Earnings Call Transcript - MAGN Q4 2025

Operator, Operator

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

Robert Weilminster, Moderator

Thank you, operator, and thank you, everyone, for joining Magnera's Fourth 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 into 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; therefore, they 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 Begle, CEO

Thank you, Robert. Good morning, and thank you for joining our call. I am pleased to present our fourth quarter results and discuss the significant progress achieved as we marked our first anniversary as Magnera. During this update, I would like to emphasize 3 key takeaways: First, our strategy to establish ourselves as a leader in advanced specialty materials is yielding positive results. Our global stature as an innovative organization with substantial scale and strategic geographic presence has enabled us to consistently succeed in the current bid cycle with top-tier customers. We've been able to gain share in markets and product segments of our choosing. Second, the macroeconomic conditions across our operating regions remain challenging with a cautious outlook as we begin fiscal year 2026. Third, our focus remains on controllable factors. We have made measurable improvements in our synergy run rate performance and have already demonstrated substantial advancement with Project CORE introduced last quarter. The Magnera team delivered robust results to close the fiscal year, achieving $839 million in sales and adjusted EBITDA of $90 million for the quarter. For the full year, revenues reached $3.2 billion with adjusted EBITDA standing at $362 million. We generated $126 million of free cash flow, representing a yield exceeding 30%. I wish to express my gratitude to our teams who have collaborated effectively, stabilized our organization, developed optimization plans and taken decisive actions positioning us for continued success. These financial outcomes were underpinned by several notable successes with our customers. In a subdued personal care market, we experienced ongoing product mix enhancements as consumers increasingly opted for premium softness and comfort. Our adult incontinence products experienced mid-single-digit growth through increased adoption rates, with our customers increasingly seeking innovative features similar to those found in baby care items. Within consumer solutions, increased demand for wipes and infrastructure contributed to our segment's portfolio increasing from 51% to 53% of our total revenue. Our consumer solutions portfolio utilization is tracking nicely with growth projects and targeted asset upgrades. Sales of infection prevention wipes rose 10% year-over-year, with balanced growth from both branded and private label customers. Demand for convenience surface cleaning and disinfecting remains strong across households and institutional use. Our strong positioning in cable wrap and specialty solutions has benefited from ongoing electrification and infrastructure growth worldwide. In response to growing sustainability requirements, we have provided advanced material solutions for wipes, tea and coffee filtration and compostable offerings for in-home and away from home usage. Looking forward to 2026, we anticipate an earnings improvement of approximately 9% driven by synergy realization, project CORE initiatives, and further advances in product mix and innovation. The company has successfully completed its stabilization phase following our formation and maintained uninterrupted delivery of premium products to our customers over the past year. Now entering the optimization phase of our transformation, we are cultivating an innovative culture aligned with our commitments to our customers. Our commercial teams have been integrated to ensure consistent service. Operational metrics and processes are being standardized and efficiency initiatives are underway throughout the organization. We continue to be action-oriented with our purpose, promise, and beliefs providing our guiding compass. At this point, I will conclude opening remarks and invite Jim to provide a detailed overview of our financial performance.

James Till, CFO

Thank you, Curt, and good morning, everyone. Before we dive into our results, I want to remind everyone that when we compare our performance to the prior quarter, all the prior period figures are adjusted on a constant currency basis to eliminate the impact of exchange rate fluctuations. Additionally, last year's results incorporate the full impact of the merger. For those interested in the details, the reconciliations between our adjusted and reported results are included in the appendix of today's presentation. Now turning to our financial results on Slide 9. We delivered performance that aligns with the expectations that we shared during the previous quarterly call. Volumes and earnings came in as anticipated, while cash flows exceeded our projections, reflecting the strong execution and discipline of our global teams. Our teams have done an exceptional job advancing synergy realization since the merger, implementing new robust cost reduction initiatives, and optimizing our product mix capacity and allocations across the portfolio. During the quarter, these efforts helped offset softer baby demand in South America as well as general market softness in Europe. Despite the external challenges, adjusted EBITDA remained essentially flat for the quarter. Looking at the full year results, fiscal 2025 was a year of disciplined execution, strategic progress, and solid cash generation. Our teams delivered strong operational performance, advanced merger synergies, and maintained financial discipline. Free cash flow for the year exceeded the high end of our originally provided guidance range, reflecting an intense focus on CapEx and prudent working capital improvements. This strong cash generation is a testament to the dedication of our operational focus of our teams worldwide. Since the merger, we generated $126 million of free cash flow, representing a free cash flow yield of more than 30% relative to our year-end market capitalization. This performance has allowed us to strengthen our balance sheet and reduce our debt leverage to 3.8x at the end of the fourth quarter. We concluded the year with approximately $600 million of available liquidity, providing a solid financial foundation to support strategic investments, pursue growth opportunities and maintain flexibility in a dynamic market environment. Moving forward, we will continue to prioritize strengthening the balance sheet and maintaining operational agility. Moving on to my fourth quarter segment reviews, starting with Rest of World on Slide 10. Revenue declined 3% for the quarter as stronger performance in the select consumer solutions categories was offset by the pass-through of lower raw material costs and weaker consumption levels in Europe. Adjusted EBITDA for the segment increased $4 million, reflecting operational efficiencies, rigorous cost reduction programs, and continued synergy benefits from the integration. These improvements underscore the resilience of our business model and effectiveness of our disciplined global operations. Turning to Americas on Slide 11. Revenues were down 9% for the quarter as a result of the pass-through of lower raw material costs and competitive pressures from imports in South America. For the full year, headwinds were partially offset by stronger demand in infrastructure and wipes end markets, which helped stabilize our overall annual results. Adjusted EBITDA in the Americas segment declined $5 million for the quarter, largely reflecting the volume and product mix challenges in South America. Despite the decline, we are confident that our ongoing improvement initiatives and synergy realization will support margin recovery in the coming quarters as operational excellence remains a central focus. Looking ahead to fiscal 2026, our guidance assumptions are shown on Slide 12. At the $395 million midpoint, we are expecting EBITDA growth of approximately 9% year-over-year. This growth reflects continued synergy realization and ongoing benefits from Project CORE, including cost reductions and capacity rationalization. In terms of the free cash flow, we expect a range of $90 million to $110 million, including $80 million of capital investments, which includes $10 million from the IT conversion related CapEx. This guidance reflects a prudent assessment of the near-term environment and a disciplined execution of our operational and financial strategies. This concludes my financial review, and I'll now turn it back over to Curt.

Curtis Begle, CEO

Closing 2025, I'm pleased with the progress we made as a new company. We over-delivered on our free cash flow, delivered on our updated EBITDA guidance and CapEx commitments, and strengthened our balance sheet. Looking forward to 2026, we are forecasting an increase in earnings as we continue to leverage our scale, unique value proposition, and reliability to deliver for our stakeholders. We are confident in our ability to drive value creation through both EBITDA growth and robust free cash flow generation. Our priorities are clear: operational excellence; balance sheet strength; disciplined capital allocation and strategic investment in growth opportunities. These actions position us to continue building long-term shareholder value while maintaining flexibility in a dynamic global environment. Operator, please open the line for questions.

Operator, Operator

Our first question comes from Richard Carlson with Wells Fargo.

Richard Carlson, Analyst

Congrats on the progress and happy anniversary.

Curtis Begle, CEO

Thanks, Richard.

Richard Carlson, Analyst

I have several questions, but I'll start with the first one, which is significant, and then I'll return for the others. I want to explore EBITDA a bit more and the factors influencing it. I believe your range is between plus 5% and plus 13%. What are some of the key elements involved? What are the assumptions regarding volume, mix, pricing, and so on? Additionally, it seems a lot of this is tied to EBITDA margin expansion. What factors are contributing to that as well?

James Till, CFO

Thanks, Richard. Thanks for the questions. As we think about the guide for next year, the margin expansion is really about the continued synergy realization that we've highlighted throughout the year, which starts hitting more of a full run rate next year. So we've talked about realizing 70% to 75% of the remaining outstanding unrealized synergies next year, as well as Project CORE that we highlighted last quarter. So that will begin to ramp up here in the back half of Q1 and then we'll begin to get full realization in Q2, Q3, and Q4. So that's the lift on the EBITDA side in terms of margin expansion. In terms of the volumes, we're expecting sort of flattish for the overall business as we look at it today, with some puts and takes between the regions. And that's really the driving factors. And so as you go to the bottom end of the range, the top end of the range, volume is going to be kind of the outstanding question for us and is the reason for the wider range than you may expect.

Curtis Begle, CEO

Yes. Richard, the other comment I would make is, we've highlighted in previous calls and commented again on this quarter, we'll be lapping some of the South America conditions from the prior year in the first two quarters. And so that's being offset by some of the positive signals of growth that we're seeing in the U.S. and a cautious outlook on Europe.

Operator, Operator

Our next question comes from Kevin McCarthy with Vertical Research Partners.

Kevin McCarthy, Analyst

Yes. Thank you, and good morning, everyone. Curt, in listening to your prepared remarks, it sounds like you're having some success here in bid season. Can you just elaborate on where you're targeting share gains and having success and maybe just put that into the context of what you see unfolding mix-wise within the portfolio in '26 and the volume trends that you foresee globally?

Curtis Begle, CEO

Yes. Thanks, Kevin. Appreciate you joining. As we've talked about historically, going into this year, obviously, there were contracts that we needed to see through and then we needed to understand from a cost profile and a differentiation, where we stood from an organization as we realized synergies and made sure that we were getting the value for the products we were selling, also maximizing throughput and output on our most contemporary line. So as we've gone through the season, and we're probably 70% to 75% through—typically, some of this carries into Q1 or Q2 of our fiscal year—we feel very good about how we position not only our ability to service our customers. As you can imagine, with a combination this size, one of the risks that a customer may see is how they will be treated and whether we'll be able to deliver for them with the quality and service that they deserve and expect. And I'm very proud of what the group has been able to accomplish. So that certainly provided us with the right discussions at the highest levels inside those organizations. And I will say that all of our customers are living in a very competitive environment as well. So finding ways to help them optimize their cost structure, but more importantly, provide some differentiated features through products such as lamination and some of our soft applications within the nonwoven segment, is really giving a good mix lift, particularly in our personal care side. We're seeing healthcare recover a little bit as well, which is a positive signal. In some cases, we are seeing growth in geographies that we hadn't historically looked at, and that's been a good job by our sales forces across the globe. And we look at consumer solutions, we comment on the fact that the mix of our portfolio is shifting from 51% to 53% in consumer solutions. As you look at—it's difficult sometimes to see the forest through the trees. We try to really bucket those into major segments. We've talked about wipes. We have a great franchise inside of our consumer solutions space, both our branded products for dry wipes that go into institutional services and distribution channels with Sontara and Chicopee. But also, as you look at our broad portfolio globally within differentiated substrates inside of our portfolio, our spinlace technology continues to be preferred by the consumer and a great product and delivery for our customers as well as we round out with airlaid and spunlace technologies. We're able to capture general surface cleaning, general personal care cleaning, and also the institutional dry wipes goods. So we're excited about that. I talked about electrification initiatives. Our cable wrap business continues to build momentum through projects, green energy projects and high-voltage cable needs. That product line, we believe, is another great niche application where we have some unique value propositions there. And then on the infrastructure side, while you may see some softness in different parts of the world, the broad part of our portfolio is not just the building construction wrap, but in some of the other products that we've highlighted as a nice complement to those kinds of total systems solutions for contractors and various distributors alike. We continue to lean on that front. I don't want to be remiss if I didn't talk about some of the filtration projects we have, particularly in the beverage space. The one thing that we've really grown to appreciate over the past year is how significant and trusted the sites that we acquired are in that space, very high-quality demand, as you can expect. But more importantly, our ability to service and deliver for those customers is something that we pride ourselves on and look to continue to improve in certain areas. There's demands on being on the front end of ever-changing needs in the markets on compostable opportunities and addressing the customers' requirements from their ESG metrics. But more importantly, the safety and security of the products they're putting in the market. Make no mistake across the board, we have to maintain the highest quality levels and service levels—not only in who we do business with, but in the applications, the end-use applications that we supply to. We are touching skin. We are in the operating room. We are protecting babies and adults, et cetera, and that's something that we take very seriously, but also something that is a differentiation for us in a space that can be competitive at times. But we are the trusted and reliable player in the geographies that we serve.

Kevin McCarthy, Analyst

Curt, my second question relates to free cash flow. I thought you did a nice job generating cash and deleveraging in the quarter. Specifically, can you unpack the forward-looking free cash flow range of $90 million to $110 million in 2026? Just looking for your thoughts on things like cash costs for integration and Project CORE, what you're baking in for working capital, cash taxes, and other items you may care to call out?

James Till, CFO

Sure. Thanks, Kevin. Absolutely. So when—obviously, you start at the top of the house with the EBITDA. We've highlighted the $80 million of capital expenditures, which is $10 million of IT-related integration costs. On the integration and tax question, there's roughly $20 million of CORE, and we have in the range of $30 million to $35 million for cash taxes. We've highlighted that 10% to 11% of EBITDA, but we have some projects we think can offset that next year to help lower that number a little bit. The remaining is just our normal integration; we're in year 2 of a 3-year path. The overall total of that category is roughly $80 million. We highlighted that on Slide 12 to help you with the walks.

Kevin McCarthy, Analyst

Okay. And is working capital, Jim, expected to be a small number? Or how would you characterize that?

James Till, CFO

In working capital, we assume flat. We have some items that were onetime benefits that came in at the end of the quarter this year. Roughly $10 million of that benefit will offset next year. We do have some items as we go off of legacy GLT terms, the remaining portion that should offset that. So we would assume flat for next year.

Operator, Operator

Our next question comes from Roger Spitz with Bank of America.

Roger Spitz, Analyst

Maybe I missed it, but for fiscal 2025 overall, on a pro forma basis, what was the volume growth?

Curtis Begle, CEO

Yes. Thanks, Roger. I think we finished right about a 3% negative, 3.5%, and that was—for the Americas, the decline was really due to the South America challenges we faced from a competitive standpoint. Europe was roughly 4%. So in total tonnage sold, right about the 3.5%, 4% negative for the year.

Roger Spitz, Analyst

Got it. And then for thinking about fiscal 2026, you're up 9% year-over-year. How should we think about the quarterly tempo of outperforming the 2025 fiscal quarters?

Curtis Begle, CEO

Yes. So we don't provide quarterly details, but what I will tell you is we've highlighted, we are on a good trajectory into the synergy realization on the procurement side. I'm really proud of what the group and the team has been able to do from offsetting the stand-alone costs from the SG&A front. We continue to make good progress from our overall BECCS programs inside of the facilities to offset other inflation. Project CORE, as we have communicated, will continue to ramp up throughout the year. We're going to see most of that benefit come in Q3 and Q4, but we'll see that phased-in with a little bit of an impact this quarter and in Q2. In terms of what we see, not a tremendous hockey stick going into next year, but in general, South America is the big initial lap we have for Q1 and Q2 due to the business we were doing last year. We've highlighted that in previous quarters, and those are the negotiations taking place right now. We feel like we're very well-positioned going into 2026, particularly in the back half.

Operator, Operator

Our next question comes from Edward Brucker with Barclays.

Edward Brucker, Analyst

Congrats on the quarter. The first one, would you be able to just dive into the demand environment? It sounds like you're being cautious, which is prudent given what we've seen from a bunch of other packaging companies. But is it something where it's cyclical, where the consumer is just weaker right now and buying less product? Or do you think there's something more structural going on?

Curtis Begle, CEO

Thanks for the question. I mean if you look at the portfolio, these are products that are needed every day, essential goods and products, both on the disposal and durable side. Yes, we listen very intently and closely to our customers, even through various negotiations of what we can do to help them not only secure business on the shelf but find ways to cost reduce. So that comes from a number of different areas, whether it's new materials that we can provide, a new platform that we can run it on, or down-gauging as they look for high-performance materials at lighter weight. So that's been a major point of emphasis. In general, I would say that the European market certainly has more caution to it based on what you're hearing, what everybody is talking about in the space. As we communicated before, we sell to both branded and private label. As consumers make choices on the shelf, we're there. One comment I would make on the personal care front is there's always concern about baby and whether birth rates are going to negatively impact this business long-term. Fortunately for us, we highlighted that our adult incontinence products continue to expand significantly in terms of acceptance rate and need as aging populations grow globally. When you talk about form, fit, and function, that's an essential part of our developments with our customers, both from a discretion standpoint and ultimately a performance standpoint. In terms of overall demand, I would say consumption rates in various product lines may be a little bit softer in certain geographies, with a bit more positive demand than others, which we see by region. Even in South American markets, where we've had a challenging run from import price pressure, customers have grown to appreciate our ability to service them and respond in a very short order. We're there to take care of customers when they need us while ensuring we get value for the products we manufacture and sell. In general, Asia, albeit small for us, is pretty stable; Europe has definite concerns which is why we provided some of that range. The Americas will show growth; North America is positive, though offset initially by some of the South American comps, evening out throughout the year.

Edward Brucker, Analyst

That's helpful. The debt paydown on the term loan was a pleasant surprise. Would you be able to explain the rationale behind paying down that debt? And do you expect to use excess cash flow next year to do the same?

Curtis Begle, CEO

Yes. Look, that was part of the capital allocation priorities we've laid out, that we review with the Board every quarter. That was just doing what we said we were going to do. At this point, we'll continue down that path with a focus on deleveraging and making sure we're appropriately managing our cash and liquidity. As you can appreciate, we work with our vendors to negotiate the best terms we can and prove that we have solid liquidity and a robust balance sheet. We'll continue to evaluate with our Board of Directors, but we believe at this point we will focus on deleveraging and debt reduction.

Operator, Operator

Our next question comes from Richard Carlson with Wells Fargo.

Richard Carlson, Analyst

Thanks for the follow-up. Just piggybacking on that last question with the deleveraging. Of course, this is something you've been telling us that you plan on doing, but just wondering based on where your stock price has been recently, did the thought of spending that cash on repurchases come up at all, or the thought of buying your debt in the open market?

Curtis Begle, CEO

Richard, thanks for the question. This is something we review every quarter with our Board of Directors and certainly, it's part of the conversation. But again, we believe that sticking to our original plan of debt reduction is essential. In terms of buying back debt, I'm not really in a position to address that other than to say we keep all discussions in front of our Board of Directors and have robust dialogue each quarter.

Richard Carlson, Analyst

Understood. A couple of modeling questions, Jim. I think D&A was down quite a bit in the fourth quarter. How should we think about that? Is this a new run rate going forward? Or is that just some catch-up in the year? And then I don't think there was a share count in your press release. So is it safe to assume it was flat quarter-over-quarter?

James Till, CFO

Yes. Share count was flat, correct on that. For the D&A guide, if you look at the year-to-date, some purchase accounting finalization got caught up for the year, as you highlighted. I would look at our year-to-date number as a better representative of the forward-looking rate.

Richard Carlson, Analyst

Got it. And then just one more if I could squeeze it in. CapEx is running in line with what you guys have been telling us for a year now. But I guess we're still just a little wondering if that 2% to 3% of sales, how long does that last? And are you able to properly capitalize the business at that level? I think there was a mention of eventually stepping that up a little bit. But I guess, maybe just remind us from what you told us a year ago as far as how you see your CapEx projecting over a multiyear period?

Curtis Begle, CEO

Yes. Thanks. Very good question. We—again, coming into the combination of the two organizations, we had the opportunity to review and do a number of site visits. There was some expectation that plants or sites or lines were undercapitalized, and that certainly wasn't the case. We felt very comfortable coming into the year that we had both well-capitalized facilities and capitalized businesses. The one thing we can put into our overall spending discipline is a capital committee that we have internally, which reviews projects not only on a stand-alone basis from an ROIC standpoint but also our maintenance and safety CapEx. I will tell you with 100% certainty, we've not sacrificed in any of those areas. As you look at growth projects inside of the businesses, we have a large fleet of contemporary assets and also niche assets. Our ability to upgrade some of those lines falls within the CapEx spend where we're not having to go out and buy a new line for $50 million or $90 million. The other thing that has been really good work by the teams is understanding where we had vendors or things such as belts on our processing lines. The procurement team has done an excellent job there, especially coordinating procurement with our teams and offsetting inflation that takes place. In terms of the foreseeable future, as we've highlighted before, there will be a time when we pivot to larger growth investments and new lines as the market warrants it and as we select where to put that capacity. But it goes back to our initiatives with Project CORE and prioritizing where we're going to spend that CapEx and where we have the greatest right to win, the opportunity to win, and take care of our sites and ultimately, the safety of our employees.

Operator, Operator

Our next question comes from Kevin McCarthy with Vertical Research.

Kevin McCarthy, Analyst

I was wondering if you could review and elaborate on the integration process? Maybe provide a little bit more color on what you've accomplished to date and what still lies ahead for fiscal '26 with regard to procurement, G&A, and on the operational side as well? Any additional color there would be helpful.

Curtis Begle, CEO

No. Thanks, Kevin. As we talked about early on, culture is a big thing and putting organizations together and identifying the Magnera culture and then implementing that is a day-to-day job. Making sure that we're touching and getting our 9,000 employees walking lockstep with us is key. So that journey will continue on, and employee engagement is going to continue to be a main focus for us going into 2026 and beyond. We've had good momentum on that front. Great work from the HR team on benefits and things like that as we've peeled off the need for some of the transition services agreements with Berry. The procurement team is well ahead of where we anticipated. We've staffed that organization with key talent, done a fantastic job of really taking on the reins and going out for our best cost analysis, and coordinating that with our innovation team. So good progress has been made there. We've experienced procurement savings in Q4 and a bit in Q3, and that run rate coming into this year is part of our overall walk and range. Project CORE is certainly something that has a lot of attention on it internally. We review it quite frequently. It impacts all regions, except for Asia. The purpose of that is from a capacity optimization standpoint; the work done throughout this year has enabled cross-qualification of materials with competing vendors and more importantly, building flexibility in our network. We'll continue to improve upon our separation from the transition services agreement with Amkor. We're on track with our systems changes throughout this year. I would say we're well ahead of schedule in terms of our expectations during the combination, and encouraged by what we've seen over the last month.

Operator, Operator

I'm not showing any further questions at this time. I'd like to turn the call back to Curt Begle for any further remarks.

Curtis Begle, CEO

We appreciate everybody joining the call today and your interest in Magnera. We continue to be very excited about the business and the future. Despite all the noise in the world, we're in a great position from having the best products and capabilities to service not only our customers but the end consumers as we continue to protect the world. I look forward to speaking to many of you through our investment calls and investor calls as well as some of the upcoming investor conferences. So everybody have a great day, and we look forward to connecting on our next quarter earnings call.

Operator, Operator

Thank you. Ladies and gentlemen, this does conclude today's presentation. We thank you for your participation. You may now disconnect and have a wonderful day.