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Good day, and welcome to the Magnera second quarter 2026 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question, you will need to press star one one on your touchtone telephone. Please note this call is being recorded. I'd like to turn the call over to Robert Weilminster, Executive Vice President of Investor Relations. Please go ahead.

Thank you, operator, thank you everyone for joining Magnera's second fiscal quarter 2026 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. Our annual report and proxy statements with the SEC can be found on our website under Investor Relations.

As referenced on slide two 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.

Thank you, Robert. Good morning, thank you for joining our call. I am pleased to present our second quarter results and highlight our performance amid ongoing macroeconomic uncertainty. My remarks today will focus on four key themes. First, our earnings of $90 million of adjusted EBITDA were in line with expectations after adjusting for weather-related factors highlighted during our February earnings call. Our strong free cash flow enabled us to pay down $36 million of debt in the quarter. Second, I will discuss the winter storms that affected more than 50% of the United States., causing significant supply chain disruptions impacting both our customers' operations and our own. Third, the war in the Middle East has created global challenges on many fronts, including having a direct impact on our raw material and supply chain costs.

I'll discuss how Magnera has responded to these challenges and continues to strategically invest in our business to position us for future success. The global economic environment remains strained, though there are signs of resilience within the Americas. Elsewhere, we continue to encounter tempered demand, particularly in Europe. Compounding these challenges, new geopolitical conflicts have contributed to higher operational costs and further supply chain disruptions. Magnera's scale and global footprint are built for times like this. Through localized sourcing, disciplined cost management, and success in Project CORE initiatives, we have mitigated many of these impacts. We remain focused on managing our controllables. As mentioned, our largest region, North America, was impacted by back-to-back winter storms, Fern and Hernando. Fern required the temporary shutdown of 13 manufacturing sites, resulting in lost production, impacting shipping days depending on the location.

The second storm, Hernando, affected seven plants. As with Fern, there was no significant damage and shipping resumed. We anticipate recouping most weather-related setbacks in the second half of the fiscal year. Transportation lanes remain tight in the quarter and are expected to require additional time to stabilize. Our teams did an excellent job responding to the storms by working together to prioritize the safety of our employees and assets. As the weather improved, our teams quickly assessed impacts and initiated plans to restart production and supply to our customers. We had no major weather-related damage at our plants. Next, I want to talk about how the conflict in Iran impacted us in the quarter. Our strategic principles to procure, manufacture, and sell within our regions provides a competitive advantage given our extensive asset base and leading positions in specialty materials.

The majority of our business is sourced and sold locally within the respective regions, providing us and our customers reliability of supply. The rising costs in raw materials, fuel, container shipping, and delivery times, notably affecting resin, pulp, and energy expenses, constitute approximately 70% of our cost of goods sold. Additionally, inbound and outbound transportation expenses have increased. To address these pressures, we are working closely with customers to transition pricing mechanisms to a monthly cadence, helping mitigate timing lags and cost recovery. While enhancements to our global energy program have helped offset some of the increased costs, prices remain above pre-pandemic levels. Further details on the financial impact and working capital implications will be provided by Jim in his update. Before transitioning to Jim, I want to reiterate the resilience demonstrated by our organization in a persistently challenging market.

In the Americas, industrial activity remains subdued despite signs of stability as the sector contends with tariffs, geopolitical uncertainty, and policy ambiguity. The U.S. economy persists in a stable yet cautious state, while South America shows early signs of improvement following proactive measures addressing deflationary pressures and elevated transport costs from Asia. We expect a stronger performance in the latter half of the year in this region, and excluding weather impacts, volumes in the Americas would have reflected a positive year-over-year increase. In Europe, the manufacturing index has seen modest improvements. However, business sentiment remains cautious, mirroring trends from recent years. In the Rest of World, year-over-year volume change was down 4%. We achieved mid single-digit volume increases globally in infrastructure product lines, driven by seasonality and continued emphasis on consumer solutions.

Adult personal care categories, especially incontinence and feminine hygiene, also experienced solid growth, supported by demographic shifts and higher consumer adoption. Initiatives from governments and NGOs to destigmatize incontinence products combined with customers' preferences for innovative and premium features have bolstered demand. We are investing in our business for growth and improving our competitive position. We initiated two critical projects at our Gernsbach and Lydney facilities that will reduce our energy consumption and help advance our sustainability agenda. Our Lydney project will reduce our electricity and water usage by installing modern vacuum blowers. We appreciate the support from the Industrial Energy Transformation Fund in our decarbonization efforts. Our team at Dombühl recently commissioned a new film asset that will modernize our product offering for elastic back sheets in hygiene, generate new volume, and provide energy, raw material, and plant efficiency improvements.

Each of these investments is aligned with our capital allocation strategy and demonstrates our commitment to improving our business over the long term. Finally, I would like to highlight the ambitious commitments detailed in our latest corporate sustainability report. This document underscores our resolve to operate transparently and deliver measurable progress. We have set targets to reduce Scope 1 and 2 emissions by 42% and Scope 3 emissions by 25% by 2035. We are also aiming for a 10% reduction in water consumption and plan to achieve zero waste to landfill at 75% of our sites or 34 locations by 2035. These goals reflect our commitment to building a more resilient, sustainable enterprise and making meaningful contributions to a better world. I will now turn the call over to Jim for a comprehensive financial update.

Thank you, Curt, and good morning, everyone. Turning to our financial results on slide 11. After adjusting for the impacts of the winter storms in North America, we delivered performance that was in line with our expectations. Volumes and earnings came in as anticipated while we continued our trend of strong free cash flow generation, which we've demonstrated since the closing of the merger. Our teams have done an exceptional job of advancing synergy realization and making substantial progress on Project CORE, which resulted in adjusted EBITDA remaining essentially flat for the quarter as gains from internal initiatives were offset by external headwinds. During the quarter, we generated a robust $73 million of free cash flow, reflecting our focus of operational excellence, a disciplined capital expenditure approach, and working capital improvement initiatives.

Over the last 12 months, we've generated $128 million of adjusted free cash flow, representing a free cash flow yield of over 40% relative to our quarter-end market capitalization. For the quarter, sales were $796 million as solid performance across adult and infrastructure product categories were offset by weather-related disruptions in North America and continued broad-based market softness in Europe. Adjusted EBITDA for the quarter was $90 million as contributions from synergies and Project CORE were offset by the headwinds from the winter storm shutdowns as well as weaker demand in Europe and negative mix in South America. Turning to our segment performance, beginning with Americas on Slide 12.

Despite the winter storm impacts, we achieved volume growth in our adult and infrastructure categories and saw normalization toward the end of the quarter in South America as we lapped the Asia import pressures discussed on prior calls. Reported revenues reflected the contractual pass-through of lower raw material costs during the quarter, which pressured pricing but did not have a material effect on underlying profitability. Adjusted EBITDA in Americas declined by $6 million compared to the prior year. Although winter storms pressured reported volumes, the most pronounced impact was on our conversion costs and product mix as constrained capacity areas did not fully recover during the quarter. We do anticipate recovery of these areas in the second half of fiscal 2026.

Turning now to the Rest of World division on slide 13. We experienced a year-over-year decline in revenues in the quarter as strength in the European wipes business was more than offset by ongoing general market softness in Europe and the pass-through of lower raw material costs. Adjusted EBIT for the Rest of World division increased by an impressive 19% to $32 million. The improvement reflects our progress on disciplined cost management and synergy realization as the division's performance illustrates the positive impacts of our focus on operational efficiency and portfolio optimization. Turning to capital allocation on slide 14. Aligned with our capital allocation priorities, we repaid $36 million of outstanding debt during the quarter, bringing our debt repurchases for the first half of fiscal 2026 to $63 million.

These actions reflect our continued focus on strengthening the balance sheet while maintaining a disciplined and balanced approach to capital deployment. We closed the quarter with approximately $600 million of available liquidity, providing a strong financial foundation to navigate ongoing inflationary pressures, fund strategic investments, and pursue attractive growth opportunities while preserving flexibility in an increasingly dynamic geopolitical environment. From a guidance standpoint, after incorporating the March inflation, our target range remains unchanged. While we benefit from efficient pass-through mechanisms, we are operating in an environment of potentially unprecedented volatility, both in terms of the magnitude and timing of raw material inflation. We would expect some headwinds in the third quarter, followed by recovery in quarter four. This concludes my financial overview, and I'll turn it back to Curt.

Thank you, Jim. This quarter's performance reflects the balance we have in our portfolio, global scale, and our focus on improving our cost competitiveness. We've recovered from operational disruptions caused by the winter storms, worked closely with our customers to manage the negative impacts of the war in Iran, and maintain our long-term focus on business improvement. Our confidence in our business drove our debt repayment in the quarter. As we look ahead, there is uncertainty, but we remain steadfast in our commitment to delivering improved value for our stakeholders. Operator, please open the line for questions.

Thank you. As a reminder, to ask a question, please press star one one. If your question has been answered and you would like to remove yourself from the queue, press star one one again. Our first question comes from Gabe Hajde with Wells Fargo. Your line is open.

Curt, James, good morning.

Morning, Gabe.

Morning, Gabe.

I know it was, I guess, one month in the March quarter, obviously, that you guys kind of faced some of these higher costs, and the raw material suppliers tried to push in some price increases pretty quick. I suspect that you had some, you know, you had some level of raw material that sits on the books, and then by the time it filters through the income statement, maybe that was, you know, mitigate some of the impact, I guess, in the, in the immediate short term. You talked about, you know, having an impact, a lag impact maybe on the third quarter. Can you give us a sense with, you know, I guess five months left for the second half, how you're thinking about the cadence and what you kind of alluded to at the end of your remarks there, Jim, on EBITDA progression?

Yeah. I'll maybe cover the first part and then kick it over to Jim, Gabe, if that's okay. First of all, as we, you know, did see some of the inflationary measures coming through and anticipated, you know, historically, you know, we've experienced some of these things. Even if you go back to Katrina and Rita, where you had really unprecedented lifts in a very short period of time, the most responsible and appropriate thing to do is to ensure continuity of supply for our customers. That's going to require whatever it takes to ensure that, you know, again, you're paying for the product to get it in.

With that, the immediate, you know, action and response from our commercial team was extremely pleased with and proud of for, you know, getting with customers as soon as possible and to start to address, you know, where we may have a quarterly, you know, price change versus monthly. In many cases, as we've talked about before, we're very efficient in our pass-through mechanisms for those inflationary costs, but whenever it goes up to the levels that it has, it's gonna require shortening that window, and these are abnormal times. In terms of the collaboration with customers, it's been, you know, very positive. Ensuring that we get them supplied is paramount across the globe. You know, more importantly, again, staying in regular communication.

The one thing that we did not highlight maybe on the script as much that I do wanna address is, you know, there's other increases that you do experience outside of just the raw material pass-throughs, freight, logistics, energy, et cetera. In addition to moving with the monthly price index moves, we work with customers on identifying surcharge opportunities and ensuring, again, continuity of supply for them. Then, Jim, I'll let you cover how we're kind of seeing the back half and the recovery.

Thanks, Gabe, for the question. You know, as Curt highlighted from an earnings standpoint, the teams jumped in pretty quick to sort of mitigate that, those gaps. Gabe, I'm sure you can appreciate the current environment is pretty fluid. My remarks in terms of headwinds is more in terms of cash and what I would say from a cash standpoint. You know, the teams are working with customers and with vendors to offset any pressure that we would see in Q3 and offset that through the remainder of the year as we finish out the back half.

Well, I guess for posterity, you talked about reiterating the guidance, I think $380 million-$410 million of EBITDA and free cash of $90 million-$110 million. Both of those elements is sort of what you're talking about. Relatedly, I mean, cash flow generation, obviously, it was super strong in the first half. Congratulations on that. Is there anything seasonally, I mean, we're trying to look back.

There's unfortunately not a lot of history that we can kind of look to, because it would just seem to suggest to your point, I mean, I appreciate suppliers may give you a little bit of relief on the AP side, but, you know, with costs going up, it would consume cash. Maybe for those of us in the outside world, I think good, bad, and different, part of your parent company would give us kind of a rule of thumb. If for every $0.01, it was roughly $7 million of cash consumption. Is there anything that you can help us with in that regard? Thank you.

Yeah, sure. I remember that well. Unfortunately, it's not quite as mechanical, right? For us, the straight math is, you know, $2 million, that's before offsetting actions is what I would say, Gabe, right? That's kind of just straight, you think about working with customers, working with vendors, working on inventory levels. You know, I'd be remiss if I didn't highlight, you know, it's very fluid in terms of where we're gonna be by the end of the year in terms of this inflation. You know, even it's changed a lot in the last 24 hours is what I would say. You're absolutely right, which is we had a very strong first half to the year.

Q3 just generally is a softer cash generation quarter for us, just timing of some of the payments and things like that. You know, really proud of where the team, where we started, gave us a good head start as we get into the back half. Again, there's a lot of uncertainty in terms of where it all plays out, but the teams are working diligently to offset the pressures that we see on cash and again, earnings. We were very quick to try to address those gaps.

Okay. Last one for me, just order patterns or anything that you have observed, I guess, you know, 60 some days in, into the conflict, that you know, again, that you would share with us or that, you know, you'd say might be pre-order or maybe even delays in orders, anything like that that's salient. Thank you.

Yeah.

Yeah. That's a good call out, Gabe. You know, if you recall last year at this time, we had, you know, a great deal of concerns as it related to order bookings, with the announcement of the tariffs and some of the behaviors that we did start to see from customers. You know, in this case, as we headed into Q3, you know, bookings are very normal for us. If anything, you know, we're still fulfilling orders that were impacted by the storms in February. There's still some catch up there. You know, there are customers that did get low on inventories in a couple of areas, so we've looked to support them.

You know, for, you know, from a year ago to now, I would say we feel good about where our bookings are. Again, I don't wanna declare, you know, victory or, you know, have a one-month trend declare what the next two months might look like. You know, coming out of March into April, we feel good about where the volume sits and the demand outlooks are. You know, and we are staying close to customers, both, you know, existing and potentially new customers, as they're identifying maybe challenges within their own, you know, supply streams. We're being very responsible and, you know, looking to make sure that whatever we do, go pick up from a, you know, customer order standpoint is above our expectations from a profit margin standpoint.

Great. Thank you. I'll hand it over.

Thanks, Gabe.

Thank you. Our next question comes from Kevin McCarthy with Vertical Research Partners. Your line is open.

Yeah. Thank you, and good morning. Curt, I think I heard you reference a shift to a monthly pricing paradigm. I was wondering if you'd just elaborate on that in terms of the reception among your customers, what constraints, if any, you may have given existing contracts, and you know, how we should think about lag effects as you shift to this new pricing strategy.

Sure. Thanks, Kevin, and good to hear your voice. You know, historically, as we've talked about and communicated, we're very efficient in terms of the pass-through mechanisms in a normal environment. If polyolefins, you know, go up or down 3%, 5%, 6% or $0.0625, it typically doesn't have a material impact positively or negatively on our financials. In this case, it's abnormal times. Contracts are meant to be, you know, established for, you know, kind of normal environment times. We acted quickly. In fact, I was laughing with some of the salespeople that said, well, our customers are telling us that we're the first ones that have come to them with this. I said, well, I hope so.

We're the largest player, and we need to make sure that we're on our front foot here and collaborating with them. I would say, you know, in general, the entire market understands the negative impact this can have on, you know, businesses and in our space, and really proud of what the team has done in terms of that collaborative discussions with customers. Ensuring that we get them supply is paramount. Ensuring that they can run their lines and provide products on the shelf is of the utmost importance.

I would say, as I expected, after, you know, tense, you know, early negotiations and early discussions, our customers as a whole have been very supportive and again, shifting simply in the near term from some of those customers that were quarterly to monthly, understanding that, you know, that will, you know, preside for the foreseeable future until things settle down, and then we would go back to our normal price through mechanisms.

Understood. Wanted to follow up on your comments regarding Winter Storms Fern and Hernando. What was the EBITDA impact on Magnera's fiscal second quarter from those storms? Do you expect to recover the majority of it or all of it in the back half? What is the cadence of that?

Yeah, Kevin, if you recall, you know, during the earnings call that we had in February, we had kind of highlighted $4 million-$6 million of pressure because of those shutdowns, and it came in about $5 million total for the quarter. It's a matter of us catching up with those orders, getting the lines to, you know, run efficiently. Our expectation was to recover that through the balance of the year.

Okay, very good. Last one for me. Jim, just to follow up on your reiteration of the free cash flow range, can you provide an update on some of the moving parts? I would have thought that working capital today would require a larger use of cash than we might have thought pre-war. What are you doing to try to offset that and maintain the range?

Sure. Thank you for the question. Yeah, we're roughly $10 million+ through the first half, thanks to, you know, really good work by the team and all the efforts which sort of delivered a really strong kind of quarter as well as first half and enabled us to pay down. What I would say is that as we're, I think Gabe asked a similar question, is, the inflationary pressure that we're going to have on working capital from a cash standpoint, again, it's the uncertainty or the outlook is, I mean, it's very fluid ultimately.

The teams are doing a nice job of working with customers in terms of shortening terms, which they understand as we're having the conversations on shortening the lag as well. We're talking with our vendors in terms of temporary terms, as well as we're looking at our inventory levels. All the things that we would normally do, but in this kind of situation, everything gets heightened even that much more to offset so those pressures.

Okay. Thanks very much.

Thanks, Kevin.

Thank you. Our next question comes from Roger Spitz with Bank of America. Your line is open.

Thanks very much. Good morning. I think at one point, maybe you can update us on this, is you gave a split of your sales by that amount that's subject to contract with pass-through mechanisms, which we've been talking about here going from, I guess, trying to go from quarterly to monthly resets. Secondly, to subject, you know, what % subject to general price change announcements and tertiary, what percent spot sales. Do you have an update on that?

Yeah. Thanks, Roger. Good to hear you, hear your voice as well. We've done a really good job, and we talked about it last year as we started to put in new contracts, particularly around some of the legacy Glatfelter customers, which is, you know, a good portion of that is the fiber-based business. You know, we were roughly 70% a year ago.

That's closer to 85% roughly on any contract customers. If you think about the mix of business that we have across the organization, we have, I would say, you know, 20% of the total portfolio is, you know, in terms of, like, a general price increase mechanism or spot business. That would be included in the 2%. If you think about product lines like TYPAR, for instance, typically those are annual adjustments that are made, and, you know, we've recently gone out with an increase in that infrastructure space.

Great. That's it for me. Thank you.

Thanks, Roger.

Thank you. Our next question comes from Edward Brucker with Barclays. Your line is open.

Thanks for taking the question. Just to add on to that, the business that's not on contract pass-throughs, how does pricing, or is it through kind of negotiated pricing or price increase that you get to that? Secondly, the contract pass-throughs, is that just for raw materials, and then you have to do surcharges on top of that to offset the freight, energy, and logistics?

Yes, correct. To answer your second question first, historically and strategically, you know, the, our input costs, raw material costs make up the majority of our cost to get sold. Those are on indexes. Those are baked into the contracts, as I talked about. In times like this, you know, they're set up for normal kind of periods of time. In times like this when it escalates so quickly, so rapidly, you know, those are the discussions that we have with customers to ensure that, again, we can keep them in supply.

When you think about, you know, the other inflationary costs, just, you know, we typically have openers in the language of the contracts to be able to have those discussions with our customers, show them, you know, the benchmarks and the changes, and then, you know, put those through whether it be a temporary or a little bit longer term surcharge to recover some of those costs. Again, assuming there's, you know, not continued escalation. If there is, then again, we have to address it with additional surcharges. At this point, you know, we've worked, you know, really closely with customers from, you know, like I said, 80 to 80% of our total portfolio.

You know, the other 20% is balanced out by some of our branded business that we, you know, sell on the market, like our TYPAR brands in the building construction market, our Sontara, Chicopee wipes business. Again, those are negotiated or actually negotiated their price pass-throughs and updates throughout the year where needed, where appropriate. Then the, you know, less than 10% of our business I would consider spot, and that's negotiated typically quarter to quarter or order to order. It's much like just bidding on a campaign for a particular quarter if we have some line time that we think makes sense to go out and get some spot business.

Got it. That's helpful. Just on capital allocation, you've done an impressive job reducing debt the past two quarters. Do you expect to continue to chip away at debt? Maybe if you have a debt reduction goal, that would be helpful. How have you been taking that debt out? Has it been through open market purchases?

Our capital allocation approach has been to de-lever, pay down debt, and we do it in open market. We're very efficient with our cash, as you would expect, and that was the case for the entirety of this current year. What I would say, we gave the target at the beginning of the year of roughly $100 million of debt that pay down this year, based off our guided free cash flow range, and that hasn't changed.

Got it. Thanks.

Thank you. Our next question is a follow-up from Kevin McCarthy with Vertical Research Partners. Your line is open.

Yes, thank you, and good morning. Question for you on your sequential margin progression. As, you know, we think about this wave of cost inflation, particularly on resins, being unprecedented. You know, just theoretically, if you were to recover that cost inflation dollar for dollar, you know, maybe your top line would inflate pretty rapidly, and, you know, you'd be EBITDA neutral because you recovered one for one. One of the consequences of that is your percentage margin would decline sequentially. Is that the right way to think about it as you move from the March quarter into the June quarter? I think you're a FIFO accounting company, maybe that helps a bit. Maybe you can just kinda talk through some of those moving parts and what we should expect in terms of your sequential margin trajectory.

Yeah. Kevin, you're spot on. As you think about the pass-through mechanisms, it will increase the top line, which is why we, you know, cover both top line and volume, overall organic volume growth in a particular quarter. You would anticipate, again, you know, stable and expected EBITDA numbers on a higher sales dollar number, which in essence would reduce maybe your, you know, your EBITDA percentage by, you know, a certain amount of basis points. In general for us, it's, you know, really focused on earnings, free cash flow generation. Even in a deflationary environment, it may look like your top line's really dropping and you have bottom line, you know, margin improvement. In general, again, we focus on what the physical volume is that we sell, and then the EBITDA dollars that come along with that.

Okay. Just to follow up on a prior question that Gabe asked about your customer order patterns. You know, are your customers, in any cases, trying to get ahead of what's likely to be, you know, meaningful inflation or are they not doing that? If they are doing that, you know, how do you approach that? Do you try to control the pace of orders in some fashion? Maybe you can talk through what you're seeing and hearing in that regard.

Yeah. Again, we didn't necessarily experience some of those swings as much as maybe we've experienced historically. I think in some cases, there's only so much we can make in a given, you know, quarter or month or a week. As we take those orders, again, it's just ensuring that we keep them in supply, understanding where their inventory positions may be. We may have, you know, certain inventory levels that we keep as safety stock for them. I can't tell you that we've seen anything that's really crazy from an abnormality standpoint. They operate typically on lower inventories as well, and they only have so much warehouse space to take product in. In general, you know, we are FIFO.

We have, you know, roughly 60 day turns as a whole. We have certain product lines that are, you know, 14 days. We're still, as we talked about before, we're still catching up with some of the orders that were impacted with the February storms, and that's what we're expecting to experience throughout the balance of the year.

Perfect. Thank you again.

Sure.

Thank you. There are no further questions at this time. I'd like to turn the call back over to Curt Begle for closing remarks.

Thank you, operator, and thank you again for joining us today and for your interest in Magnera. We look forward to updating you on our progress in our next quarter and seeing many of you at the conferences scheduled in June. Have a great day, everybody.

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