Mativ Holdings Inc

NYSE:MATV

Earnings Call Analysis

Mativ's Q3 2023 Earnings Signal Challenges

Mativ faces a turbulent financial period, with their Advanced Technical Materials net sales declining by 8% year-over-year to $394 million. The Fiber-Based Solutions segment also saw a decrease, with net sales falling 2% from the previous quarter and 17% year-over-year. These reductions reflect customer destocking, reduced demand for premium paper and packaging, and challenging industry conditions. As a result, quarterly EBITDA projections were not specified, but a $401 million noncash charge for goodwill impairment was reported, accommodating weaker economic conditions and revised valuations of previous acquisitions. The sale of the Engineered Papers business is in progress, which will potentially reduce net debt by over $575 million and decrease annual interest expenses by over $40 million. For 2024, Mativ plans for recovering sales and profits, projecting to exit the year with $70 million in quarterly EBITDA, driven by a modest 5% annual sales increase and $25 million in synergies from procurement contracts and efficiency measures.

Revenue and EBITDA Overview

In a period marked by challenging market conditions, Mativ's consolidated net sales dropped to $498 million from $551 million the previous year, primarily due to a substantial volume decline of 12%, which overshadowed the 3% increase obtained from selling price and currency benefits. This volume dip significantly impacted the packaging and specialty papers segments, while the healthcare segment managed a 12% growth in sales. Despite this, the company generated an Adjusted EBITDA from continuing operations of over $55 million, keeping pace with the preceding quarter but falling short of the prior year's $70 million, a shortfall attributed to volume loss and manufacturing costs.

Strategic Adjustments and Cost-Reduction Initiatives

The team celebrated notable achievements over the past year, including surpassing synergy targets and conducting a conclusive strategic review leading to the divestiture of the Engineered Papers business. The anticipated $575 million net proceeds from the sale will significantly pare down debt. Mativ has embarked on aggressive cost-saving measures, including manufacturing footprint consolidation at three less profitable facilities, planned to commence early in 2024, aimed at generating meaningful savings. Projects necessary for safe operation and capable of yielding healthy financial returns will continue to receive investment.

Innovative Product Development and Market Expansion

Mativ's commitment to innovation and expansion in promising markets such as filtration and release liners is evident in their plan to roll out new products that could drive over $10 million in new revenue over the next year. Large-scale projects, like the newly operational capacity in Mexico and the upcoming melt-blown fiber asset, are projected to contribute upwards of $50 million in additional revenue. This focus on creating products that align with customer needs is central to Mativ's aim to accelerate growth and enhance margins.

Inventory Efficiency and Operating Savings

Efforts to augment cash flows have been impressive, yielding over $50 million in inventory reductions since Q1. Mativ targets to heighten inventory efficiency by another 100 basis points as a percentage of sales, reinforcing their commitment to operating savings and capital efficiency.

Guidance and Future Outlook

Mativ anticipates that the subdued demand, influenced by economic uncertainty, will linger in the near term with modest impacts expected in the fourth quarter due to year-end inventory adjustments and scheduled facility maintenance. Looking forward to 2024, the company is optimistic about a stabilization and modest uptick in demand starting in the first half, with improvement expected to ramp up in the second half. The company projects sales and profits to grow, targeting an EBITDA of $70 million per quarter by the end of 2024, bolstered by a 5% sales increase and $25 million in additional synergies.

Customer Engagement and Demand Generation

Mativ's business model emphasizes strong bonds with leading customers and leveraging those relationships to foster demand for its specialized offerings. The company's concerted efforts in streamlining operations and generating demand are expected to deliver sustained profitable growth and reinforce Mativ's financial standing.

Capital Allocation Strategy and Shareholder Value

The company's clear capital allocation strategy is calibrated to expedite profitable growth, solidify financial stability, and thereby heighten shareholder value. Confidence reigns in the company's leadership regarding its trajectory and capacity to navigate future market conditions favorably.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to Mativ's Third Quarter 2023 Earnings Conference Call. On the call today from Mativ is Julie Schertell, Chief Executive Officer; Greg Weitzel, Chief Financial Officer; and Chris Kuepper, Director of Investor Relations. Today's call is being recorded and will be available for replay later this afternoon. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Chris Kuepper. Please go ahead.

[Chris Kuepper, executive]

Good morning, everyone, and thank you for joining us on Mativ's Third Quarter 2023 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 and accompanying presentation slides.

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.mativ.com as are the slides for today's presentation. You can download the slides and or click through the slides at your own pace during the call using the webcast interface. Since the SWM and Neenah merger closed on July 6, 2022, the third quarter of 2023 is the first reporting period since the merger that is truly comparable. However, year-to-date GAAP results for the first half of 2022 will still include legacy SWM since this was prior to the merger.

Comparable performance for year-to-date figures to illustrate how our results compare on a like-for-like basis are shown in tables in our earnings release and the appendix of our presentation slides. Finally, with the August announcement about the sale of the Engineered Papers. Results for this business are now being summarized separately as discontinued operations. With all remaining businesses, being reported as continuing operations. With that, I'll turn the call over to Julie.

[Julie Schertell, executive]

Thanks, Chris. And good morning, everyone. The third quarter marked the start of our second year as Mativ. Our teams have accomplished a lot over the past year, bringing 2 companies together and establishing one new can-do culture quickly identifying and realizing synergies that are tracking ahead of our $65 million target and completing a detailed strategic assessment of our business portfolio. As we assess our businesses, we analyzed market dynamics, coupled with our right to win, looking for the ability to grow and deliver attractive margins and returns on capital.

We plan to invest most strongly behind our fastest-growing and most profitable categories like filtration and release liner. And drive operational efficiencies and margin improvement across all categories. Following this review, we made the decision to divest our tabacular-related Engineered Papers business and found a strategic buyer who was able to move quickly with an attractive offer. The transaction is moving forward as planned and on track to close in the fourth quarter.

Net proceeds from the sale are expected to be over $575 million and will be used to reduce debt. Now in our second year, we are focused on further augmenting cash flows through both operating savings and capital efficiencies and have a number of activities underway. Our supply chain efforts have been impressive. We've rightsized crew schedules and asset plan to reflect the current demand environment and reduced costs and have taken out over $50 million of inventory since the first quarter.

We have plans to further improve inventory efficiencies measured as a percent of sales, targeting at least another 100 basis points. I mentioned in the past that we would be working on footprint optimization as part of the merger. We've recently announced manufacturing footprint consolidation at 3 of our smaller and less profitable facilities and are in the process of consolidating warehouse and distribution operations as well. These changes will begin in early 2024. And while they have minor upfront costs, they will deliver meaningful ongoing savings. We have aggressive and specific cost reduction programs for manufacturing and SG&A.

Some of these began delivering value earlier this year, and some will begin in early 2024. We are carefully managing capital spending with 2024 spending expected to be below $70 million, down from the past 2 years. While tightening our belts, we will continue to invest in projects necessary to safely operate and maintain our equipment as well as those delivering compelling financial returns. Lastly, synergy realization remains a priority and is ahead of plan, with over $25 million of value being delivered in 2023 and another $25 million identified for 2024. These efforts are especially appropriate in today's uncertain economic and geopolitical environment. As a manufacturing company, many of our markets are economically sensitive.

The U.S. manufacturing sector as measured by the manufacturing PMI contracted in the third quarter as order softness continues, and this was confirmed by volume declines reported by our customers.

Turning to third quarter results. Sales from continuing operations were about $0.5 billion and reflected lower customer demand due to economic conditions, continued destocking of inventory as well as seasonal slowdowns in some of our European businesses. Sales were down 5% from Q2 and 10% below prior year. comparisons versus prior year were impacted more significantly in specialty paper and packaging where industry-wide customer destocking continued this year. and compared to a very strong prior year period.

Adjusted EBITDA was $55 million for the quarter, similar to Q2 but below prior year levels. Volume continues to be the biggest driver, including impact of fixed cost absorption at manufacturing sites. And this offset continued benefit from synergy realization and positive price input cost management. I noted many of the activities we have underway to reduce costs. Demand generation is also extremely important in this environment, and we are working closely with customers to grow share and explore new opportunities.

Some of these efforts include the launch of new pearlized high-quality packaging paper, where we are the only North American producer capable of making this a faster dissolving label that improves efficiency for customers, a new mid-tier paint protection film to meet growing market adoption rate and advancements in optical films, such as those used in ballistic resistant materials. In total, we expect these initiatives can add over $10 million in new revenue over the next 12 months.

In addition, we are on track with larger projects to enable ad growth in key markets. Release Liners has a strong record of profitable growth. Our new capacity in Mexico recently came online and allows us to continue this growth as we expand our position in North and South America. Air, Industrial and Life Science filtration are large, fast-growing markets. Our investment in a new melt-blown signed fiber asset to support these markets is on track to come online early in Q2 of next year.

As noted in our last call, these 2 capacity additions represent over $50 million of added revenue. So let me sum up with a few comments.

Over the course of the past year, our goal has been and continues to be to reposition Mativ strategically and financially for a strong future. While the short-term environment is challenging, we know what we need to do, and our teams are focused in executing well. We are addressing the fundamentals by providing customers with innovative new products that meet their needs, managing operations to deliver high-quality products in a safe manner and driving continuous improvement in productivity and efficiencies in all areas. We are continuing to deliver benefits by managing selling prices to cover input cost inflation and realized merger synergies.

We are taking additional actions to reduce costs and increase cash flow, including footprint optimization spending controls and working capital and capital spending initiatives.

And importantly, we continue to execute against our long-term strategy. Investing in attractive markets like filtration and release liners that will accelerate our growth rate and expand our margins. I'm confident our actions will make Mativ stronger in the long run, and I'm excited about our future. I'll talk more about our outlook later in the call.

But for now, I'll turn it over to Greg to review the third quarter financials.

[Greg Weitzel, executive]

Thanks, Julie, and good morning, everyone. Consolidated net sales for the quarter were $498 million compared to $551 million in the prior year. Selling price and currency were up about 3%, but were more than offset by a 12% volume base decline. Healthcare was our best-performing category in the quarter with sales up 12%. While packaging and specialty papers felt the most pressure for the reasons Julie noted.

Adjusted EBITDA from continuing operations was over $55 million, in line with Q2 but down from $70 million in the prior year.

Volume and manufacturing costs represented a combined $40 million impact, which was only partially offset by $23 million of combined net selling price input cost benefits and favorable impacts from lower SG&A, realized synergies and currency.

Turning to each of our segments. Net sales in Advanced Technical Materials of $394 million were down 8% year-over-year and 6% versus Q2. This reflected lower volumes due to increased customer caution and the uncertain macroeconomic environment as well as seasonal flowing, particularly in Europe.

The lower volumes were partially offset by higher selling prices and currency translation. ATM adjusted EBITDA of $59 million was down 6% year-over-year, reflecting the effects of lower volumes that were partially offset by positive net selling price input costs, distribution efficiencies in currency translation. Despite weak demand, we improved adjusted EBITDA margin by 30 basis points to 15%, mainly due to realized synergies and favorable product mix. In our fiber-based solutions for FBS segment, which now is comprised solely of packaging and specialty papers, net sales of $104 million were down 2% from last quarter and 17% from last year.

Year-on-year results reflected customer destocking, along with lower demand for premium paper and packaging in the current quarter. Industry data for uncoated freesheet papers indicated demand was down around 25% during the quarter. Results compared to a very strong prior year when there was significant industry-wide customer inventory build, partly offsetting impacts of lower volumes were increased sales of consumer papers and higher selling prices. FBS adjusted EBITDA of $15 million was down slightly versus the prior quarter but down significantly year-over-year.

The comparison to prior year was negatively impacted by a onetime benefit in 2022 of almost $7 million as we harmonized inventory costing systems between Neenah and SWM following the merger. Lower volume and associated manufacturing cost impact in the current quarter were partly offset by favorable net selling price input costs. Turning to a few of the corporate items. Unallocated corporate adjusted EBITDA expense of around $18 million was flat year-on-year. Interest expense of $17 million was up $2 million from the prior year period, due to higher interest rates on our variable debt in 2023.

We will be paying off this higher cost debt with proceeds from the EP sales. Other income was around 0 in 2023, down $2 million from 2022 when we recorded gains on certain foreign currency contracts. Our tax rate was negative in the quarter. This rate was driven by the goodwill impairment that was not deductible for tax purposes and a change in the valuation allowance against one of our tax assets. As you saw on our GAAP results, during the third quarter, we performed a goodwill impairment analysis and recorded a pretax noncash charge of $401 million.

The write-off included goodwill created at the time of the merger when our company market valuation was higher and reflected today's weaker economic conditions and associated impact on the valuation of certain acquisitions.

I'd note that while current valuations for some acquisitions are lower than when they were acquired a few years ago, when conditions were more robust and interest and discount rates were lower, these acquisitions are still attractive and gaining momentum.

During the quarter, we also recorded $19 million of noncash costs to write down assets, including sites impacted by rationalizing our manufacturing footprint and just over $5 million of cash costs related to the pending sale of Engineered Papers.

At the end of the quarter, net debt was a little over $1.6 billion and available liquidity was $414 million. Our debt matures on a staggered basis between 2026 and 2028. As announced in August, with our revised capital allocation priorities, we resized our quarterly dividend to $0.10 a share.

We made our first dividend payout of $5.5 million in September at this new rate. This revised payout frees up cash while still providing an attractive yield. We also repurchased over $4 million of shares in the quarter. Our intent is to opportunistically repurchase shares to offset dilution from stock compensation. We expect repurchases in the fourth quarter to be at or below this amount. The priorities of cash flow, however, remains paying down debt. The sale of our Engineered Papers business, which is on track to close this year, will enable us to pay off more than 1/3 of our outstanding net debt.

We expect a reduction of over $575 million will decrease annual interest expense by more than $40 million. For modeling purposes, following the sale of Engineered Papers, depreciation and amortization expense should decline by around $20 million annually, and we expect a normalized tax rate of about 24%. With that, I will turn the call back to Julie for her closing remarks.

[Julie Schertell, executive]

Thanks, Greg. I'll start with a few near-term outlook comments before getting into 2024. Discussions with customers, vendors and others indicate near-term demand will remain subdued given the still uncertain environment. While indications are that destocking is largely over, customers typically manage inventories down at year-end. So there may be a small sequential impact on our sales in the fourth quarter. We also take maintenance and holiday downs across our facilities which may add $2 million to $3 million of incremental cost to the bottom line, in addition to impacts from lower quarterly sales.

Looking ahead to 2024, expectations are for demand to stabilize and then begin to pick up modestly later in the first half with recovery accelerating in the second half of the year. Input costs generally appear to have reached their low point and are projected to modestly increase. We will continue to implement our disciplined pricing practices that overcome input cost pressures. Overall, we expect growing sales and profits in 2024. Improvement should accelerate in the back half of the year as volumes recover allowing us to reach quarterly EBITDA of $70 million as we exit the year and grow from there.

To bridge this number, a 5% increase in annual sales add $35 million annually of profit contribution, and we expect to deliver an additional $25 million in synergies as procurement contracts go into access and footprint efforts are executed. Combined, this represents an incremental $15 million of quarterly EBITDA and excludes any upside from additional cost-saving initiatives underway.

However, the key to this starts with demand recovery. As market dynamics stabilize and recover, Mativ is well positioned for long-term growth. Following the sale of engineered paper, about 80% of our revenues will come from ATM, which has stable mid-teen EBITDA margin.

This business is global, serving both industrial and consumer markets with attractive growth drivers, such as clean air and water and infrastructure investments. Our technical capabilities are broad, and we have a long-standing relationships with leading customers with specified products that can uniquely meet their needs.

You've heard this morning that our teams are aggressively executing plans to reduce costs, drive operating and capital efficiencies and working closely with customers to generate demand.

Our business and capital allocation strategies are clear and designed to accelerate profitable growth, strengthen our financial position and deliver value to our stakeholders. I remain confident in our success in the years ahead and look forward to sharing our progress with you. That concludes our prepared remarks. Thank you for joining us, and please open the line for questions.

[Operator]

[Operator Instructions] First question comes from John Tanwanteng from CJS Securities.

[Unknown Analyst]

This is Justin on for John. I know you just mentioned about the quarterly EBITDA run rate of $70 million. I was just hoping to get a little more color on when you expect to hit that? And what kind of volume or macro improvement do you need to see to get there?

[Julie Schertell, executive]

Sure. I would say, as we think about 2024, we believe the first quarter will be similar to our current pace. And over the course of the year, we'll continue to make progress toward an exit rate of $70 million in EBITDA so in Q1, we expect demand to remain fairly subdued with a modest pickup in Q2 and then continued recovery in the back half of the year. And then as I mentioned, we are expecting in total stronger top line and bottom line in '24 and it doesn't take much to get there to the $70 million.

We were at $70 million last Q3 with a stronger macro environment a 5% increase in top line, coupled with our synergies, adds $15 million to our current pace. So I'm really bullish about it. We just need a little bit of modest market recovery to get there.

[Unknown Analyst]

Okay. That's helpful. And then can you give some more detail on which end markets do you see remaining weak or strengthening heading into Q4 and then 2024?

[Julie Schertell, executive]

Yes. From an end market standpoint, I'd say we've seen the most strength in healthcare in where we compete in healthcare, weakness primarily in construction, and that's new construction, rebuilds, commercial and residential. And that impacts us from an industrial standpoint or release liner standpoint in our adhesives and films and protective solutions.

And then a little bit of weakness in transportation as well. The strongest in health hygiene, I'd say moderate weakest in construction and transportation. And then our paper business, we have good visibility to our customers' inventories in paper, and we can see there is continued destocking in that business, inventory they're still remaining a little bit elevated.

[Unknown Analyst]

That's great. And then just one more, if I could squeeze it in. Can you give a little more detail on the valuation allowance you had in the quarter? Where is that coming from?

[Greg Weitzel, executive]

Sure, Justin, this is Greg. That was related to a tax asset that we had associated in Luxembourg associated with the EP business. that we are now releasing don't -- with the sale of EP, don't see the ability to fully utilize that asset.

[Operator]

Our next question is from Daniel Harriman from Sidoti.

[Daniel Harriman, analyst]

Please don't worry, I'm not going to ask a question about destocking. I promised you last time. But it seems like margins in both segments held up fairly well for the quarter despite the negative impact of volumes. So could you maybe just provide a little bit more color about the ongoing cost reduction efforts and what you're planning to do as we enter 2024? And then Julie, you mentioned footprint optimization. And I was just hoping to get a little bit more color on that as well.

[Julie Schertell, executive]

Sure. Yes, I'm really bullish on our margins and how well the team has managed them in this environment with ATM margins at 15% and up versus prior year. It gives me a lot of confidence that as we realize some volume recovery, our margins will continue to show really nice expansion. From a cost reduction standpoint, we talked earlier this year about a $10 million target versus Q1 in manufacturing costs. We achieved that in Q2, and then that continues to pull through in Q3 and Q4. That's mainly driven by staffing changes, asset schedule changes, maintenance and purchase service reductions. Then there's an additional $5 million in cost improvement that will come as we consolidate some of these smaller assets that I mentioned. So we've announced the consolidation at 3 small sites that will migrate mostly to different sites that we have. Some of the business won't, but the majority of it will. There's some upfront costs, it's fairly minimal, and then it adds about $5 million going forward. And that really starts I'd say, mid to late Q1 of 2024.

And then the last thing I would mention is as we divest EP, it's a great time for us to launch an SG&A effort to ensure that we're rightsizing our internal infrastructure to mirror what we have from a remaining business standpoint. So we have launched that we're using an outside resource because I think it's important to somebody to help us kind of look really strongly in the mirror what we need to reduce so that we don't end up with stranded costs. So those are the really the 3 big buckets I would think about from a cost standpoint, manufacturing costs, asset consolidation and then SG&A efforts.

[Daniel Harriman, analyst]

Okay. Great. That's really helpful. And then last 1 for me is just how should we think about the company's leverage target? Obviously, as you build up through 2024 and you see that $70 million in EBITDA run rate in the fourth quarter. Is there a particular target that the company is looking to achieve by year-end 2024.

[Greg Weitzel, executive]

Yes, Daniel. The target still remains the same of 2.5 to 3.5x. The journey there is a little more prolonged based on kind of the market dynamics that we just talked about. As we recover and work our way to that $70 million a quarter. That's what gets us there. The fact that, that metric is based on a trailing 12 months, and we're not going to come out of the gate, not expecting to come out of the gates in Q1 at $70 million. It will prolong that a little bit, but the target remains the same, and our plan to get there remains the same.

[Operator]

So we have no further questions on the call at this time. So I'll hand the call back to the team.

[Julie Schertell, executive]

Yes. Thank you for joining us this morning and your interest in Mativ, and we look forward to talking to you at our next quarterly call.

[Operator]

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