Q3 2023 Mativ Holdings Inc Earnings Call

Okay.

Speaker 1: Welcome to Mativ's third quarter, 2023 earnings conference call. On the call today from Mativ is Julie Shertel, Chief Executive Officer, Greg Weitzel, Chief Financial Officer and Chris Cooper, Director of Investor Relations.

Welcome to much of third quarter 2023 earnings conference call on the call today from massive Julie Schatzel, Chief Executive Officer, Greg Weitzel, Chief Financial Officer, and Chris Cooper Director of Investor Relations.

Speaker 1: Today's call is being recorded and will be available for replay later this afternoon.

Today's call is being recorded and will be available for replay later this afternoon.

Speaker 1: 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.

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.

Speaker 1: If you would like to ask a question at that time, please press star one on your touchtone phone. If you need to remove yourself from the queue, please press star two. If you should require operator assistance, please press star zero. We ask that you pick up your handset to allow optimal sound quality. It is now my pleasure to turn the call over to Mr. Chris Cooper. Please go ahead.

I would like to ask a question at that time. Please press star one on your Touchtone phone if.

If you need to remove yourself from the queue. Please press star two.

If you should require operator assistance, please press star zero.

We ask that you pick up your handset to allow optimal sound quality. It is now my pleasure to turn the call over to Mr. Chris Cooper. Please go ahead.

Speaker 2: Good morning, everyone. And thank you for joining us on Matteth's third quarter, 2023 earnings call. Before we begin, I'd like to remind you that comments included in today's conference is fine enough.

Good morning, everyone and thank you for joining us on matters third quarter 2023 earnings call before we begin I would like to remind you that comments included in today's conference call include forward looking statements.

Speaker 2: Actual results may differ materially from these comments, for reasons shown in detail in our securities and exchange commission filing, including our annual report on Form 10K, our quarterly reports on Form 10Q.

Actual results may differ materially from these comments for reasons shown in detail in our Securities and Exchange Commission filings.

Moving our annual report on Form 10-K, and our quarterly report on Form 10-Q.

Speaker 2: Some financial measures discussing this call are non-gape financial measures.

Financial measures discussed during this call are non-GAAP financial measures reckon.

Speaker 2: Reconciliation of these measures to the closest GAAP measures are included in the appendix of the earnings release and a company presentation slide.

Reconciliations of these measures to the closest GAAP measures are included in the appendix of the earnings release and accompanying presentation slides.

Speaker 2: unless stated otherwise, financial and operational metric comparison are to the prior year period and relates to continuing operation.

Unless stated otherwise financial and operational metric comparison to the prior year period and relate to continuing operations.

Speaker 2: Earnings released, issued yesterday afternoon, is available in our website at ir.madiv.com. As our display puts the date's presentation.

Our earnings release issued yesterday afternoon is available on our website at IR Dot <unk> dot com as are the slides for today's presentation.

Speaker 2: You can download the slides and or click through the slides at your own pace during the call using the webcast interface.

You can download the slides and click through these slides at your own pace during the call using the webcast interface.

Speaker 2: Since the SWM and Nina merger closed on July 6, 2022, the third quarter of 2023 is the first reporting period since the merger that is truly comparable.

Since the SWM at Neenah merger closed on July six 2022.

Third quarter of 2023 is the first reporting period since the merger that is truly comparable.

Speaker 2: However, you'd a date gap results for the first half of 2022 will still include legacy SWM. So this was prior to the merger.

However year to date GAAP results for the first half of 2022 will still include legacy SWM. This was prior to the merger.

Speaker 2: Comparable performance for year-to-date figures to illustrate how our results compare on a light-for-like basis are shown in tables in our earnings release and the appendix of our presentation slides.

Terrible performance for year to date bigger illustrate how our results compare on a like for like basis are shown in the tables in our earnings release and the appendix of our presentation slides.

Speaker 2: Finally, with the August announcement about the sale of the engineer's papers, results for this business are now being summarized separately as this continued operation.

Finally, with the August announcement about the tail of the engineered papers.

<unk> for this business are now being summarized separately as discontinued operations.

Speaker 2: with all remaining businesses being reported as continuing operations. With that, I'll turn the call over to Julie.

We've all remaining businesses being reported as continuing operations.

That I will turn the call over to Julie.

Thanks, Chris and good morning, everyone.

Speaker 3: The third quarter marked the start of our second year as MATIM. Our teams have accomplished a lot over the past year, bringing two companies together and establishing one new can-do culture, quickly identifying and realizing synergies that are tracking ahead of our $65 million target.

Third quarter Mark.

And my second year as matter.

Teams have accomplished a lot over the past year.

Bringing two companies together and establishing one new can do culture.

Quickly identifying and realizing synergies that are tracking ahead of our $65 million target.

Speaker 3: and completing a detailed strategic assessment of our business portfolio.

And completing a deep strategic assessment of our business portfolio.

Speaker 3: As we assess our businesses, we analyze market dynamics coupled with our right to win. Looking for the ability to grow and deliver attractive margins and returns on capital.

As we assessed our businesses, we analyze the market dynamic coupled with our right to win.

Looking for the ability to grow and deliver attractive margins and returns on capital.

Speaker 3: We plan to invest most strongly behind our fastest growing and most possible categories like filtration and release?ers.

We plan to invest strongly behind our fastest growing and profitable categories.

Filtration and release liner.

Speaker 3: Androd's operational efficiencies and margin improvement across all categories.

And drive operational efficiencies and margin improvement across all categories.

Speaker 3: Following this review, we made the decision to divest our tobacco-related engineered paper business and founded Strategic Fire, who was able to move quickly with an attractive offer.

Following this review we made the decision to divest our tobacco related engineered papers business and found a strategic buyer, who was able to move quickly with an attractive offer.

Speaker 3: The transaction is moving forward as planned and on track to close in the fourth quarter.

Transaction is moving forward as planned and on track to close in the fourth quarter.

Speaker 3: Net proceeds from the sale are expected to be over 575 million and will be used to reduce debt.

Net proceeds from the sale are expected to be over $575 million and will be used to reduce debt.

Speaker 3: 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.

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.

Speaker 3: Our supply chain efforts have been impressive. We've right sized crew schedules and asset plans through select the current demand environment and reduced costs and have taken out over $50 million of inventory since the first quarter.

Our supply chain efforts have been impressive with right.

Right sized crew schedules and asset plan for it.

The current demand environment and reduced costs.

And have taken out over $50 million of inventory since the first quarter.

Speaker 3: We have plans to further improve inventory efficiencies, measured as a percent of sales, targeting at least another 100 basis point.

We have plans to further improve inventory efficiency measured as a percentage of sales targeting at least another 100 basis points.

Speaker 3: I mentioned in the past that we would be working on subcred optimization as part of the merger.

I mentioned in the past that we would be working on footprint optimization as part of the merger.

Speaker 3: We've recently announced manufacturing footprint consolidation at three of our smaller and less profitable facilities and are in the process of consolidating warehouse and distribution operations as well.

We've recently announced manufacturing footprint consolidation at three of our smaller and less profitable facilities and are in the process of consolidating warehouse and distribution operations as well.

Speaker 3: These changes will begin in early 2024, and while I have minor upfront costs, they will deliver meaningful ongoing savings.

These changes will begin in early 2024, and while they have minor upfront costs.

We'll deliver meaningful ongoing savings.

Speaker 3: We have aggressive and specific cost reduction programs for manufacturing and S-DNA. Some of these began delivering value earlier this year and some will begin in early 2024.

We have aggressive and specific cost reduction program for manufacturing and SG&A.

Some of these began delivering value earlier this year and some will begin in early 2024.

Speaker 3: We're carefully managing capital who bending was 2024 spending expected to be below $70 million down in the past two years.

We're carefully managing capital spending was 2024 spending expected to be below $70 million down from the past two years.

Speaker 3: 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.

While tightening our belt, we will continue to invest in projects necessary to safely operate and maintain our equipment.

Well, if those delivering compelling financial return.

Speaker 3: 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.

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.

Speaker 3: These efforts are especially appropriate in today's uncertain economic and geopolitical environment.

These efforts are especially appropriate in today's uncertain economic and geopolitical environment.

Speaker 3: As a manufacturing company, many of our markets are economically sensitive.

As a manufacturing company many of our markets are economically sensitive.

Speaker 3: The U.S. manufacturing sector, as measured by the manufacturing PMI, contracted in the third quarter, as border softness continued. And this was confirmed by volume declines reported by our customers.

The U S manufacturing sector as measured by the manufacturing PMI contracted in the third quarter as order softness continue.

And this was confirmed by volume declines reported by our customers.

Speaker 3: Turning to third quarter results, sales from continuing operations were about half a billion dollars and reflected lower customer demand due to economic conditions, continued destocking of inventory, as well as seasonal slowdowns in some of our European businesses.

Turning to third quarter results.

Sales from continuing operations were about half a billion dollar and reflected lower customer demand due to economic conditions.

<unk> destocking of inventory as well as seasonal slowdowns in some of our European businesses.

Speaker 3: Sales were down 5% from Q2 and 10% below prior year.

Sales were down 5% from Q2 and 10% below prior year.

Speaker 3: Comparisons versus prior year were impacted more significantly in specialty paper and packaging, where industry-wide customer de-stocking continued this year, and compared to a very strong prior year period.

Comparisons versus prior year were impacted more significantly in specialty paper and packaging.

Industry wide customer Destocking continued this year.

And compared to a very strong prior year period.

Speaker 3: Adjusted EBITDA with $55 million for the quarter, similar to Q2, but the low prior year level.

Adjusted EBITDA was $55 million for the quarter similar to Q2, but below prior year levels.

Speaker 3: Volume continues to be the biggest driver, including impact of fixed cost adorption at manufacturing sites.

Volume continues to be the biggest driver, including impact of fixed cost absorption and manufacturing site.

Speaker 3: And this offset continued benefits from synergy realization and positive price input cost manage.

And this offset continued benefits from synergy realization and positive price input cost management.

Speaker 3: 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.

I've noted many of the activities, we have underway to reduce costs there.

Demand generation is also extremely important in this environment and we are working closely with customers to grow share and explore new opportunities.

Speaker 3: Some of these efforts include the launch of new paralyzed high-quality packaging papers where we are the only North American producer capable of making this.

These efforts include the launch of new paralyzed high quality packaging paper, where we are the only north American producer capable of making the <unk>.

Speaker 3: A spactor-desolving label that improved its efficiency for customers.

The faster dissolving label that improves the efficiency for customer.

Speaker 3: A new mid-tier paint protection zone to meet growing market adoption rates.

Our new mid tier paint protection film to meet growing market adoption rate.

Speaker 3: and advancements in optical films such as those used in the lactic resistant material.

And advancements in optical films, such as those used in ballistic resistant materials.

Speaker 3: In total, we expect these initiatives can add over $10 million in new revenue over the next 12 months.

In total we expect these initiatives can add over $10 million in new revenue over the next 12 months.

Speaker 3: In addition, we are on track with larger projects to enable ad growth and key markets.

In addition, we are on track with larger projects to enable added growth in key markets.

Speaker 3: 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.

Release liner 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.

Speaker 3: Air, industrial and life-science filtration are large, fast-growing markets.

Air Industrial and life science filtration, our large fast growing market.

Speaker 3: Our investment in a new meltblown fine fiber asset to support these markets is on track to come online early in Q2 of next year.

Our investment in a new melt blown find fiber asset to support these markets is on track to come online early in Q2 of next year.

Speaker 3: As noted in our last call, these two capacity additions represent over $50 million of added revenue.

As noted in our last call. These two capacity additions represent over $50 million of added revenue.

So let me start off with a few comments.

Speaker 3: Over the course of the past year, our goal has been and continue to be to reposition matters strategically and financially for strong future.

Over the course of the past year. Our goal has been and continues to be to reposition Matt is strategically and financially for strong future.

Speaker 3: While the short-term environment is challenging, we know what we need to do, and our teams are focused in executing well.

While the short term environment is challenging we know what we need to do and our teams are focused and executing well.

Speaker 3: We are addressing the fundamentals by providing customers with innovative new products that meet their needs.

We are addressing the fundamentals by providing customers with innovative new products that meet their needs.

Speaker 3: Managing operations deliver high quality products in a safe manner and driving continuous improvement in productivity and efficiencies in all areas.

Managing operations to deliver high quality products in a safe manner.

And driving continuous improvement in productivity and efficiencies in all areas.

Speaker 3: We are continuing to deliver benefits by managing selling prices to cover input cost inflation and realize merger synergy.

We are continuing to deliver benefit by managing selling prices to cover input cost inflation and realized merger synergies.

Speaker 3: We are taking additional actions to reduce costs and increase cash flow, including footprint optimization, sending controls, and working capital and capital spending initiatives.

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

Speaker 3: 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.

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.

Speaker 3: I'm confident our actions will make Matt a 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, we'll turn it over to Greg to review third quarter financials.

I'm confident our actions will make Matt is 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 will turn it over to Greg to review, our third quarter financials.

Thanks, Julie and good morning, everyone.

Speaker 4: Consolidated net sales for the quarter for $498 million compared to $551 million in the prior year.

<unk> net sales for the quarter for $498 million compared to $551 million in the prior year.

Speaker 4: Selling price and currency were up about 3%, but were more than offset by a 12% volume based decline.

Selling price and currency were up about 3%, but were more than offset by a 12% volume base decline.

Speaker 4: Health care was their best performing category in the quarter, which sales up 12%. While packaging and specialty paper it's self-in-most pressure for the reasons you really noted.

Health care was our best performing category in the quarter with sales up 12%.

Packaging and specialty paper itself the most pressure for the reasons duly noted.

Speaker 4: Adjusted the MEDAV for continuing operation was over 55 million and lined with Q2 but down from 70 million in the prior year.

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

Speaker 4: Volume and manufacturing costs represented a combined 40 million impact, which was only partially off-step by 23 million of combined net-delling price input cost benefits.

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 benefit.

Speaker 4: and favorable impacts from lower SQNA, relife synergies and currency.

Favorable impacts from lower SG&A realized synergies and currency.

Speaker 4: Turning to each of our segments, net sales and advanced technical materials is 390,4 million, we're down 8% year-over-year in 6% versus Q2.

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.

Speaker 4: Disreflected lower volume due to increased customer caution and the uncertain macroeconomic environment as well as seasonal flowing, particularly in Europe .

This reflected lower volumes due to increased customer caution in the uncertain macroeconomic environment as well as seasonal slowing particularly in Europe.

Speaker 4: The lower volumes were partially off-depth by higher selling prices and currency translation.

The lower volumes were partially offset by higher selling prices and currency translation.

Speaker 4: ATM Adjusted Depit of 59,000 was down 6% year over year, reflecting the effect of lower volumes that were partially offset by positive net selling price input costs, distribution efficiencies, and currently translation.

ATM adjusted EBITDA of $59 million was down 6% year over year, reflecting the effect of lower volumes that were partially offset by positive net selling price input cost distribution efficiencies and currency translation.

Speaker 4: In the fight week to man, we improved the density of the Dalmargin by 30 basis points to 15%. Mainly due to realized energy and favorable product mitt.

Despite weak demand, we improved adjusted EBITDA margin by 30 basis points to 15% mainly.

Mainly due to realized synergies and favorable product mix.

Speaker 4: and our fiber-based solutions for FBS segment, which now has comprised solely of packaging and specialty papers. Net sales of 104 million were down 2% from last quarter and 17% from last year.

In our fiber based solutions for FBS segment, which now comprised solely of packaging and specialty papers net sales of $104 million were down 2% from last quarter and 17% from last year.

Speaker 4: You're on your results reflected customer-deep docking along with lower demand for premium paper and packaging in the current quarter.

Year on year results reflected customer destocking, along with lower demand for premium paper and packaging in the current quarter.

Speaker 4: Industry data for uncoated pre-deaf papers indicated demand would stay on around 25% in the quarter.

Industry data for uncoated freesheet papers indicated demand was down around 25% in the quarter.

Speaker 4: Results compared to a very strong prior year when there was significant industry-wide customer inventory bill.

Results compared to a very strong prior year.

When there was significant industry wide customer inventory build.

Speaker 4: Partly upsetting impact of lower volume for increased sales of consumer paybers and higher selling price.

Partly offsetting impacts of lower volume increase sales of consumer papers and higher selling prices.

Speaker 4: FBS adjusted eva down 15 million with sound slightly versus the prior quarter, but down significantly year over year.

FBS adjusted EBITDA of $15 million was down slightly versus the prior quarter, but down significantly year over year.

Speaker 4: The comparison to prior year was negatively impacted by a one-time benefit in 2022 of almost 7 million, as we've harmonized inventory costing systems between Nina and SWM following the merger.

The comparison to prior year was negatively impacted by a onetime benefit in 2022 of almost $7 million.

<unk> inventory costing systems between <unk> and <unk> following the merger.

Speaker 4: lower volume and associated manufacturing cost and cost in the current border were partly off to find favorable net selling price input cost.

Lower volume and associated manufacturing costs and costs in the current quarter.

Partly offset by favorable net selling price input costs.

Yes.

Speaker 4: Turning to a few of the corporate items, unallocated corporate adjustity the direct expense of around 18 million was flat year on year.

Turning to a few of the corporate items unallocated corporate adjusted EBITDA expense of around $18 million was flat year on year.

Speaker 4: Interest expense with 17 million was up 2 million from the prior year period due to higher interest rates on a variable debt in 2023.

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.

Speaker 4: We will be paying off the tire cost debt with proceeds from the E-P sale.

We will be paying off the higher cost debt with proceeds from the sale.

Speaker 4: Other income was around zero in 2023, down two million from 2022, when we recorded gains on certain foreign currency contracts.

Other income was around zero in 2023 down $2 million from 2022, when we recorded gains on certain foreign currency contracts.

Speaker 4: 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.

Our tax rate was negative in the quarter. This rate was driven by the goodwill impairment that was not deductible for tax purposes, and the change in the valuation allowance against one of our tax assets.

Speaker 4: Adding all in our gap results. During the third quarter, we performed a goodwill impairment analysis that recorded a pre-tax, non-tax charge of $401 million.

As you saw on our GAAP results during the third quarter, we performed a goodwill impairment analysis and recorded a pretax non cash charge of $401 million.

Speaker 4: The right-off included goodwill created at the time in the merger when our company marked evaluation was higher and reflected today's weaker economic conditions and associated impact on the valuation of certain acquisitions.

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

Speaker 4: 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 in discount rates were lower, these acquisitions are still attractive and gaining momentum.

I would 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.

Speaker 4: During the quarter, we also recorded 19 million of non-cast costs to write down assets, including sites impacted by rationalizing our manufacturing footprint, and just over 5 million of cast costs related to the pending sales of engineer papers.

During the quarter, we also recorded $19 million of non cash cost 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.

Speaker 4: At the end of the quarter, net debt was a little over 1.6 billion and available liquidity was 414 million.

At the end of the quarter net debt was a little over $1 6 billion and available liquidity was $414 million.

Speaker 4: Our depth mature is on a staggered basis between 2026 and 2028.

Our debt matures on a staggered basis between 2026 and 2028.

As announced in August with a revised capital allocation priorities, we resized, our quarterly dividend of <unk> 10 cents a share.

Speaker 4: We made our first dividend payout of $5.5 million in September at this new rating.

We made our first dividend payout of $5 $5 million in September at this new rate.

Speaker 4: Disrivaled Payout, freed that pass while still providing an attractive yield.

Just revised payout freezer task, while still providing an attractive yield.

Speaker 4: We also refer just over $4 million of shares in the quarter.

We also repurchased over $4 million of shares in the quarter.

Our intent is to opportunistically repurchase shares to offset dilution from stock compensation.

Speaker 4: We expect repurchases in the board quarter to be at or below this amount.

We expect repurchases in the fourth quarter to be at or below this amount.

The priority use of cash flow, however remains paying down debt.

Sale of our engineered papers business, which is on track to close this year will enable us to pay off more than a third of our outstanding net debt.

Speaker 4: We expect a reduction of over $575 million will decrease annual interest expense by more than $40 million dollars.

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.

Thanks, Greg.

I'll start with a few near term outlet comments before getting into 2024.

Speaker 3: discussions with customers, vendors, and others indicate near-term demand were mains of dude, given the still uncertain environment.

Discussions with customers vendors and others indicate near term demand will remain subdued given the still uncertain environment.

Speaker 3: while indications are that de-stocking is largely over, customers typically manage inventory down at year end, but there may be a small sequential impact on our sales in the fourth quarter.

All 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.

Speaker 3: We also take maintenance and holiday downs across our facilities, which may add $2 to $3 million of incremental cost to the bottom line. In addition to impact from lower-

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.

Speaker 3: Looking ahead to 2024, expectations are for demands to stabilize and then begin to pick up modestly later in the first half with recovery accelerating in the second half of the year.

Looking ahead to 2024 expectations are for demand to stabilize and then begin to pick up modestly later in the first half with a recovery accelerating in the second half of the year.

Speaker 3: Input costs generally appear to have reached their load points and are projected to modestly increase.

Input costs generally appear to have reached their low point and are projected to modestly increase.

Speaker 3: We will continue to implement our discipline pricing practices that overcome input cost pressures.

We will continue to implement our disciplined pricing practices to overcome input cost pressures.

Speaker 3: 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.

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.

Speaker 3: So, the bracheness number of 5% increase in annual sales adds $35 million annually of profit contribution, and we expect to deliver an additional $25 million in synodies as procurement contracts go into a set and footprint efforts are executed.

To break this number a 5% increase in annual sales.

At $35 million annually of profit contribution and we expect to deliver an additional $25 million in synergies as procurement contracts go into effect 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 the dark with demand recovery.

As market dynamics stabilize and recover Matt have us 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 investment.

Our technical capabilities are broad, we have long standing relationships with leading customers with specified product that can uniquely meet their need.

You've heard this morning that our teams are aggressively executing plans to reduce costs.

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.

And our financial position and deliver value to our stakeholders.

Confident in our success in the years ahead and look forward to sharing our progress with you.

That concludes our prepared remark. Thank you for joining us and please open the line for questions.

Thank you.

I'd like to ask a question. Please press star one on your telephone keypad.

You wish to withdraw your question. Please press star two.

The first question comes from John ton, one thing from CJS Securities. Please go ahead.

Hi, This is Justin on for John.

Good morning.

I know you just mentioned about.

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 improvements do you need to see to get there.

Sure. So 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 will continue to make progress toward an exit rate of $70 million in EBITDA. So in Q1, we expect demand to remain fairly subdued.

A modest pick up in Q2, and then continued recovery in the back half of the year and then as I mentioned, we are expecting in total stronger topline and Bottomline in 'twenty four.

And it doesn't take much to get there to the $70 million $70 million last Q3, with a stronger macro environment, a 5% increase in top line, coupled with our synergies at $15 million to our current pace.

I'm really bullish about it we just need a little bit of modest market recovery to get there.

Okay. That's helpful. Thank you.

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.

Yeah from an end market standpoint, I'd say, we've seen the most strength in health care and where we compete in health care.

Weakness, primarily in construction and Thats, new construction rebuild commercial and residential and that impacts us from an industrial standpoint, or at least liner standpoint in our adhesives and films and protective solutions.

Is that a little bit of weakness in transportation as well so strongest in health hygiene, I'd say moderate weakness in construction and transportation and then our paper business, we have good visibility to our customers' inventories and paper and we can see there is continued destocking in that business inventory Theres still room.

Turning a little bit elevated.

Yes.

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's that coming from.

Sure. Justin this is Gregg that was related to.

The tax assets that we had associated in Luxembourg associated with the with EP business that we are now releasing don't with the sale of EEP don't don't see the ability to fully utilize that asset.

Okay. That's great. Thanks for taking my questions.

Thank you.

Our next question is from Daniel Harman from Sidoti. Please go ahead.

Hey, good morning, everyone. Please don't worry I'm not going to ask a question about Destocking I promised you last time.

But it seems like margins margins in both segments held up fairly well for.

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.

Sure.

Yeah, I'm really bullish on our margins and how well the team has managed to them in this environment with ATM margins at 15% and up versus prior year. It gives me a lot of confidence that as we realized 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, and manufacturing cost 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 purchased service reductions.

And then there is an additional $5 million and cost improvement that will come as we consolidate some of these smaller assets that I mentioned, so we've announced the consolidation of three small sites that will migrate mostly two different sites that we have some of the business well, but the majority of it well there's some upfront cost.

It's fairly minimal and then it adds about $5 million going forward and that really starts I would say mid to late Q1 of 2024 and then the last thing I would mention is you know as we divest EEP. It's a great time for us to launch an SG&A effort to ensure.

That were right sizing our internal infrastructure to mirror, what we have from our remaining business standpoint. So we have launched that we're using an outside resource because I think it's important for 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 three big buckets I would think about from a cost standpoint manufacturing cost asset consolidation and then SG&A effort.

Okay, Great. That's really helpful. And then last one for me is just how should we think about the companies.

Leverage target obviously.

As you as you build up through 2024, and you see that $70 million and an EBITDA run rate in the fourth quarter.

Is there a particular target.

Company is looking to achieve by by year end 2024.

Yes, Daniel the target still remains the same at two 5% to three five times.

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 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 to 70.

It will prolong that a little bit, but the target remains the same and our plan to get there remains the same.

Perfect. That's very helpful. Thank you both.

Thanks, Dan.

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

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

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

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