Q3 2024 Mativ Holdings Inc Earnings Call
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Speaker Change: It is now my pleasure to turn the call over to Mr. Chris Kuepper. Sir, you may begin.
Chris Kuepper: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Unless stated otherwise, financial and operational metric comparisons are to the prior year period and relate to continuing operations.
Speaker Change: The earnings release issued yesterday afternoon is available on our website at ir.mattis.com. With that, I'll turn the call over to Julie.
Julie: Thanks, Chris. Good morning, everyone, and thank you for joining our call.
Julie: 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.
Speaker Change: Sales were up 1% organically and essentially flat year over year on a reported basis.
Speaker Change: 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.
Speaker Change: as well as lower productivity in one of our largest film plants.
I'll provide more color on this in a moment.
Speaker Change: For TotalMADM, 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 of 110 basis points year-over-year.
Speaker Change: Primary drivers were increased volume and filtration, and our overall staff segment, as well as lower manufacturing costs.
Speaker Change: Let me touch on Fast First, which delivered adjusted EBITDA up almost 20% and increased margin of 200 basis points.
Speaker Change: Within SAS, healthcare was very strong, followed by label, commercial prints, and release liners.
Speaker Change: Overall, FAM performance in the quarter was mixed, with solid results in filtration and challenging results in advanced film.
Speaker Change: Let me provide a bit more color on this part of our business and what we are doing to improve film performance going forward.
Speaker Change: First, in our filtration category, revenues were up almost 6%, led by growth in air filtration using HVAC and air pollution control.
Speaker Change: Our largest end market infiltration is transportation, which was up over 5% and continues to have a very healthy pipeline of new products and opportunities in 2025.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Another large part is optical film, which is often used on the exterior and interior of office buildings.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: And lastly, we underperformed at our largest films plant, impacting margins in Q3 and Q4 as we sell through high-cost inventory.
Speaker Change: 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 actions to improve results over the next 12 months.
Speaker Change: First, accelerating our presence in targeted markets, particularly in medical and optical films, such as advanced wound care, smart glass, and interlayer applications.
Speaker Change: These applications play to our strengths in advanced materials and technology development.
Speaker Change: 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.
Speaker Change: These products feature increased energy efficiency, temperature control, and improved aesthetics.
Speaker Change: We recently showcased this partnership and samples at the International GLAFTEC 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.
Speaker Change: Turning to medical films, we have invested in a new medical films line in the UK that will start up in Q1 of 2025.
Speaker Change: and provides improved quality and capacity for growth in our healthcare applications.
Speaker Change: giving us over $15 million of incremental revenue opportunities over the next four years.
Speaker Change: The second platform is providing a unique capability and holistic supply chain solution, a one matter solution for customers to procure not only the base film product, but the fully coated and converted film product for their application.
Speaker Change: Today, most customers are sourcing this solution through three or more suppliers.
Speaker Change: The third platform is aggressive cost reduction in our manufacturing sites, as well as how we develop new products.
Speaker Change: 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.
Speaker Change: The Advanced Film Turnaround Effort is similar to the approach we took over the course of 2023 to improve performance in healthcare.
Speaker Change: The year-to-date results of this effort in health care are above-market organic sales growth of more than 5% versus prior year and significantly improved profitability that has exceeded our expectations.
Speaker Change: Based on this similar effort and the outcome, I am confident we will successfully improve results in advanced film over the course of the next 12 months.
Speaker Change: 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 investments in the UK to expand our medical film capacity.
Speaker Change: We are close to capacity in this category and have significant upside opportunities and commitment from key customers for future growth.
Speaker Change: 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 3, and with almost 50% of the volume expected to be realized in year 1.
Speaker Change: 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.
Speaker Change: Additionally, our commercial teams are executing well to drive sustained sales growth. Here are just a few examples. In SAM, we've realized over $10 million in share gains with a number of HVAC and air pollution control customers.
Speaker Change: 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.
Speaker Change: We talked about a new leader, Ryan Elwert, that we hired to run the segment earlier this year, and he and his staff team are doing exactly what we wanted from them, which is driving our commercial excellence efforts and focusing on new demand generation opportunities.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: I'm very pleased with the sales pipeline that we have in place and with the team driving it.
Speaker Change: Finally, as a manufacturing company, we are always focused on reducing our costs and optimizing our assets.
Speaker Change: During this most recent quarter, we added to this list, divesting a small, non-strategic, and high-cost facility in Massachusetts.
Speaker Change: 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.
Speaker Change: 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 percent.
Speaker Change: 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.
Speaker Change: We will continue to evaluate our portfolio and our manufacturing and warehousing footprint for further opportunities to reduce complexity and unlock incremental value.
Speaker Change: 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.
Speaker Change: And selling prices were essentially flat versus prior year, while currency was favorable.
Speaker Change: Adjusted EBITDA from continuing operations was $60.8 million, up 10% from $55.4 million in the prior year.
Speaker Change: 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 to 110 basis points year-over-year.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: We partially offset these pressures with higher volumes in our filtration categories, lower SCNA expenses, and improved manufacturing efficiencies.
Speaker Change: Organic growth reflected higher volumes across all of our end markets and higher selling prices.
Speaker Change: SAS generated strong adjusted EBITDA performance of 41 million, which was up almost 20% year-over-year.
Speaker Change: Adjusted EBITDA margin increased 200 basis points versus the prior year.
Speaker Change: 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.
Speaker Change: Unallocated corporate adjusted EBITDA expense of around $17 million was down more than 7% versus the prior year.
Speaker Change: As a reminder, we still expect unallocated to be around $80 million for the full year.
Speaker Change: 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 a higher revolver balance in the current period.
Speaker Change: 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.
Speaker Change: We were able to take advantage of the then-prevailing market rates and risk premiums that allowed us to reach a favorable outcome for MATIV, essentially providing certainty in what has become a more volatile interest rate environment.
Speaker Change: We use 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.
Speaker Change: With these changes, we expect our go-forward annual interest expense to be $75 million per year.
as well as losses on foreign exchange.
Speaker Change: 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%.
Speaker Change: At the end of the quarter, net debt was $981 million and available liquidity was $463 million.
Speaker Change: Our net leverage ratio, as defined in our credit agreement, was 4.1 times, sequentially flat with Q2.
Speaker Change: Our number one priority for cash flow utilization is, and continues to be, deleveraging and debt reduction.
Speaker Change: and our target leverage range is two and a half to three and a half 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.
Speaker Change: Turning to our outlook for Q4 2024, we do not see evidence of a change in demand from what we have seen in Q3.
Speaker Change: And we recognize a number of our categories are also subject to normal year-end seasonality.
Speaker Change: Timing of maintenance outages and extended downtime over the holiday season versus Q4 2023.
Speaker Change: We will provide more detail on our expectations on the next fiscal year during our earnings call in February.
Speaker Change: 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.
Speaker Change: With that, Julie, I'll hand it back over to you for closing remarks.
Julie: 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 in taking actions to offset the impact, grow share, and capture incremental value when markets improve.
Speaker Change: 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 more.
Speaker Change: in Medical and Optical Films, where we have upside growth opportunities.
Speaker Change: We continue to simplify and streamline our operations, including divesting non-core business lines and consolidating assets, warehouses, and manufacturing plants.
Speaker Change: And we've outlined our turnaround plan for an underperforming category, Advanced Films, which mirrors our demonstrated success within healthcare.
Speaker Change: And lastly, we are aggressively driving out costs with over $20 million of non-operating cost reduction this year.
Speaker Change: One last item to highlight, we will be publishing our 2023 ESG report over the course of this month.
Speaker Change: 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.
Speaker Change: Thank you for joining us this morning, and please open the line for questions.
Speaker Change: We have our first question from Daniel Harriman with Sedolte & Company.
Your line is open, please go ahead.
Hey, good morning, guys. Thanks for taking my questions.
Speaker Change: 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 initiative, but I'm just wondering if you could just.
Speaker Change: 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.
Speaker Change: And then on the Q4 guide, the increase in revenue and the decrease in EBITDA year over year, that disconnect, is that made up mostly just of expectations for poor performance in films or is there something else to look for there? Thanks.
Speaker Change: Thanks, Dan. Let me start with your first question on films.
Speaker Change: 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.
Speaker Change: and the TIGER team is really focused around three primary issues.
Speaker Change: how we battle the headwinds of just weak markets in automotive and construction.
Speaker Change: 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.
Speaker Change: 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 Mative. We know what good looks like. We know how to operate well. We have a very strong facility that makes these products in China.
Speaker Change: 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.
Speaker Change: The second one is the increased competition from Asia that has accelerated with a lower cost.
Lower Performance Alternative.
Speaker Change: 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.
Speaker Change: 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 matter of potential solution.
Speaker Change: It is a place where, I've mentioned a couple of 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.
Speaker Change: 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.
Speaker Change: And then the last is how we battle just kind of weak markets that continue in automotive and construction. And, you know, as a reminder, about 85% of our film…
Speaker Change: 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.
Speaker Change: And the other one is, and this is the second one I'm most excited about.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: But we have the opportunity to provide more resilient in this category by extending our end use applications in markets like I. Just described I'm also very confident and 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 health.
Speaker Change: 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.
Speaker Change: There are exceeding our expectations. So I look forward to the team's continued performance that they've already had key milestone report to me and they're continuing to make great progress.
Speaker Change: So I look forward to, you know, the team's continued performance. They've already had key milestone report outs to me and they're continuing to make great progress.
Speaker Change: Yeah.
Speaker Change: And then Daniel this is Gregg I'll take your second question, which had to do with the.
Speaker Change: 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 increase 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 SAS segment for Q4,
Speaker Change: <unk> for the fourth quarter and the increase year over year sales, but the decrease year over year EBITDA.
Speaker Change: You are right, although we're expecting strong sales primarily driven in the SaaS segment for Q4.
Speaker Change: The films business is definitely weighing down on the on the EBITDA.
The film business is definitely weighing down on the EBITDA.
Speaker Change: Additionally, that's one of the largest in addition to that there is some price input timing and there are some pockets of.
Speaker Change: 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.
Speaker Change: Pockets of pricing within that as well.
Speaker Change: Working on to maintain volume and to gain volume.
Speaker Change: 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 accruals last year that we're comping.
Speaker Change: 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.
Speaker Change: And then really finally to a lesser extent the timing of the holidays and the the outage I mentioned is really the last loss impacting item.
Speaker Change: 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.
Speaker Change: Perfect. Thanks, guys, so much and ill get back in the queue.
Speaker Change: Perfect, thanks guys so much and I'll get back in the queue.
Speaker Change: Thanks, Dan.
Thanks, Dan.
Speaker Change: Thank you. The next question is from John Tomlinson with CJS security.
Speaker Change: Thank you. The next question is from John Tan-Wan Tan with CJS Security. Your line is open. Please go ahead.
Speaker Change: Line is open. Please go ahead.
Speaker Change: Hi, good morning, and thank you for taking my questions.
Speaker Change: 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.
Speaker Change: The detail on Q4.
Speaker Change: What's the puts and takes going into it but I was wondering if you could talk about what your customers are telling you.
Speaker Change: 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?
Speaker Change: You entered a 25% exiting Q4 shutdowns and everything.
Speaker Change: Are they ready to pick back up again too early to tell.
Speaker Change: How should we think about it.
Speaker Change: The velocity exiting those holidays.
Speaker Change: Yeah.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: that quickly returned 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.