide insight into what factors are contributing to that range? Additionally, how are you tracking in terms of volumes or visibility through August?

Curtis L. Begle, CEO

Sure, and thanks for the question, Gabe. Throughout the fiscal year, we've been around $90 million a quarter, which we believe is a good estimate for Q4. This puts us at the lower end of our guidance range. We have confirmed this. Regarding the cash flow guidance, although you didn't ask about it, the measures being implemented by our teams related to working capital and capital expenditure management have reassured us in confirming our initial free cash flow guidance, with a midpoint of approximately $85 million. That's our position on the guidance. As for volumes, last quarter we stated that we expected them to be roughly flat in the second half compared to the first half, which would have resulted in a decline of about 3% in the second half. However, this quarter we experienced a decline of 5%. We believe that a decline of 3% to 5% is also an appropriate estimates for Q4.

Operator, Operator

Our next question is from the line of Kevin McCarthy from Vertical Research Partners.

Kevin William McCarthy, Analyst

I was wondering if you could provide perhaps a little bit more color on Project CORE. I heard an expected benefit of $20 million, so perhaps you could talk about the timing or flow-through realization of those projected savings. And is there a cash cost outlay that is associated with achieving those savings?

Curtis L. Begle, CEO

Kevin, thanks for the question. As we talked about in the last quarter, we continue to find ways to evaluate the business. At this point, we've had a very thoughtful and thorough evaluation of the portfolio and identified areas of opportunity from a capacity optimization standpoint and actions that will ultimately bring more competitiveness and differentiation in our portfolio. Those actions that we communicated today really just represent a portion of the program that we've already launched and identified as we move through the bid cycles over the next few quarters, we'll continue to evaluate and make appropriate actions if needed to add to that or make changes along the way. But I'll let Jim speak to the cash and the EBITDA benefit for '26.

James M. Till, CFO

Yes, Kevin, thanks for the question. The Project CORE represents about 5% of our global capacity and is affecting both categories, but mostly the personal care side. We shared that there will be $20 million in savings benefits in fiscal 2026, primarily benefiting 2026, and the costs will be approximately equal, so around $20 million in costs will also result from that program.

Kevin William McCarthy, Analyst

Very good. And then as a follow-up, I think your Americas volume was minus 6%. Please correct me if I'm wrong. But I was wondering if you could compare and contrast what you're seeing in the United States versus the trends in South America, where I think you cited some import pressure. Maybe just kind of frame out the glide path into 2026 by region, if possible?

Curtis L. Begle, CEO

Yes. Regarding the outlook for 2026, we will wait until next quarter to provide our forecast. However, the overall volume decline was primarily in South America, while the North American market has remained relatively stable and slightly positive.

Operator, Operator

Our next question comes from the line of Gabe Hajde from Wells Fargo.

Gabrial Shane Hajde, Analyst

I guess, dig a little bit deeper on this CORE negative and maybe on the last question, volume weakness kind of seems to be most pronounced down in Latin America. I'm assuming profitability is probably challenged down there as well. Is it safe to assume that some of your initial CORE actions would be down there? And then flipping gears to Europe, profitability actually was pretty good there. I know you kind of intimated we're not sure exactly how tariff things play out. Have we yet to see impacts there in terms of product moving around? Or can you maybe talk about how the quarter unfolded in Europe specifically?

Curtis L. Begle, CEO

Yes. So just to start with your first question. We've identified Project CORE opportunities in all regions. Obviously, some are further ahead in terms of our actions than others, but all of them have been initiated and activated across the entire portfolio globally, where we see the greatest opportunity now running through contracts with various pieces of business and understanding where we can identify the best platforms inside of our operation to service our customers in the most cost-effective manner. That will be a journey that we'll continue on. You commented on Europe. I would say, I go back to some of the comments and really the strategic value that we bring as a supplier. We have tight relationships with our accounts. We have stickiness within them, and the one thing that I'm most excited about is finding the commercial excellence opportunities where we can bring in the full suite of other products where we've had long-standing relationships, not necessarily a product in our toolbox historically. But being able to introduce those products and again grow where we want to grow. In terms of what we're seeing from supply shifts and things like that, we're really focusing on our local supply and just-in-time quality forecasts. As it relates to Europe, we talked about some of the synergies and Jim can touch on this a little bit; they are being positively impacted in Europe, probably a little bit more so than what you would see in other parts of the world. But Jim, if you have any follow-up comments on that, feel free.

James M. Till, CFO

Yes. No, Gabe, I appreciate the question. As you can imagine, there's some sensitivity to giving region by region. Again, all regions are in play, and we'll communicate with the market as appropriate in terms of where those actions are going to hit.

Gabrial Shane Hajde, Analyst

Understood. I hope you guys can appreciate this question. So, two things. One is, on a more positive note, can you help us understand, maybe quantify percentage terms, the revenue opportunities in aggregate that you're talking about for 2026? And then just sort of given the leverage profile, I know it's early to talk about '26 maybe in EBITDA terms. But just cash flow metrics, if we think about this year, directionally, should there be a little bit of benefit on the CapEx side from maybe some of these footprint consolidation efforts and then taking into account the $20 million of 1:1 spend, would we expect kind of free cash flow next year to be directionally higher or flat with this year?

James M. Till, CFO

Yes. So the question was related to some of the new business wins that we're seeing on the commercial excellence side. That's the first part of your question, Gabe?

Curtis L. Begle, CEO

Yes. So that's what we continue to build inside of the pipeline and really help give us that line of sight as to where we're going to ship some of our production around where we can see some value-added opportunities and really drive some of those programs in the innovation bucket. Given the timeframe for which these will launch, that will be part of our '26 guide. To give you some specifics on that, I'm hesitant to provide some of the details just due to the sensitive nature of the customer relationships that we have ongoing.

James M. Till, CFO

Yes. Regarding 2026, we are not providing guidance at this time. However, excluding CORE, the figures would have been higher. We are expecting increased earnings and cash flows since the October period is not included in our guidance. This will be partially offset by some cost-reduction measures we discussed today. In the next quarter, we will provide a complete overview for the market.

Operator, Operator

Our next question comes from the line of Edlain Rodriguez from Mizuho Securities.

Edlain S. Rodriguez, Analyst

Quick question, guys. I mean, looking at the South American business. I mean, clearly, it's very challenged. How should we think of your portfolio in that region? Is there anything that you can do to fix what's going on over there? How should we think of your presence there?

Curtis L. Begle, CEO

Yes. Thanks, Edlain. Again, it's been a long-standing great business with a great team and very strong facilities in the region, primarily in personal care markets that we serve in the region. That's where we've had the greatest challenge in terms of import products coming in from a pricing standpoint; there's been share shifts that have taken place in the region. I would say for us, if you look at the overall profitability and their ability to generate cash, it's been one of those things that we've been experiencing over the course of the last couple of years, and it's certainly hit its head coming into this half of the year. We believe from our positioning and what we're doing from a cost-competitive standpoint, some of the intentional actions that we're making from pricing and price line trade-offs in some respects that region will stabilize, and we'll feel much better moving forward. Again, from a competitive landscape, that's been the biggest shift is some of the import redirection of some products.

Operator, Operator

Our next question comes from the line of Kevin McCarthy from Vertical Research Partners.

Kevin William McCarthy, Analyst

I appreciate you taking the follow-up. Perhaps for Jim, I was wondering if you can just elaborate on the near-term outlook for free cash flow. If I look at the statement in your press release, it looks like cash from operations through the first 9 months was marginally positive, and maybe your CapEx profile hasn't changed very much. So how are you thinking about kind of the cadence of the cash harvest in the fourth quarter and beyond? And what do you think the important swing factors are in determining whether or not you can increase the cash flow within your targeted range?

Curtis L. Begle, CEO

Sure, and thank you for the question. In Q2, we reported $45 million of post-merger adjusted free cash flow after generating approximately $42 million. I expect Q4 to resemble Q2 closely as we continue to work through our initiatives and address questions about working capital and CapEx discipline. Overall, we are confident in our original guidance. The teams are performing exceptionally well. If we disregard the quarter-to-quarter fluctuations in working capital, our cash generation for this quarter would have been about $24 million to $25 million. The business is effectively generating cash organically, and we are very comfortable with our target of $85 million. We will strive to exceed that target to the best of our ability.

Kevin William McCarthy, Analyst

Very good. And then I was wondering if you could just elaborate or provide a little bit more color on the synergy execution. My impression is that you've been hard at work with your customers obtaining additional qualifications, perhaps over varying timelines. How is all of that going? And is your confidence the same or higher or lower relative to prior quarters as you have all of those discussions?

Curtis L. Begle, CEO

Yes, thanks, Kevin, this is Curt. We are very pleased with the team's efforts. The SG&A aspect has met our expectations, enhancing certain areas of the organization, especially where team members have taken on added responsibilities in procurement. We have discussed the advancements we're making regarding qualifications and the timing of the corresponding flow-through in our balance sheet and inventories. We are very optimistic about our current position. As I mentioned before, achieving $55 million is still very much our goal and is an expectation we'll meet by 2027.

Operator, Operator

Thank you. At this time, I would now like to turn the conference back over to Curt Begle for closing remarks.

Curtis L. Begle, CEO

Thank you, again, everybody for joining us today, and especially for your interest in Magnera. We look forward to speaking to many of you at upcoming conferences, phone calls, and look forward to continue to drive forward the business. So thank you very much.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.