Mativ Holdings, Inc.

Welcome to the MADF Third Quarter 2024 Earnings Conference Call. On the call today from MADF are Julie Chattel, Chief Executive Officer, Greg Weissel, Chief Financial Officer, and Chris Cooper, Director, Investor Relations. Today's call is being recorded and will be available for replay later this afternoon. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your touchtone phone. If you need to remove yourself from the queue, please press the pound key. If you should require operator assistance, please press star 0. We ask that you please pick up your handset to allow optimal sound quality. It is now my pleasure to turn the call over to Mr. Chris Cooper. Sir, you may begin.

Good morning, everyone, and thank you for joining us for MADF's third quarter 2024 earnings call. Before we begin, I'd like to remind you that comments included in today's conference call include forward-looking statements. Actual results may differ materially from these comments for reasons shown in detail in our Securities and Exchange Commission filings, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Some financial measures discussed during this call are non-GAAP financial measures. Reconciliations of these measures to the closest GAAP measures are included in the appendix of the earnings release. Unless stated otherwise, financial and operational metric comparisons are to the prior year period and relate to continuing operations. The earnings release, issued yesterday afternoon, is available on our website at ir.mattoff.com. With that, I'll turn the call over to Julie.

Thanks, Chris. Good morning, everyone, and thank you for joining our call. We appreciate the opportunity to share our third quarter results with you, outline a number of initiatives we've undertaken to drive continued improved performance and provide an outlook on the remaining quarter of 2024. Sales were up 1% organically and essentially flat year over year on a reported basis. Volume improvements in most of our product categories were partially offset by lower demand in film which was impacted by ongoing challenges in the automotive and construction end markets, as well as lower productivity in one of our largest films plants. I'll provide more color on this in a moment. For Total Matters, from a bottom line perspective, I'm pleased to report that Q3 results showed meaningful adjusted EBITDA improvement of 10% year over year and adjusted EBITDA margin up 110 basis points year over year. Primary drivers were increased volume and filtration and our overall FAS segment, as well as lower manufacturing costs. Let me touch on FAS first, which delivered adjusted EBITDA up almost 20% and increased margin of 200 basis points. Within FAS, healthcare was very strong, followed by label, commercial prints, and release liners. And we see continued solid volume and growth as we enter Q4, particularly in release liners in North America, as we ramp up and qualify our newest asset in Mexico. Overall, fan performance in the quarter was mixed, with solid results in filtration and challenging results in advanced films. Let me provide a bit more color on this part of our business and what we are doing to improve film's performance going forward. First, in our filtration category, revenues were up almost 6%, led by growth in air filtration using HVAC and air pollution control. Our largest end market in filtration is transportation, which was up over 5%, and continues to have a very healthy pipeline of new products and opportunities in 2025. As a reminder, in transportation filtration, we are mainly driven by the aftermarket, and about 50% of our media goes into heavy-duty fleet vehicles. These markets remain much healthier than the overall automotive market. Now turning to advanced films, which is part of our FAMS segment, as a reminder, the largest part of this category is paint protection film that is applied to new cars, typically at the time of purchase or immediately following. Another large part is optical film, which is often used on the exterior and interior of office buildings. These categories are heavily influenced by the automotive and construction markets, both of which remain soft and which impact about 85% of our film sales. Additionally, paint protection film, which makes up about a quarter of our film's revenue and with historically high margins, is a category where we are seeing increased competition from Asia with lower performance, less costly products. And lastly, we underperformed at our largest films plant, impacting margins in Q3 and Q4 as we sell through high-cost inventory. Given the rapidly evolving markets and the diversity of new applications that we have in development, we've assembled a tiger team to develop quick and aggressive action to improve results over the next 12 months. This effort is focused on demand generation and operational performance centered around three platforms. First, accelerating our presence in targeted markets, particularly in medical and optical films, such as advanced wound care, smart glass, and interlayer applications. These applications play to our strength in advanced materials and technology development. One example of extending our market reach is the partnership we recently announced with Meru Company to develop innovative smart glass products for autos and buildings. These products feature increased energy efficiency, temperature control, and improved aesthetics. We recently showcased this partnership and samples at the International Glass Tech Trade Show and received very positive feedback from key industry leaders who expressed strong interest in this new state-of-the-art technology and the ability to provide improved performance and reduced carbon footprint versus today's solutions. Turning to medical films, we have invested in a new medical films line in the UK that will start up in Q1 of 2025 and provides improved quality and capacity for growth in our healthcare applications. giving us over $15 million of incremental revenue opportunities over the next four years. The second platform is providing a unique capability and holistic supply chain solution, a one-matt solution, for customers to procure not only the base film product, but the fully coated and converted film product for their application. Today, most customers are sourcing this solution through three or more suppliers, Unique to Mativ, we can provide all four steps, improving quality and reducing our customers' supply chain complexity, cost, and lead times. The third platform is aggressive cost reduction in our manufacturing sites, as well as how we develop new products. For instance, we're focused on accelerating qualifications of more cost-efficient resins and raw materials, and introducing a mid-tier product to battle increased imports from Asia. And lastly, we have a core part of the TIGER team in our largest film site focused on driving sustainable improved productivity, quality, and operational performance. The advanced film turnaround effort is similar to the approach we took over the course of 2023 to improve performance in healthcare. The year-to-date results of this effort in healthcare are above market organic sales growth of more than 5% versus prior year and significantly improved profitability that has exceeded our expectations. Based on this similar effort and the outcome, I'm confident we will successfully improve results in advanced film over the course of the next 12 months. I'll now turn to some of our high growth categories where we are investing for additional capacity. We've previously talked about the investments we are making in filtration, specialty tapes, and release liners, and I just touched on the new investment in the UK to expand our medical film capacity. We also recently improved an investment in specialty tapes to support our polyflex and athletic tapes category with a new line in our facility in Canada. We are close to capacity in this category and have significant upside opportunities and commitments from key customers for future growth. We expect the line to start up in early 2026 and support over $20 million in incremental revenue once fully utilized by the end of year three, and with almost 50% of the volume expected to be realized in year one. Combined, the investments in growth that we've announced throughout 2023 and 2024 are expected to provide incremental revenues of over $115 million in the next three to four years. Additionally, our commercial teams are executing well to drive sustained sales growth. Here are just a few examples. In FAM, we've realized over $10 million in share gains with a number of HVAC and air pollution control customers. We also negotiated over $10 million in new customer agreements that will begin mid-2025 and continue to add to our large pipeline for product development with key customers. In SAS, our momentum is strong. We talked about a new leader, Ryan Elwert, that we hired to run this segment earlier this year, and he and his staff team are doing exactly what we wanted from them, which is driving our commercial excellence effort and focusing on new demand generation opportunities. As evidence of this, we recently signed a new long-term commitment for release liners with one of the largest consumer goods companies in North America. In paper and packaging, we previously told you about a major win in our digital print category worth over $10 million annually, and I'm happy to share that we have secured additional commitments totaling another $5 million in opportunities starting in mid-year 2025. And in healthcare, we are launching a new sterilizable medical paper product. This is a reinforced and partially bio-based solution for the healthcare packaging sector and will launch in the first half of next year. I'm very pleased with the sales pipeline that we have in place and with the team driving it. Finally, as a manufacturing company, we are always focused on reducing our costs and optimizing our assets. During this most recent quarter, we added to this list, divesting a small, non-strategic, and high-cost facility in Massachusetts. And this past week, we closed on the sale of our plant in the Netherlands, which is expected to have an immediate accretive effect on our operating margin and will further reduce the complexity of our portfolio by exiting a category. With that, since the merger, we have streamlined our footprint from 48 sites to now 35 sites and reduced our outside warehouses by over 25%. Taken together, these actions have and will continue to reduce our costs, improve the customer experience, and improve our margins, especially as demand returns to more normalized levels. We will continue to evaluate our portfolio and our manufacturing and warehousing footprint for further opportunities to reduce complexity and unlock incremental value. With that, I'll turn it over to Greg for a more detailed discussion of our financial performance.

Thanks, Julie, and good morning, everyone. Consolidated net sales from continuing operations for the quarter were 498.5 million compared to 498.2 million in the prior year. Sales were up 1.4% year-over-year on an organic basis, and selling prices were essentially flat versus prior year, while currency was favorable. Adjusted EBITDA from continuing operations was 60.8 million up 10% from $55.4 million in the prior year. Improved distribution and manufacturing costs and lower SG&A expenses represented a combined $7 million favorable impact, which was partially offset by $2 million of lower contribution from mix. Adjusted EBITDA margin increased 110 basis points year-over-year. Turning to each of our segments, Net sales in our filtration and advanced materials segment of $190 million were down 3% versus Q3 of 2023. As Julie mentioned, we reported higher volumes in our filtration categories that were more than offset by lower volumes in our advanced films category, as well as lower selling prices in the segment. FAM adjusted EBITDA of $36 million was down almost 7% year over year, reflecting the effects of lower volumes in our high margin advanced films category and lower selling prices in the segment. We partially offset these pressures with higher volumes in our filtration categories, lower SG&A expenses, and improved manufacturing efficiencies. In our sustainable and adhesive solutions segment, net sales of 309 million were up more than 4% from last year on an organic basis, and up more than 2% on an as-reported basis. Organic growth reflected higher volumes across all of our end markets and higher selling prices. SAS generated strong adjusted EBITDA performance of 41 million, which was up almost 20% year over year. Adjusted EBITDA margin increased 200 basis points versus the prior year. The year over year performance reflected favorable manufacturing and distribution costs, favorable relative net selling price versus input cost, and higher volumes partially offset by unfavorable mix and slightly higher SG&A expenses. Turning to a few of the corporate items, unallocated corporate adjusted EBITDA expense of around $17 million was down more than 7% versus the prior year. As a reminder, we still expect unallocated to be around $80 million for the full year. Interest expense of $18 million increased 9% from the prior year, primarily due to higher interest rates on our floating rate debt in 2024, coupled with the higher revolver balance in the current period. When taking hedges into account, approximately 75% of our debt is at a fixed rate and matures on a staggered basis between 2027 and 2029. In late September, we went to market with a $400 million bond offering that priced at 8% and settled subsequent to the end of the quarter on October 7th. We were able to take advantage of the then-prevailing market rates and risk premiums that allowed us to reach a favorable outcome for Mative, essentially providing certainty in what has become a more volatile interest rate environment. We used the proceeds from the bond offering to pay off our outstanding $350 million bond that was due in 2026 as well as the $43 million portion of our term loan B. With these changes, we expect our go-forward annual interest expense to be $75 million per year. Other expense of $12.7 million increased $12.4 million compared with the prior year period, largely due to other asset-related charges in connection with the two facility rationalizations Julie outlined earlier, as well as losses on foreign exchange. Our tax rate was 13% in the quarter, This low tax rate was driven by one-time tax adjustments, which, if excluded, would yield an effective tax rate of 21%. For modeling purposes, however, we suggest using a normalized tax rate of 24%. At the end of the quarter, net debt was $981 million and available liquidity was $463 million. Our net leverage ratio, as defined in our credit agreement, was 4.1 times, sequentially flat with Q2. Our number one priority for cash flow utilization is and continues to be deleveraging and debt reduction, and our target leverage range is 2.5 to 3.5 times. We did not repurchase any shares during the quarter. Our intent continues to be to opportunistically repurchase shares to offset dilution, and the priority of cash flow remains on paying down debt. Turning to our outlook for Q4 2024, we do not see evidence of a change in demand from what we have seen in Q3. And we recognize a number of our categories are also subject to normal year-end seasonality. Therefore, we expect Q4 sales to be up mid-single digits versus last year and Q4 adjusted EBITDA to be down low double digits versus last year. This is driven by timing of incentives, product mix, timing of maintenance outages, and extended downtime over the holiday season versus Q4 2023. We will provide more detail on our expectations on the next fiscal year during our earnings call in February. For modeling purposes, we are now planning for 2024 full-year capital expenditures of approximately $50 million, down from the previously communicated $60 million, and we expect our depreciation and amortization expense to be around $100 million. With that, Julie, I'll hand it back over to you for closing remarks.

Thank you, Greg. What you should take away from this call is that while the pace of demand is slower than expected, we are focused and taking actions to offset the impact, grow share, and capture incremental value when markets improve. This includes new programs, resources, and products that result in new business with examples provided earlier today, and investments and partnerships in key categories of filtration, release liners, specialty tapes, and medical and optical films, where we have upside growth opportunities. We continue to simplify and streamline our operations, including divesting non-core business lines and consolidating assets, warehouses, and manufacturing plants. And we've outlined our turnaround plan for an underperforming category, advanced films, which mirrors our demonstrated success within healthcare. And lastly, we are aggressively driving out costs with over $20 million of non-operating cost reduction this year. All of these actions are the right things to do. And I appreciate the support from our board and making these decisions and from our teams and making them happen. One last item to highlight, we will be publishing our 2023 ESG report over the course of this month. We look forward to sharing with you our continued commitment to being responsible stewards of the environment, maintaining a diverse and caring culture, and having strong corporate governance practices. Thank you for joining us this morning, and please open the line for questions.

Thank you, Ms. Chantal. If you would like to ask a question, please press star 1 on your touchtone phone now. If you change your mind, please press star 2. When preparing to ask you a question, please ensure your devices are moved locally. We have our first question from Daniel Harriman with Sudolty and Company. Your line is open. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. I'll start off with two quick ones, and then I'll get back in the queue afterwards. But Julie, I know you provided a lot of information to us on the TIGER team. um initiative but i'm just wondering if you could just maybe provide a little bit more information about when that process started and maybe what demand generation ideas you're most excited about within that and then on the q4 guide the increase in revenue and the decrease in in ebitda year over year that disconnect is that made up mostly just of expectations for poor performance and films or is there something else to look for there thanks

Thanks, Dan. Let me start with your first question on films. From a Tiger Team standpoint, it really started this quarter. So films is down about 10% this year versus last year, and it's a category that has historically had very high margins, so it has a disproportionate impact on our bottom line. And the Tiger Team is really focused around three primary issues. How we battle the headwinds of just weak markets in automotive and construction, The second is increased competition from Asia with lower performance alternatives. And the third is poor operational performance in one of our largest plants in North America. And if I work my way backwards, the most straightforward issue for us to address is the low performance in our own plant. That's all within the four walls of Mativ. We know what good looks like. We know how to operate well. We have a very strong facility that makes these products in China. so that we can better share best practices to drive improvements in productivity and speed and quality and in overall performance in the supply chain to our customers. The second one is the increased competition from Asia that has accelerated with a lower cost, lower performance alternative. So we are working very hard and have developed a mid-tier alternative. I think even more important than that for us is to ensure that we are showcasing the clear differences between a premium product solution and the mid-tier solution because there are clear performance differences that our customers need to have the opportunity to take into consideration. The second really opportunity there and one that I am most excited about, there's two that I'll talk to you about that I'm most excited about, but one of them is this one MADDV potential solution. It is a place where, I've mentioned a couple times, our customers are buying from three to four different suppliers, and we are in a very unique position where we can provide all of those services and capabilities to our customers. The base film, the top coat, the PSA, and the converted product. We've got customers that are very interested and engaged with us on that process. It will take some time because there's a fair amount of qualification that has to happen. But it's a big opportunity, a big idea that can really change the supply chain capabilities for us and our customers in this space. And then the last is how we battle just kind of weak markets that continue in automotive and construction. And as a reminder, about 85% of our films are impacted by the automotive and construction markets. And to combat this, we are aggressively expanding our addressable markets in a couple of ways. One is with an investment into medical films capabilities in the UK that will start up and start qualifications in 2025. And the other one is, and this is the second one I'm most excited about, it's in our optical films business. And we recently announced a partnership with a company called Meru. And the technology that we're working on provides glass capabilities that increase energy efficiency, it reduces carbon footprint, and it improves aesthetics. And we have a very large EV manufacturer as our first customer and expect to launch that product in early 2026. So again, it's going to take some time. These are highly technical, require a lot of qualification, but big value opportunities. Paint protection film is still really important to us. And in the interim, we have the opportunity while the markets are weak before they return because they will return. But we have the opportunity to provide more resilience in this category by extending our end-use applications and markets like I just described. I'm also very confident in the turnaround effort and in the Tiger Team effort that we have in place. It's a very similar approach to what we used in healthcare, as I mentioned on the call, and the results in healthcare are exceeding our expectations. So I look forward to the team's continued performance. They've already had key milestone report outs to me, and they're continuing to make great progress.

And then, Daniel, this is Greg. I'll take your second question, which had to do with the expectations for the fourth quarter and the increased year-over-year sales, but the decrease year-over-year EBITDA. And you were right. Although we're expecting strong sales, primarily driven in the SaaS segment for Q4, the films business is definitely weighing down on the EBITDA. That's one of the largest. In addition to that, There is some price input timing, and there are some pockets of pricing within FAM that we're working on to maintain volume and to gain volume. On the cost side, the overhead reduction program that we talked about earlier is flowing through to the P&L. From a comp standpoint, though, year over year, we did have a much lower incentive accrual last year that we're comping. And then really, finally, to a lesser extent, the timing of the holidays and the outage that I mentioned is really the last impacting item.

Perfect. Thanks, guys, so much. And I'll get back in the queue.

Thanks, Dan.

Thank you. The next question is from John Tomlinson with CJS Security. Your line is open. Please go ahead.

Hi, good morning, and thank you for taking my questions. I appreciate the detail on Q4 and all the inputs and the puts and takes going into it. But I was wondering if you could talk about what your customers are telling you, you know, as you enter 25, they exit the, you know, the Q4 shutdowns and everything. Are they ready to pick back up again? Is it too early to tell? You know, how should we think about, you know, the velocity exiting the holidays?

Yeah. Thanks for the question, John, and I would tell you demand recovery remains sluggish, and I think we're seeing that all around us. The PMI fell again this month. I believe it hit the lowest point since COVID, and that means manufacturing and materials industries are not yet healthy. They're still contracting, and we are obviously directly correlated to that. We're not seeing indicators of a changing demand profile in the near term. It almost seems like we got a false positive in the spring, that quickly return to a very sluggish environment. So until we see interest rates decrease more and auto home DIY and remodeling start to rebound to a greater degree, we expect to experience this lower level of demand. From a customer standpoint, they're in the same spot. They're not seeing meaningful indicators. They remain conservative in their willingness to build inventory given past supply chain challenges that we had over the last couple of years. There's pockets of strength, I would tell you. Filtration remains fairly resilient, particularly air filtration and transportation filtration. But again, that's driven primarily by the aftermarket. And then I'm really excited about the pipeline that we have in our FAST segment. We've got aggressive growth opportunities in release liners, particularly in North America, and new commitments and agreements from leading customers in the geography that will launch next year. We've got new commitments in our healthcare business, and we've got big opportunities in our tape business that they may not all hit, but we just need a couple of them to hit. That will come mid to late 2025. So I'm excited about the pipeline. I'm excited about and thrilled with all the efforts the teams have put in place, but I would not suggest there's a healthy demand environment that we're seeing.

Okay. Fair enough. And any thoughts on the potential for a more aggressive tariff environment or perhaps a more relaxed tax environment? That might affect your business if you're planning for anything like that in your strategic level planning.

Yeah, I mean, I think it's too, if you're talking about potential new administration, I think it's a little too early to speculate what that could do for us. From a tariff standpoint, we have pretty low exposure on the cost side. About 88% of our spend is sourced from a site's home region. So that's a really good spot to be in. If we expect incremental tariff on Chinese-made goods sold into the U.S. as the most likely scenario, that could be an advantage for us, particularly in the films business that I just talked about, where we are seeing an acceleration of lower-cost, lower-performance film products coming into

north america and europe from asia so there potentially be you know advantage boards there okay great and then just lastly um just an update on how much progress do you think you can make against the leverage and the debt um you know in the coming year or so sure i'll take that john um our target still remains the same the two and a half to three and a half times uh based on yeah based on the uh kind of prolonged market recovery We expect to still hit that, but it probably will be more in the 2026 timeframe, and that we'd be making progress toward that over the course of 2025.

Understood. Thank you.

Thanks, John.

Thank you. We have a follow-up question from Daniel Harriman with Sudoti & Company. Your line is open. Please go ahead.

You guys, just two more quick ones for me, if that's okay. First, can you expand a little bit upon the two most recent facility closures? Maybe just a little bit more detail on the rationale there and the potential for more closures moving forward as you optimize the footprint. And then with the reduction in CapEx spend, what are your expectations for the impact on cash flow for the year?

Sure. Thanks, Dan. The divestitures that we announced this quarter, the first one was a site in the Netherlands that we sold, which produced paper for dye sublimation products. So with the sale of that site, we have exited that business. It was a non-strategic, break-even type of EBITDA business for us and will be better in the hands of the buyer who has plans to invest in the business. We also exited a site in Massachusetts. We divested it as well, and it supported our paper business too. I would tell you that both sales support our strategy to reduce complexity, to prune non-strategic, non-accretive sites and categories, and accelerate growth by focusing our efforts in areas where we have unique capabilities to win in the marketplace. The impact of those, the revenue and EBITDA impact of those divestitures combined is about $50 million in less revenue that we'll see next year and about $1 million in more EBITDA that we'll see next year.

I'll take your second question, Dan, on the CapEx and the cash flow. So yeah, based on the suppressed markets that we've been seeing, we continue to revisit the capital plan for the year, and that is a big reason why we dropped it from 60 to 50 million this year, primarily in reduction and discretionary sustaining and maintenance capital, and then also some deferral of IT capital spend. As far as cash flow, Q3 was a relatively strong cash flow quarter. For Q4, based on the results that we would expect in that lower CapEx spend from previous estimates. It should still be a cash flow that's lower than Q3, but still in positive territory for Q4.

Great. Thanks so much, guys. Best of luck in the quarter.

Thanks, Dan.

Thank you. We currently have no further questions, so I'll hand back to Ms. Julie Chateau to conclude.

Sure. Thank you for joining us this morning on our Q3 2024 earnings call. We look forward to connecting with you throughout the quarter and on our next earnings call in February. Have a wonderful day.

Thank you. This concludes today's call. Thank you all for joining. You may now disconnect your lines.