Mativ Holdings, Inc. (MATV) Earnings Call Transcript & Summary

Good morning and thank you for joining this morning's call to discuss the announced merger of SWM and Neenah. [Operator Instructions] I'd now like to turn the call over to Dr. Jeff Kramer, Chief Executive Officer of SWM International; and Julie Schertell, President and Chief Executive Officer of Neenah. Please go ahead.

Thank you, and good morning, everyone. I'm so excited to join Julie Schertell, President and CEO of Neenah, to announce the merger of our 2 great companies. This is an important step in the continued execution of the strategies of both SWM and Neenah, creating a leading global manufacturer with strong positions in growing, attractive, specialty materials and solutions categories. The combination will deliver real value from a top line perspective while also providing over $65 million of highly achievable cost synergies. The pairing of our talent, technologies and capabilities will enable the new entity to accelerate its pace of innovation and deliver exciting new products for our customers. We will tag team the call today. I'll start out by covering the background and high-level strategic merits of the transaction, then turn it over to Julie to discuss the new company on a go-forward basis. Following our remarks, we will open the line for questions from analysts, and we look forward to connecting further with the investment community after the call. As a reminder, our comments include forward-looking statements and we may be limited in discussing certain aspects of the transaction until after closing. Actual results could differ from these statements due to risks outlined on both of our websites and in our SEC filings. So let's start with a snapshot of the merits of the transaction. This combination will create a global leader in specialty materials with approximately $3 billion in sales, attractive margins and $65 million of anticipated run rate synergies, which we feel are highly realizable. All are important measures, but when we step back and actually look at our complementary products and innovation capabilities, our customers in attractive end markets and our global scale, we find that the potential to create significant value for our employees, our customers and our shareholders is meaningfully larger than what either company could achieve as stand-alone entities. With more than 2/3 of the enterprise now focused to advanced specialty products and solutions, the outlook for sustained long-term organic growth is extremely promising. On a stand-alone basis, each company is financially sound with a strong portfolio of high-value technologies and attractive end markets. Both companies have a track record of successfully transforming themselves, however, it is by coming together that we fully unlock the strategic advantages of our work to date. As both companies continue to realize the benefits of their stand-alone growth and margin initiatives, we expect EBITDA to increase to approximately $450 million when synergies are added in with attractive mid-teen margins. The combined EBITDA and synergies are expected to add to the already-strong cash generation, which the new enterprise will use to fund growth initiatives, pay down debt and continue returning cash to shareholders. While the financial aspects noted above were very attractive, when Julie and I began our conversations, what stood out to us was the highly compatible nature of our 2 organizations. We have multiple touch points in shared product categories but with complementary offerings rather than the direct overlaps, giving us confidence that we could bring more to our valued customers. Further, we expect that the combined portfolio should demonstrate low cyclicality, improving the resilience of the top line and the overall financial stability of the enterprise. Ultimately, it was clear that we could be better and stronger together. Now, as illustrated here, the merger is a transformational step change in the competitive position of both organizations, springing us into the upper echelon of materials companies, which would have taken longer and required more resources if each company had continued to go it alone. In addition to the augmented capabilities we bring to bear, our increased relevance in the categories in which we compete will also offer significant commercial and operational benefits, strengthening the company for longer-term success. Another advantage of this increased scale is that it will improve our visibility and presence in financial markets, one of the challenges for smaller-scale companies today. As a $3 billion leader in specialty materials and solutions, we believe the combined entity is an attractive investment opportunity and should garner increased attention. With scale, we also have the opportunity for increased stock liquidity, improved access to capital markets and broader investor appeal from a more compelling story. Turning to the terms of the deal. This will be an all-stock transaction, offering an efficient way to unlock the value potential of this merger to be shared by both sets of shareholders, many of whom own shares in both companies. The exchange ratio of the transaction is 1.358 shares of SWM for each Neenah share, representing an ownership split of 58% and 42% for shareholders of SWM and Neenah, respectively. On governance, the new board of directors will be comprised of 5 members from SWM including John Rogers, who will continue as Non-Executive Chairman; and 4 members from Neenah, including Julie Schertell, who will also assume the leadership role of Chief Executive Officer of the combined company. To facilitate this transaction, I will serve as Strategic Adviser after the close of the transaction, allowing me to contribute my experience while clarifying leadership. Other elements of the merger, including members of the new company's leadership and company name will be announced at a later date. One thing is for certain, headquarters will remain in Alpharetta, Georgia, given that both offices currently sit only a few miles apart. Now, as noted upon closing, I will be stepping down from my leadership role at SWM, a very bittersweet moment. Leaving a winning team is always hard to do. But when I arrived, I promised SWM that we would all work together to grow this company. And with this transaction, I'm proud to remain true to that commitment. With that, I'll turn it over to Julie.

Thanks, Jeff, and good morning, everyone. Like Jeff, I'm excited about this value-creating merger of equals, and I'm honored to lead this combined organization into the next chapter of our journey. Before I go further, I would like to extend my congratulations to Jeff for all of his contributions to SWM and its success as well as my appreciation for his partnership throughout this process over the last several months. Stepping back and looking at the 2 companies' histories, the stories are remarkably similar. We share a common heritage as spin-off from Kimberly-Clark, and both companies have meaningfully transformed since becoming independent. What started in 1995 for SWM and 2004 for Neenah as 2 lower growth companies with limited end-market exposure and manufacturing technologies has culminated in separate but similar strategies to evolve our portfolio towards a large, growing, defensible category that value premium, unique solutions. Over the last several years, each company has demonstrated a strong track record of successful acquisitions, increasingly aligning our business profiles. Each company is now positioned with about 2/3 of the business weighted towards higher growth categories, supporting customers that require innovative solutions to solve some of their most challenging needs. Joining together will make us that much stronger. This complementary combination has touch points in key product categories such as filtration, healthcare, packaging and specialty tapes. Individually, we serve critical yet different components of the end product. Together, we become a more significant part of the market solution with greater scale. As an illustrative example, Neenah is a leader in the production of membrane support media used in reverse osmosis filtration. SWM is a leader in spacing media that is used in the same application. There are many such examples, which highlight this unique opportunity to increase our breadth of portfolio and increase our value to customers. Additionally, strong megatrends support the positive outlook of our business such as the need for clean air and water, personal health and wellness, performance coating solutions and sustainable alternatives. Our specialty paper business, while much smaller than our technical business, will continue to generate strong cash that we use to invest in higher growth opportunities. Complementary customers and technologies, when paired with our deep material science know-how, are also a key to unlocking the growth potential of this combination. We each add something different to the equation, but when put together, we create unique opportunities to address our customers' most challenging and complex needs. Both companies excel in advanced coating, engineered nonwovens, polymer extrusion and specialty adhesives, all core technologies that align with our target categories' evolving needs and increasing technical demand. With a more expansive toolbox, combined with our now broader portfolio and extensive innovation capabilities, we have the potential to accelerate sales growth as a trusted solutions provider by delivering enhanced value to our customers. One example is the potential to leverage the strength of SWM specialty film capabilities to expand Neenah's presence in release liners, where film solutions are used for some of the most technically demanding applications like advanced wound care. Another possibility is leveraging the lightweight paper capabilities of SWM to support innovation in Neenah's release liner, premium packaging and dye sublimation businesses. In short, we see numerous opportunities to strengthen our value proposition, better meet the needs of our customers and drive long-term profitability. Together, the company will have a meaningful access to the key economic regions across the world. In today's environment, with increasing regionalization, customers prefer global-scale capabilities with local manufacturing presence. The broader footprint and complementary technologies afforded by this combination provide supply chain advantages for our global customers. While our most complementary regions are North America and Europe, this merger also offers a unique opportunity for Neenah to leverage SWM's established manufacturing and sales infrastructure in the rapidly growing Asia Pacific region. One of the most compelling parts of this transaction is a meaningful value creation from synergies. We have identified over $65 million of annual run rate cost synergies and we expect to achieve over half within the first year and full run rate within 24 to 36 months post-close. These cost synergies are comprised primarily of SG&A reductions, including redundancy sweep and public company costs, as well as organizational optimization. Supply chain efficiencies including procurement, logistics and operating optimization, and other cost reductions, such as purchase services and leased office consolidation. In addition to these bankable cost synergies, we have significant incremental growth opportunities that will drive our top line as referenced previously in our discussed strategic fit. Between cross selling a broader portfolio to better support our customers, geographic expansion and increased opportunities for innovation, we believe there are numerous prospects to drive incremental growth. We also have the potential to optimize our working capital with payment terms and inventory practices that unlock cash. We've talked a lot about the financial benefits this combination creates. I'd be remiss if I didn't also recognize the resident talent and shared organizational values of the 2 companies, including our mutual commitment to safety. I'm confident the fusion of these 2 like-minded organizations will ensure the anticipated integration efforts to progress smoothly and efficiently to set a solid foundation for success. In summary, this transaction is a compelling and unique opportunity to create significant short and long-term value for our shareholders and key stakeholders. Through accelerated growth and higher margins, the pro forma enterprise will be a world-class company with the scale to expand and fortify our position in the attractive specialty materials space. These are exciting times, and I know Jeff shares my confidence in the path ahead and our ability to realize the full potential of this strategic combination. We'll now turn the call back to the operator for questions.

[Operator Instructions] Our first question today is coming from Chris McGinnis from Sidoti & Company.

Julie and Jeff, congrats on the announcement. Obviously, I think it makes a lot of sense, and so congrats on that. I think just maybe just -- just maybe to start around thinking about the 2 portfolios coming together. Obviously, it seems like there's a lot of opportunities for revenue synergies. Can you just talk about maybe where you see the greatest opportunity? Is it infiltration or some of the other kind of subsegments that you operate within -- when you look at the portfolio, is the most opportunity for growth.

Sure, Chris. I think there's a couple of areas. Filtration is definitely one of them where we have complementary technologies and an expanded footprint. It will be very beneficial. Health care, I'd say, is another area where we have complementary portfolios, serving similar customers. Tape, that sits in our Industrial Solutions business, is the third one. I'd say our Premium Packaging business, and some of the capabilities that are afforded to us with the assets in SWM and then our release liners as well, and that would be in addition to the coating, the film capabilities. So there's a tremendous amount of overlap and strong geographic footprint that really gives us the capability to increase our presence in those markets, and they're large growing markets with a lot of shared customers.

Great. And just in thinking Scapa was about a year ago, and so was ITASA, it was acquired about a year ago. Can you just talk about where you're at with the integration of that? And then layering in the merger, how do you just approach it all? Can you just talk a little bit about that?

Sure. Those acquisitions were the largest each company's ever had. Added a lot of value and capabilities to our combined portfolio and increase the synergistic and strategic alignment of the 2 companies. So part of the timing is those acquisitions really continue to unlock opportunities for how we come together from a strategic standpoint. Both acquisitions, as we worked together, are performing well and ahead of plan. We're pleased with where we are in the integration. There's still some technology solutions that have to be implemented on both sides. But I can tell you, they unlock additional synergies because of those 2 acquisitions between Scapa and ITASA.

Great. And just thinking about kind of the current state of Ukraine and Russia conflict, European exposure. Can you just maybe provide any update you possibly can with just what's happening there, and the expectations if that's a longer -- if it's really prolonged conflict, the impact of both of the businesses as you think about it?

Sure. Why don't we tag team that one, since it's an immediate challenge for it. From a Neenah standpoint, we have very limited exposure. We do less than $4 million of revenue in the region. We do not have significant supply or anything coming out of the region, so the exposure we have is really indirect from a cost standpoint and energy inflationary type of exposure.

Yes, Chris, I think on our last earnings call, we addressed that. I mean, we're watching it closely, but we're similar to Neenah. We have very little direct exposure to Russia itself, et cetera, and Ukraine. For most of our Western European businesses, they're all functioning well. We're seeing the same operational capability as before. We are seeing some uptick in energy costs and that is the inflationary pressures, which I think are more of the secondary aspects of the conflict in Ukraine. And I can tell you, my teams are actively contributing to supporting all those refugees that are flowing into the countries, particularly our Polish team. I just want to give them a call out in these difficult times. They're just doing an outstanding job of keeping focused on the business but also representing their humanity. I just think it's outstanding.

Great. And just maybe a couple more, if you don't mind. Just around the 15% EBITDA kind of target. It sounds like I think you referenced it could probably go higher. Just given as the repricing of the portfolios, and hopefully, in a more stabilized environment, do you think it could be above that 15%?

I think combined, what we're looking at is coming together with that 15%, the $450 million in EBITDA is the combination of EBITDA and a full rate synergy. So over time, as both organizations have driven aggressive pricing actions and margin improvement actions, our expectation is going to be to continue to grow our margin.

Okay. Great. And then just one more about thinking about the engineered papers, sometimes it's high on investors, kind of risks about the company. Any thoughts around portfolio rationalization? I know it's obviously early stage.

Yes. Let me take that one just because it's on Engineered Papers, and Julie and I have had the similar conversation on a number of things. We really like our position in Engineered Papers. Those cash flows have allowed us to do a lot of the investments in growing our portfolio. I think we've always been clear that as a company, we're always looking at our portfolio and looking at the best opportunities to optimize it. But at this point, I think we're very consistent in how we're approaching that business. And if things change in the future, we'll make the appropriate decisions.

Great. I'm going to jump back in queue, congrats on the announcement.

Next question is coming from Jon Tanwanteng from CJS Securities.

Congratulations on the announcement. My first one. Julie. I was wondering if, underlying those synergy expectations on the revenue side, do you have a new target growth rate for the combined companies?

John, we haven't disclosed anything like that at this point. I think we're early in the process. We're in early innings. We feel really good about the hard synergies of $65 million and getting half of those in the first year and where those are identified. The softer synergies will come a little bit later and a little bit longer term, but really strong opportunities from cross selling, geographic expansion and the complementary technologies that both companies have.

Okay. Great. And then are there any regulatory concerns? And if there might be, is there a breakup fee associated with this?

Yes. We don't see any major regulatory hurdles. We're doing all the appropriate notifications now, but we don't see any implications to that. There is a breakup fee included. That will come out in more of the details at the appropriate time.

Okay. Great. And then just finally, building on one of the last questions. Just given all the macro and geopolitical friction that's out there, Ukraine, supply chain, COVID hotspots. Can you just tell us how this combination will help you navigate that just in terms of helping you to better manufacture, optimize your routes, how much of that is included in the synergy expectations in the near term? And how much of that maybe, actually in immediate release, just given how tight things are?

Okay, John, that was a lot of questions in that one question. From a supply chain standpoint, let me start there, and I'll make sure I answer all your questions. We talked a little bit about the regionalization. And where customers really are, conversation is around having a global footprint but regional supply, ensuring that continuity of supply. And these are typically highly qualified unique products, so they're not easy to find additional supply or significant barriers to entry. So the supply chain that helps us from a footprint standpoint as well as just a scale standpoint as we work through some of the discussions on availability. And then the third area of support would be, we have additional technologies now as we come together or when we come together. So that pro forma, there's the opportunity to share those technologies, share those innovation capabilities and different chemistry solutions. So there's just a broader footprint of capabilities, talent and resources for us to pull from to support the supply chain challenges. Does that answer your question or...

Yes. Mostly does.

Okay.

Thank you. We reached end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

So I think Julie and I both will share just a short closing comment. As you've heard through this discussion, we're just incredibly excited about the potential of the combination. I think Julie is going to be an outstanding CEO for the combination. I'm really excited to see where she and the rest of the executive teams from both companies bring the company together. It's going to be an exciting journey. This is really about accelerating our current strategy. This is not a change in strategy. This is just an opportunity to really accelerate what both companies were doing, and I think that's just very powerful.

Yes. I agree completely. We've talked about this a lot as this is an and, not an or. This is continuing to grow our strategy and the growth platforms both companies have identified and have invested behind. It's not replacing those things, so this really is an acceleration. The strategic merits are extremely strong, and then the synergies are hard synergies that we can go and accomplish and drive both short-term and long-term value with us. And then I just want to thank Jeff again for his support and his entire team as we've worked through this over the past several months. It's been a journey, but we're looking forward to the future to be a very exciting opportunity for both companies.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.