Tredegar Reports Third Quarter 2023 Results
RICHMOND, VA–(BUSINESS WIRE)–Tredegar Corporation (NYSE:TG, also the “Company” or “Tredegar”) today reported third quarter financial results for the period ended September 30, 2023.
Third quarter 2023 net income (loss) was $(50.4) million ($(1.47) per diluted share) compared to net income (loss) of $1.0 million ($0.03 per diluted share) in the third quarter of 2022. Net income (loss) from ongoing operations, which excludes special items, was $(5.1) million ($(0.15) per diluted share) in the third quarter of 2023 compared with $4.8 million ($0.14 per diluted share) in the third quarter of 2022. A reconciliation of net income (loss), a financial measure calculated in accordance with U.S. generally accepted accounting principles (“GAAP”), to net income (loss) from ongoing operations, a non-GAAP financial measure, for the three and nine months ended September 30, 2023 and 2022, is provided in Note (a) to the Financial Tables in this press release.
Third Quarter Financial Results Highlights
-
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) from ongoing operations for Aluminum Extrusions was $5.1 million in the third quarter of 2023 versus $12.1 million in the third quarter of last year due to sluggish market conditions. EBITDA from ongoing operations during the last four quarters has been weak, in a range of $5.1 million to $14.6 million.
- Sales volume of 32.5 million pounds in the third quarter of 2023 declined significantly versus 45.5 million pounds in the third quarter of last year.
- Open orders at the end of the third quarter of 2023 were approximately 17 million pounds (versus 20 million pounds at the end of the second quarter of 2023), which is below the quarterly range of 21 to 27 million pounds in 2019 before pandemic-related disruptions that resulted in excessive open orders, which peaked in the first quarter of 2022 at approximately 100 million pounds.
- EBITDA from ongoing operations for PE Films was $4.0 million in the third quarter of 2023 versus $0.4 million in the third quarter of 2022. EBITDA from ongoing operations during the last four quarters has been low with a range of negative $2.6 million to positive $4.0 million.
- EBITDA from ongoing operations for Flexible Packaging Films (also referred to as “Terphane”) was $0.5 million during the third quarter of 2023 versus $7.8 million in the third quarter of 2022 primarily due to lower sales volume and lower margins that the Company believes were driven by customer inventory corrections earlier in the year and now are being driven by global excess capacity and competition in Brazil from imports. See the Status of Current Corporate Strategic Initiatives section of this report for information on the sale of Terphane.
John Steitz, Tredegar’s president and chief executive officer, said, “We recognized another loss for the quarter as our businesses continued to suffer from severe down cycles in their markets that we believe are residual impacts of the pandemic. The timing of a recovery remains uncertain as we move into the seasonally low winter months for Bonnell.”
Mr. Steitz continued, “Despite the disappointing and challenging business environment in our markets, we made progress in our corporate strategic initiatives by executing an agreement to sell Terphane, which is subject to clearance by competition authorities, settling our pension plan obligation and taking steps to restructure our credit situation in light of our depressed markets and income.”
OPERATIONS REVIEW
Aluminum Extrusions
Aluminum Extrusions (or Bonnell Aluminum) produces high-quality, soft-alloy and medium-strength custom fabricated and finished aluminum extrusions primarily for the following markets: building and construction (B&C), automotive and specialty (which consists of consumer durables, machinery and equipment, electrical and renewable energy, and distribution end-use products). A summary of results for Aluminum Extrusions is provided below:
|
|
Three Months Ended |
|
Favorable/ (Unfavorable) % Change |
|
Nine Months Ended |
|
Favorable/ (Unfavorable) % Change |
||||||||||||||
|
(In thousands, except percentages) |
September 30, |
|
September 30, |
|
|||||||||||||||||
|
|
2023 |
|
|
|
2022 |
|
|
|
2023 |
|
|
|
2022 |
|
|
||||||
|
Sales volume (lbs) |
|
32,457 |
|
|
|
45,457 |
|
|
(28.6 |
)% |
|
|
105,511 |
|
|
|
137,427 |
|
|
(23.2 |
)% |
|
Net sales |
$ |
109,410 |
|
|
$ |
161,649 |
|
|
(32.3 |
)% |
|
$ |
364,607 |
|
|
$ |
510,066 |
|
|
(28.5 |
)% |
|
Ongoing operations: |
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
EBITDA |
$ |
5,113 |
|
|
$ |
12,071 |
|
|
(57.6 |
)% |
|
$ |
29,968 |
|
|
$ |
57,885 |
|
|
(48.2 |
)% |
|
Depreciation & amortization |
|
(4,683 |
) |
|
|
(4,416 |
) |
|
(6.0 |
)% |
|
|
(13,252 |
) |
|
|
(12,846 |
) |
|
(3.2 |
)% |
|
EBIT* |
$ |
430 |
|
|
$ |
7,655 |
|
|
(94.4 |
)% |
|
$ |
16,716 |
|
|
$ |
45,039 |
|
|
(62.9 |
)% |
|
Capital expenditures |
$ |
4,489 |
|
|
$ |
8,218 |
|
|
|
|
$ |
17,862 |
|
|
$ |
15,089 |
|
|
|
||
|
* For a reconciliation of this non-GAAP measure to the most directly comparable measure calculated in accordance with GAAP, see the EBITDA from ongoing operations by segment statements in the Financial Tables in this press release. |
|||||||||||||||||||||
Third Quarter 2023 Results vs. Third Quarter 2022 Results
Net sales (sales less freight) in the third quarter of 2023 decreased 32.3% versus the third quarter of 2022 primarily due to lower sales volume and the pass-through of lower metal costs. Sales volume in the third quarter of 2023 declined 28.6% versus the third quarter of 2022. Nonresidential B&C sales volume, which represented 53% of 2022 volume, declined 28.9% in the third quarter of 2023 versus the third quarter of 2022. Sales volume in the specialty market, which represented 29% of total volume in 2022, decreased 35.6% in the third quarter of 2023 versus the third quarter of 2022, primarily due to lower volume in the consumer durables sector. Sales volume in the automotive market, which represented 8% of total volume in 2022, increased 14.2% in the third quarter of 2023 versus the third quarter of 2022.
Beginning in the third quarter of 2022, the Company observed order cancellations and slowing order input as customers continued to report high inventory levels, which carried into 2023. Currently, the Company is experiencing sluggish demand in most markets. Open orders at the end of the third quarter of 2023 were 17 million pounds (versus 20 million pounds at the end of the second quarter of 2023 and 59 million pounds at the end of the third quarter 2022). This level is below the quarterly range of 21 to 27 million pounds in 2019 before pandemic-related disruptions that resulted in long lead times, driving a peak in open orders of approximately 100 million pounds during the first quarter of 2022. In addition, data indicates that aluminum extrusion imports have increased significantly in recent years, and some of Bonnell Aluminum’s customers may have sourced, and continue to source, aluminum extrusions from producers outside of the United States. The Company is participating as part of a coalition of members of the Aluminum Extruders Council who have filed a trade case against 15 countries in response to alleged large and increasing volumes of unfairly priced imports of aluminum extrusions since 2019.
EBITDA from ongoing operations in the third quarter of 2023 decreased $7.0 million or 57.6% versus the third quarter of 2022 primarily due to:
- Lower volume ($9.9 million), higher labor and employee-related costs ($1.4 million), lower pricing ($1.0 million), higher supply expense associated with inflationary costs ($0.1 million), higher selling, general and administrative (“SG&A”) expenses ($0.5 million) and higher freight rates ($0.4 million), partially offset by lower utility costs ($1.0 million); and
- The timing of the flow-through under the first-in first-out method of aluminum raw material costs passed through to customers, previously acquired at higher prices in a quickly changing commodity pricing environment, resulted in a charge of $1.2 million in the third quarter of 2023 versus a charge of $3.8 million in the third quarter of 2022. In addition, the Company recorded an unfavorable out-of-period adjustment of $2.5 million related to inventory and accrued labor costs in the third quarter of 2022.
First Nine Months of 2023 Results vs. First Nine Months of 2022 Results
Net sales in the first nine months of 2023 decreased 28.5% versus the first nine months of 2022 primarily due to lower sales volume and the pass-through of lower metal costs, partially offset by an increase in prices to cover higher operating costs in the first half of 2023. Sales volume in the first nine months of 2023 decreased by 23.2% versus the first nine months of 2022.
EBITDA from ongoing operations in the first nine months of 2023 decreased $27.9 million or 48.2% in comparison to the first nine months of 2022 primarily due to:
- Lower volume ($26.0 million), higher labor and employee-related costs ($3.5 million), lower labor productivity ($1.0 million), higher supply expense, including higher paint expense associated with a shift to more painted product in the first six months of 2023 and inflationary costs for other supplies ($3.1 million) and higher freight rates ($0.8 million), partially offset by higher pricing ($4.6 million), lower utility costs ($1.6 million) and lower SG&A expenses ($0.3 million); and
- The timing of the flow-through under the first-in first-out method of aluminum raw material costs passed through to customers, previously acquired at higher prices in a quickly changing commodity pricing environment, resulted in a charge of $0.8 million in the first nine months of 2023 versus a benefit of $1.7 million in the first nine months of 2022. In addition, the Company recorded an unfavorable out-of-period adjustment of $2.5 million related to inventory and accrued labor costs in the third quarter of 2022.
Refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk in the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2023 (“Third Quarter Form 10-Q”) for additional information on aluminum price trends.
Projected Capital Expenditures and Depreciation & Amortization
Capital expenditures for Bonnell Aluminum are projected to be $19 million in 2023, consistent with the previously disclosed projection. The Company has implemented stringent spending measures to control its financial leverage (see “Net Debt, Financial Leverage, Debt Covenants and Debt Refinancing” section for more information). In this regard, Bonnell Aluminum reduced projected capital expenditures in the second half of 2023 to $5 million to mainly support continuity of current operations versus broader spending of $14 million during the first half of the year. The most significant reduction relates to the multi-year implementation of new enterprise resource planning and manufacturing execution systems (“ERP/MES”). This project has been reorganized with an extended implementation period. As a result, the earliest “go-live” date for the new ERP/MES is 2025. The ERP/MES project commenced in 2022, with spending to-date of approximately $21 million. Depreciation expense is projected to be $16 million in 2023. Amortization expense is projected to be $2 million in 2023.
PE Films
PE Films produces surface protection films for high-technology applications in the global electronics industry and polyethylene overwrap and polypropylene films for other markets. A summary of results for PE Films, which does not include the goodwill impairment discussed in the “Goodwill Impairment in Surface Protection” section, is provided below:
|
|
Three Months Ended |
|
Favorable/ (Unfavorable) % Change |
|
Nine Months Ended |
|
Favorable/ (Unfavorable) % Change |
||||||||||||||
|
(In thousands, except percentages) |
September 30, |
|
September 30, |
|
|||||||||||||||||
|
|
2023 |
|
|
|
2022 |
|
|
|
2023 |
|
|
|
2022 |
|
|
||||||
|
Sales volume (lbs) |
|
7,224 |
|
|
|
7,081 |
|
|
2.0 |
% |
|
|
20,837 |
|
|
|
27,273 |
|
|
(23.6 |
)% |
|
Net sales |
$ |
19,938 |
|
|
$ |
20,059 |
|
|
(0.6 |
)% |
|
$ |
56,036 |
|
|
$ |
82,613 |
|
|
(32.2 |
)% |
|
Ongoing operations: |
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
EBITDA |
$ |
4,037 |
|
|
$ |
431 |
|
|
836.7 |
% |
|
$ |
6,700 |
|
|
$ |
14,543 |
|
|
(53.9 |
)% |
|
Depreciation & amortization |
|
(2,111 |
) |
|
|
(1,579 |
) |
|
(33.7 |
)% |
|
|
(5,305 |
) |
|
|
(4,733 |
) |
|
(12.1 |
)% |
|
EBIT* |
$ |
1,926 |
|
|
$ |
(1,148 |
) |
|
(267.8 |
)% |
|
$ |
1,395 |
|
|
$ |
9,810 |
|
|
(85.8 |
)% |
|
Capital expenditures |
$ |
431 |
|
|
$ |
793 |
|
|
|
|
$ |
1,506 |
|
|
$ |
2,537 |
|
|
|
||
|
* For a reconciliation of this non-GAAP measure to the most directly comparable measure calculated in accordance with GAAP, see the EBITDA from ongoing operations by segment statements in the Financial Tables in this press release. |
|||||||||||||||||||||
Third Quarter 2023 Results vs. Third Quarter 2022 Results
Net sales in the third quarter of 2023 were relatively flat compared to the third quarter of 2022, with volume increases in both Surface Protection and overwrap films. Surface Protection sales volume in the third quarter of 2023 increased 1% versus the third quarter of 2022 and 39% versus the second quarter of 2023. The Company is projecting lower Surface Protection sales volume in the fourth quarter of 2023, in line with typical seasonality.
EBITDA from ongoing operations in the third quarter of 2023 increased $3.6 million versus the third quarter of 2022, primarily due to:
-
A $1.7 million increase from Surface Protection:
- Higher contribution margin associated with favorable pricing ($0.5 million), lower SG&A ($0.5 million), operating efficiencies ($0.5 million), and lower fixed costs ($0.8 million); and
- No foreign currency transaction gain or loss in the third quarter of 2023 versus a gain of $0.5 million in the third quarter of 2022.
- A $1.9 million increase from overwrap films primarily due to cost improvements.
First Nine Months of 2023 Results vs. First Nine Months of 2022 Results
Net sales in the first nine months of 2023 decreased 32.2% compared to the first nine months of 2022 primarily due to a decrease in sales volume in Surface Protection, resulting from weak demand in the consumer electronics market and customer inventory corrections in the first six months of 2023. Sales volume declined 34.2% in Surface Protection in the first nine months of 2023.
EBITDA from ongoing operations in the first nine months of 2023 decreased $7.8 million versus the first nine months of 2022, primarily due to:
-
A $10.9 million decrease from Surface Protection:
- Lower contribution margin for non-transitioning products associated with a market slowdown and customer inventory corrections ($12.8 million) and for previously disclosed customer product transitions ($0.7 million), partially offset by favorable pricing ($0.3 million), lower SG&A and other employee-related expenses and operating efficiencies ($2.1 million) and lower fixed costs ($1.3 million);
- The pass-through lag associated with resin costs ($0.1 million charge in the first nine months of 2023 versus a benefit of $0.3 million in the first nine months of 2022); and
- A foreign currency transaction gain of $0.3 million in the first nine months of 2023 versus a gain of $1.0 million in the first nine months of 2022.
- A $3.1 million increase from overwrap films primarily due to cost improvements and mix.
Refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk in the Third Quarter Form 10-Q for additional information on resin price trends.
Closure of PE Films Technical Center
On August 3, 2023, the Company adopted a plan to close the PE Films technical center in Richmond, VA and reduce its efforts to develop and sell films supporting the semiconductor market. Future research & development activities for PE Films will be performed at the facility in Pottsville, PA. PE Films continues to have new business opportunities primarily relating to surface protection films that protect components of flat panel and flexible displays. The Company anticipates all activities to cease at the PE Films technical center in Richmond, VA, by the end of 2023. Including costs incurred through the first nine months ended September 30, 2023, the Company expects to recognize cash costs associated with exit activities of $1.7 million for: (i) severance and related costs ($0.8 million), (ii) vacating the facility lease (($0.6 million) payable through June 2025), and (iii) building closure costs ($0.3 million). In addition, the Company expects non-cash asset write-downs and accelerated depreciation of up to $3.7 million. Net annual cash savings of $3.4 million are anticipated, beginning in the fourth quarter of 2023.
Goodwill Impairment in Surface Protection
Manufacturers in the supply chain for consumer electronics continue to experience reduced capacity utilization and inventory corrections. In light of the continued uncertainty about the timing of a recovery for this market and the expected adverse future impact to the Surface Protection business, the Company performed a goodwill impairment analysis of the Surface Protection component of PE Films using projections that contemplate the expected market recovery and business conditions, including for its three significant customers. The analysis concluded that the fair value of Surface Protection was less than its carrying value, thus a non-cash partial goodwill impairment of $19.5 million ($15.1 million after deferred income tax benefits) was recognized during the third quarter of 2023 and $34.9 million ($27.0 million after deferred income tax benefits) during the first nine months of 2023. The Surface Protection reporting unit had goodwill of $22.4 million and $57.3 million as of September 30, 2023 and December 31, 2022, respectively.
Projected Capital Expenditures and Depreciation & Amortization
Capital expenditures for PE Films are projected to be $2 million in 2023, including $1 million for productivity projects and $1 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $7 million in 2023. There is no amortization expense for PE Films.
Flexible Packaging Films
Flexible Packaging Films produces polyester-based films for use in packaging applications that have specialized properties, such as heat resistance, strength, barrier protection and the ability to accept high-quality print graphics. A summary of results for Flexible Packaging Films is provided below:
|
|
Three Months Ended |
|
Favorable/ (Unfavorable) % Change |
|
Nine Months Ended |
|
Favorable/ (Unfavorable) % Change |
||||||||||||||
|
(In thousands, except percentages) |
September 30, |
|
September 30, |
|
|||||||||||||||||
|
|
2023 |
|
|
|
2022 |
|
|
|
2023 |
|
|
|
2022 |
|
|
||||||
|
Sales volume (lbs) |
|
22,163 |
|
|
|
28,889 |
|
|
(23.3 |
)% |
|
|
65,732 |
|
|
|
82,210 |
|
|
(20.0 |
)% |
|
Net sales |
$ |
30,111 |
|
|
$ |
47,278 |
|
|
(36.3 |
)% |
|
$ |
94,861 |
|
|
$ |
128,117 |
|
|
(26.0 |
)% |
|
Ongoing operations: |
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
EBITDA |
$ |
477 |
|
|
$ |
7,830 |
|
|
(93.9 |
)% |
|
$ |
2,076 |
|
|
$ |
20,495 |
|
|
(89.9 |
)% |
|
Depreciation & amortization |
|
(704 |
) |
|
|
(590 |
) |
|
(19.3 |
)% |
|
|
(2,115 |
) |
|
|
(1,723 |
) |
|
(22.8 |
)% |
|
EBIT* |
$ |
(227 |
) |
|
$ |
7,240 |
|
|
(103.1 |
)% |
|
$ |
(39 |
) |
|
$ |
18,772 |
|
|
(100.2 |
)% |
|
Capital expenditures |
$ |
1,408 |
|
|
$ |
2,501 |
|
|
|
|
$ |
2,891 |
|
|
$ |
7,310 |
|
|
|
||
|
* For a reconciliation of this non-GAAP measure to the most directly comparable measure calculated in accordance with GAAP, see the EBITDA from ongoing operations by segment statements in the Financial Tables in this press release. |
|||||||||||||||||||||
Third Quarter 2023 Results vs. Third Quarter 2022 Results
Net sales in the third quarter of 2023 decreased 36.3% compared to the third quarter of 2022 primarily due to lower sales volume, lower selling prices that the Company believes are driven by excess global capacity and competition in Brazil from Asian imports, and the pass-through of lower resin costs.
EBITDA from ongoing operations in the third quarter of 2023 decreased $7.4 million versus the third quarter of 2022, primarily due to:
- Lower selling prices from the pass-through of lower resin costs and margin pressures ($6.9 million) and lower sales volume ($3.7 million), partially offset by lower raw material costs ($2.3 million), lower fixed costs ($0.8 million) and lower SG&A expenses ($0.7 million);
- Foreign currency transaction gains ($0.2 million) in the third quarter of 2023 compared to foreign currency transaction gains ($0.1 million) in the third quarter of 2022; and
- Net unfavorable foreign currency translation of Real-denominated operating costs ($0.6 million).
First Nine Months of 2023 Results vs. First Nine Months of 2022 Results
Net sales in the first nine months of 2023 decreased 26.0% compared to the first nine months of 2022 primarily due to lower sales volume, lower selling prices that the Company believes are driven by excess global capacity and competition in Brazil from Asian imports, and the pass-through of lower resin costs, partially offset by favorable product mix.
EBITDA from ongoing operations in the first nine months of 2023 decreased $18.4 million versus the first nine months of 2022 primarily due to:
- Lower sales volume ($8.3 million), lower selling prices from the pass-through of lower resin costs and margin pressures ($11.1 million), higher fixed costs ($1.1 million, primarily due to under absorption from lower production volumes) and higher variable costs ($2.0 million, including higher costs resulting from quality issues), partially offset by lower raw material costs ($3.9 million), favorable product mix ($0.4 million) and lower SG&A expenses ($0.9 million);
- Foreign currency transaction losses ($0.1 million) in the first nine months of 2023 compared to foreign currency transaction losses ($0.3 million) in the first nine months of 2022; and
- Net unfavorable foreign currency translation of Real-denominated operating costs ($1.1 million).
Refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk in the Third Quarter Form 10-Q for additional information on polyester fiber and component price trends.
Projected Capital Expenditures and Depreciation & Amortization
Capital expenditures for Flexible Packaging Films are projected to be $4 million in 2023, including $1 million for new capacity for value-added products and productivity projects and $3 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $3 million in 2023. Amortization expense is projected to be $0.1 million in 2023.
Corporate Expenses, Interest & Taxes
Corporate expenses, net in the first nine months of 2023 remained flat compared to the first nine months of 2022 primarily due to higher professional fees associated with business development activities ($3.3 million), offset by lower accruals for employee-related compensation ($2.5 million) and lower external and internal audit fees ($0.6 million).
Interest expense of $7.8 million in the first nine months of 2023 increased $4.6 million compared to the first nine months of 2022 due to higher average debt levels and interest rates.
The effective tax rate used to compute income tax expense (benefit) in the first nine months of 2023 was 18.8%, unchanged compared to the effective tax rate in the first nine months of 2022. The effective tax rate in the first nine months of 2023 was impacted by tax benefits related to the goodwill impairment, the pension settlement loss, and the treatment of Brazil income tax as creditable in 2022 and 2023. These benefits were offset by the reversal of the discrete tax benefit recorded in the first quarter of 2022 and an increase in the valuation allowance related to deferred tax assets. The effective tax rate from ongoing operations comparable to the earnings reconciliation table provided in Note (a) to the Financial Tables in this press release was (12.0)% for the first nine months of 2023 versus 26.6% for the first nine months of 2022 (see also Note (e) to the Financial Tables). Refer to Note 9 to the Company’s Condensed Consolidated Financial Statements in the Third Quarter Form 10-Q for an explanation of differences between the effective tax rate for income (loss) and the U.S. federal statutory rate for 2023 and 2022.
Status of Current Corporate Strategic Initiatives
The status of current corporate strategic initiatives
Contacts
Tredegar Corporation
Neill Bellamy, 804-330-1211
[email protected]
