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

Hello, everyone, and welcome to Mativ's Investor Conference Call. Hosting the call today from Mativ is Julie Schertell, Chief Executive Officer. She is joined by Greg Weitzel, Chief Financial Officer; and Mark Chekanow, VP of Investor Relations. Today's call is being recorded and will be available for replay later this afternoon. [Operator Instructions] I will now hand over to your host, Mark Chekanow. Please proceed.

Good morning, everyone, and welcome to our call to discuss the proposed transaction to sell Mativ's Engineered Papers business. We will also be sharing details on our revised capital allocation strategy. Before we begin, I'd like to remind everyone that today's call will include forward-looking statements, and that actual results and outcomes may differ materially from those suggested on this call due to a number of factors, which are detailed in our Securities and Exchange Commission filings as well as the press release and 8-K disclosing today's announcement. Also during this call, we will make references to EBITDA, adjusted EBITDA, adjusted EBITDA margin and free cash flow, which are non-GAAP financial measures. Today's press release 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 to these slides at your own pace during the call using the webcast interface. As you may have also seen in today's release, we made a comment about our upcoming second quarter earnings release. Since we are speaking publicly today, we felt it appropriate to provide directional indication on results. Consistent with our comments in May around the remainder of 2023, we still expect to deliver strong sequential growth in adjusted EBITDA for the second quarter compared to the first quarter of the year when we report next week. Those are the only prepared comments we intend to provide today on the quarter and ask that during the Q&A session, you keep questions limited to the proposed transaction and capital allocation changes from this announcement. We look forward to reporting results and taking your questions on the quarter next week. With that, I'll turn the call over to Julie.

Thank you, Mark, and good morning, everyone. We appreciate you taking the time to join us. I'm really pleased to have the opportunity to discuss this transformative transaction and what it means for Mativ future. Today's news is the culmination of nearly a year of careful decision-making and planning, a robust sales process and incredible teamwork and dedication by all those involved. We are pleased to announce the proposed sale of Engineered Papers, a leading global manufacturer of lightweight paper focused on the tobacco industry. We believe this transaction offers clear financial and strategic benefits to Mativ and better aligns the EP business with a strong strategic owner. While there is still work to be done before we close, we are highly confident in our path to executing the transaction and excited for how this will redefine Mativ going forward. The potential buyer Evergreen Hill Enterprise, an affiliate of BMJ is based in Singapore and is part of a successful Indonesian-based privately held group of diversified companies serving a wide variety of industries. This proposed transaction represents a unique opportunity for them, and we believe they will be excellent stewards of the EP business. As you may recall, Mativ became a company in July of 2022 with the merger of SWM and Neenah. And since the day we announced the merger, we've signaled that one of the key strategic benefits of the combined companies with increased scale and portfolio optionality, EP is a solid business. And while it has been part of our legacy for many years, divesting this business is key to unlocking our strategy and accelerating our growth plans. Earlier this year, we outlined Mativ's growth ambition for the future, which is to be the global leader in specialty materials consistently driving growth by engineering bold, innovative solutions that solve our customers' complex challenges as well as the 3 core pillars of our long-term strategy, lean into growth, focus our efforts and drive value creation. Simply put, these strategic imperatives are at the core of our deal rationale and underpinned our decision and the sale process. The decision was based on 3 core tenets. First, although EP delivered solid profitability, the reality is that this business faces unique secular headwinds, which is inconsistent with our long-term growth ambition and strategy, with EP representing about 20% of our total sales, the divestiture would naturally position Mativ for faster growth with a larger weighting of the portfolio and higher growing end markets. Second, this provides the opportunity to simplify our portfolio and focus our resources, time and capital in those areas with the most promising sales and margin expansion opportunities. And lastly, we believe the transaction represents an attractive valuation with a headline price of $620 million and with net proceeds that allow us to significantly reduce our overall debt and leverage. Candidly, we see our leverage and debt load as negative factors affecting our equity valuation. We believe the proposed sale and accompanying changes to our capital allocation, which we will elaborate on shortly, represent the strongest path forward to drive profit growth and maximum value creation for our shareholders. I would like to reiterate our portfolio strategy, illustrated by the pyramid framework on this slide, which captures each category's role in our company. This fuels our resource allocation and investment plans for the future. To recap, the categories of filtration, release liners and protective solutions are growth platforms where we have the greatest market opportunities and technology capabilities to provide unique defensible solutions and where we will focus our resources and investments. As such, we have invested in new capacity in both filtration in our German facility and in release liner coding in our facility in Mexico. Combined, we believe these new installations support over $50 million of annual revenue opportunities. Health care and industrials are balanced contributors with the expectation to deliver GDP-type growth and the opportunity to increase margins. The focus in both of these categories is margin expansion. In Packaging and Specialty Paper generates strong cash flow and has successfully repositioned towards higher growth opportunities in premium packaging and consumer products. These now make up nearly 50% of this business. With that strategic context, I'll now turn it over to Greg to discuss the deal highlights as well as capital allocation.

Thanks, Julie. To recap some key elements of the proposed transaction. I'll start with the $620 million gross sales price. This represents a multiple of approximately 6.5x EP's 12-month trailing EBITDA, which we consider an attractive financial valuation for this high-quality asset. Next, one of the most important highlights of the deal is the substantial net proceeds we expect to receive, which will go primarily toward immediate debt reduction. Net of taxes, fees and other items, we expect net proceeds to be approximately $575 million. This means we expect to reduce our net debt by about 35% upon close. Of note, we will not incur any penalties for the significant debt paydown of various components of our credit facility. From a leverage standpoint, we estimate net leverage will decrease by approximately 0.3 turns at close. Beyond the compelling strategic rationale and improved growth outlook for Mativ post transaction, we see the significant debt paydown and future deleveraging benefits as additional positive outcomes. The benefits are consistent with our priorities to reduce debt and work toward our targeted leverage range of 2.5 to 3.5x. With respect to timing, the transaction is expected to close during the fourth quarter of 2023, subject to regulatory approvals and completion of the consultation process with the French Works Councils. Beginning in the third quarter, EP will be reported as assets held for sale. Importantly, the purchase agreement for the transaction does not have a financing contingency. The potential buyer is well capitalized and will not be subject to the ups and downs of the financial capital markets to close the deal. They intend to fund the purchase with cash already on their balance sheet, boosting our confidence in a smooth path to close. Now shifting to the capital allocation. With our current portfolio, over 1/3 of our sales are from our more mature fiber-based solutions segment. However, following this proposed transaction, we would have a significant reshaping of our portfolio. With any such transformative action, it is prudent to reexamine capital allocation, and we have given careful consideration to our new financial profile, growth opportunities and priorities in the context of capital allocation decisions. Currently, our capital allocation is heavily weighted towards dividends, supported by our legacy fiber-based businesses that are mature and generally in secular decline. Following the sale, Mativ will have a higher growth trajectory, accelerated deleveraging and a strong but resized EBITDA and cash flow profile. With this, we have adopted a revised, more balanced approach to capital allocation. First, we intend to resize the quarterly dividend to $0.10 per share or $0.40 per share on an annual basis. This equates to a total annual cash outlay of $22 million, down from the current $88 million. The planned change will be effective for our next dividend payment in September. We expect the new dividend to represent approximately 25% of the annual free cash flow, that is operating cash flow less CapEx on a go-forward basis. We consider this 25% benchmark appropriate given we will still generate strong free cash flow and will be repositioned as a faster-growing enterprise and believe the ratio is more representative of a well-balanced capital allocation strategy, with the flexibility to continue to reduce debt, invest for growth and execute share buybacks while still offering investors a steady dividend return. With respect to share buybacks, the Board has authorized a $30 million repurchase program, which will be effective shortly after our upcoming second quarter earnings release. At the recent share price, the full plan would represent approximately 3% to 4% of our current share count. We believe our stock represents an attractive value and expect to begin executing opportunistic share repurchases in the near term. As far as debt reduction pace, based on the dividend in our 25% of free cash flow guideline, we are implying annual free cash flow post close to be approximately $90 million. After our revised dividend payments, this would leave approximately $70 million of excess cash flow post transaction on an annual basis for continued debt reduction and stock buyback. However, we want to reiterate, deleveraging remains a top priority, and this will be the primary use of excess cash in the near term. Similarly, while we maintain an active M&A pipeline with acquisitions as part of our long-term growth strategy, M&A in the near term is unlikely. Our current focus remains on executing on the commitments of the merger, bringing our strategy to life with a more focused portfolio and deleveraging to get within our target 2.5x to 3.5x range by the end of 2024. I'll turn the call back now over to Julie to wrap up.

Thanks, Greg. To conclude our comments before taking questions, I'd like to recap how we see today's announcement as a milestone event that repositions Mativ both strategically and financially for a strong future. First, post transaction, we expect to be a $2.2 billion revenue company and believe our reshaped business will be faster growing with a multiyear top line CAGR in the 3% to 5% range. We believe we are well positioned in attractive end markets and categories, several of which can deliver GDP plus growth rates. That should support strong top line growth, not just from end market demand, but also synergies, growth investments and new product innovations. As you can see on this chart, our new portfolio mix is more heavily weighted toward our 3 growth platforms as they represented 40% of our 2022 combined sales when we exclude EP. With our exposure to tobacco removed not only does our growth outlook increase, but our suitability for investors with certain ESG parameters may also be improved. From a margin standpoint, we see a clear path to mid-teen margins over the next several years through further synergy realization, organic sales growth and continued manufacturing improvements. And third, our revised and more balanced capital allocation approach offers increased flexibility to support multiple objectives, including the announced stock buyback plan, investment in organic growth opportunities and, of course, ongoing debt reduction. We look forward to reporting our earnings next week, closing the transaction in the fourth quarter and continuing to execute on top and bottom line initiatives across the company as we head into the second half of the year. We are excited about what today's announcement will do for Mativ and our stakeholders. This concludes our prepared remarks. I'd like to open the line for questions.

[Operator Instructions] We have our first question. It comes from John Tanwanteng from CJS Securities.

Congratulations on the announcement. First one, and it's more of a 3-part question here. I would like to dive a little bit more to the capital allocation priorities going forward. And I guess that the near-term debt pay down, which it should be, but you did announce the buyback, number one, when should we expect you to start executing on that. Number two, I think you mentioned the dividends are targeting 25% of free cash flow. Should we expect that to stay around that market to pace that market as earnings and margins grow going forward? And then third, are there any growth investments you're now able to pursue or can be accelerated as a result of the transaction? Or does that have to wait until you maybe hit your target leverage?

Yes. Let me start and then, Greg, feel free to add in. I think you hit it exactly right. Our first priority is continued debt reduction from a capital allocation standpoint. This transaction allows us to pay off about 35% of our outstanding net debt. So it's a big step in the right direction. And then it amplifies or accelerates deleveraging going forward. So we're really pleased with that position. From a buyback standpoint, we didn't have a buyback plan previously. So this is the first one at Mativ. It will be effective after our Q2 earnings, and we'll use it fairly opportunistically. So I would not want anyone to believe that we would be aggressively buying back shares. Our #1 priority is still debt reduction, but we do have this added flexibility for when or if our stock becomes disconnected or what we would be was undervalued in the marketplace. And then from a dividend standpoint, 25% free cash flow is what we targeted as we thought about where our dividend should be given the new profile of our company going forward and the growth projections of our company. That's fairly consistent with the similar peer companies. And we have the opportunity to adjust that as we continue to grow into the future. From a growth investment standpoint, we've got 2 really exciting investments that will be coming up in the next 12 months. One is in Mexico, which comes up late this year, and that's when the silicone release liner coating, which continues to help us grow that business. You might recall that business has grown at about 8% for the last decade. So that continues to support that kind of growth and entry greater into North America and South America. And then the investment we have in Germany, which is meltblown capacity, which helped us continue to grow in our filtration business, which is one of our strongest highest-margin businesses. Our capital plan would still be in that 3% to 4% of revenue range. We've maintained that. So I wouldn't say this unlocks the ability to invest more from a growth standpoint. I think it gives us more flexibility for when we have those opportunities that arise and we see different demand opportunities in front of us, but we'll continue to invest capital at about that 3% to 4% range.

Understood. And then my second question, if you could. I think you said that it's a cash buyer side. I understand that's less of a risk. But are there anything -- is there anything else that could push out the timing or could be a risk to the closing, whether it's regulatory or Works Councils? And is there a breakup fee at all?

It's a very normal closing approach is how I would characterize it. So there's normal customary regulations that we need to go through as well as Work Council discussions. Those are happening and then the Works Councils have been very supportive up into this point, and we would expect that to continue and for them to continue to be supportive going forward. There is a breakup fee, but I'm not -- I don't think we've disclosed what that is at this point. Yes. We definitely expect to close and have high, high confidence level in closing in the fourth quarter of this year.

Our next question comes from Daniel Harriman from Sidoti.

Julie, Greg, Mark, congratulations on this big deal. My question actually has to do with Packaging and Specialty Paper. Julie, I understand that you just highlighted 2 investments but then release liners and filtration. But moving forward, obviously, the focus is to deleverage the balance sheet and invest in the accelerated growth businesses. But can we continue to expect investment from time to time and more sustainable packaging alternatives? Or will the priority really just be on the filtration Protective Solutions and Release Liner segment of the business?

No, you should expect -- we expect all of our businesses to grow. We just expect some of them to grow at faster rates than others. And Packaging and Specialty Papers has an important role in our portfolio. And I think most importantly, what that team has been able to do is really reinvent and reposition that business over time, where it was historically 100% commercial print, which has the greatest pressure or secular decline pressures on it. It's 50% plus now between premium packaging and consumer products. And those have much stronger growth dynamics. So we will continue to invest where it makes sense across the entire portfolio, including Packaging and Specialty Papers. It will be more opportunistic. And the other thing I would tell you is the really nice thing about that business is these are assets where we have redundant capabilities, so we easily transition over time from commercial print to consumer products into premium packaging. And so it makes it a very capital-efficient effective part of our business.

[Operator Instructions] We have another question coming from John Tanwanteng from CJS Securities.

I was just wondering were there any potential buyers or interested parties? Or was this the one you focused on just all along?

No. We ran a process. I would say we had a really robust sales process and really strong partners that help us do that from Morgan Stanley.

Okay. Great. And not asking for guidance, but does your opportunities to realize the growth in synergies and drive margins that you expect -- that you got with the Neenah merger change at all with the sale? Or is it mostly still, what you expected it to be considering what's happened in the last couple of quarters.

Sure. So let me comment on the impact of the transaction and how we would think about that. I think from a transaction standpoint, a very minimal impact on our synergies, nothing that would have us restating our expectation of synergies, which was the $65 million in total over 3 years and being at 50% of that run rate by midyear of this year. We remain on pace on our synergies, and that's including the impact of this transaction. So we feel really good about achieving our synergies. And then from a margin standpoint, what we've said is over time, we expect to continue to improve margins and expand those driven by a number of things, the improved mix of our portfolio. So that becomes a natural improvement in margins, the investments in some of our growth platforms that have higher margin product innovation and then continuous improvement in our facilities. So nothing has really changed from a -- how we expect to continue to manage margins going forward and getting into mid-teen margins over the next several years.

Okay. Great. Last one, just a quick one for you, Greg. What do you expect your blended industry to be post closing?

Post closing, it'd still be very, very similar to what we talked about in that low 6 to 6.5 range. I would say, just real quick, the proceeds are being applied to the term loans on a pro rata basis.

We currently have no further questions. So I would like to hand the call back to the management team for closing remarks. Please go ahead.

We appreciate your interest today and your questions and look forward to talking to you next week at our earnings release for Q2. Thank you so much.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.