Mativ Holdings Inc (MATV) 2022 Q1 法說會逐字稿

Hello, and welcome to SWM's earnings conference call. Hosting the call today from SWM is Dr. Jeff Kramer, Chief Executive Officer. He is joined by Andrew Wamser, Chief Financial Officer; and Mark Chekanow, Director of Investor Relations. Today's call is being recorded and will be available for replay later this afternoon. (Operator Instructions)

It is now my pleasure to turn the floor over to Mr. Chekanow. Sir, you may begin. Thank you.

Thank you, Gemma. Good morning. I'm Mark Chekanow, Director of Investor Relations at SWM. Thank you for joining us to discuss SWM's first quarter 2022 earnings results.

Before we begin, I'd like to remind you that the comments included in today's call include forward-looking statements. Actual results may differ materially from the results suggested by these comments for a number of reasons, which are discussed in more detail in our Securities and Exchange Commission filings, including our Annual Report on Form 10-K and our quarterly reports on Form 10-Q.

Some financial measures discussed during this call are non-GAAP financial measures. Reconciliations of these measures to the closest GAAP measures are included in the appendix of this presentation and the earnings release. Unless stated otherwise, financial and operational metric comparisons are to the prior year period and relate to continuing operations. This presentation and the earnings release are available on the Investor Relations section of our website, www.swmintl.com.

I'll now turn the call over to Jeff.

Thank you, Mark, and good morning, everyone. I'm pleased to share that we are off to a good start to 2022 and that the two most critical themes we expected to play out this year are already materializing. First and foremost, the pricing actions we discussed on our last earnings call have been successful in offsetting higher raw material costs. Second, demand remains robust across our portfolio, and we are expecting it to remain so for the remainder of the year.

Though we had a tough comparison versus a very strong first quarter last year, organic sales were up an additional 5%. EPS though was down versus last year, which can mostly be explained by the fact that inflation and supply chain issues did not begin impacting results until the second quarter of 2021 and then accelerated from there.

Even though global uncertainties remain, we are pleased to say that we entered the second quarter with good momentum and are confident in reaffirming our financial guidance for the year. We continue to expect adjusted EPS of $3.50 to $3.95, supported by adjusted EBITDA growth of 20% to 30%. As such, we expect strong and accelerating free cash flow as the year progresses, which will delever the balance sheet throughout the remainder of the year.

And last but certainly not least, we remain incredibly excited about the pending merger of equals with Neenah. We see strong value creation opportunities from the combination, ranging from the strategic benefits of a significantly expanded portfolio of complementary technologies and multiple avenues for cross-selling and geographic expansion to more than $65 million of highly actionable cost synergies and increased long-term strategic optionality. I'll come back to the transaction later, but let me first review the quarter.

Starting with AMS. Sales were up 67%, including the benefit of the Scapa acquisition, with organic sales increasing 3%. Recall that in the first quarter last year, we delivered 15% organic sales growth as many end markets surged back with post-COVID recovery sales with only minimal signs of the supply chain disruptions that would accelerate throughout the year. Given that comparison and under continued challenging supply chain conditions, we still posted organic growth as price increases implemented over the last several quarters were effective.

On our last call, we highlighted that due to the rapidity of escalating costs, we had previously been lagging with price increases, but we're confident that we have addressed the underlying challenges to this unprecedented pricing environment. And our results show that this quarter. In our discussions on pricing with customers, they have acknowledged that we have approached the issue in a measured way. And they recognize the extraordinary importance of our efforts to be reliable partners in an uncertain and strained environment.

This trust and recognition of the value we provide has allowed us to maintain our competitive shares. Unfortunately, as most are aware, the global inflationary environment has not yet settled, so we continue to proactively monitor the situation and have already initiated additional pricing actions to offset these pressures. Bottom line, we will continue to focus on offsetting inflation in 2022.

To dive a little deeper into my earlier comments on demand, demand remains strong across most of our end markets with the key drivers of sales growth for the quarter being filtration, construction and industrial. Water and process filtration sales are healthy, the construction industry is active and sales of our broad range of industrial products are performing well.

In fact, the main constraint on our ability to capitalize on an even greater degree of demand was availability of certain key raw materials. We continue to be impacted in the quarters by tightness in a variety of select materials that varied across the spectrum, from some specialty adhesives to materials such as release liners. We have been actively sourcing from a variety of suppliers and are starting to see some relief going forward.

One area though that has been a key sales constraint remains the raw material shortage for our transportation films. As we've shared, there is a global shortage of a key ingredient up in the value chain that is limiting supply across all manufacturers. As the leading producer of transportation films, we remain the go-to source for customers worldwide for these materials but see tight supplies until 2023, although there are recent announcements about raw material expansions that should help alleviate the situation and move us back to aggressive growth.

If we were to assess AMS segment sales excluding transportation, organic sales would actually have been up 7%, showing the broad sales strength of the portfolio. Importantly, as we enter the coming quarters and comparisons normalize, we expect quarterly organic sales growth to increase from first quarter levels.

Switching to Engineered Papers. The quarter went as expected. Price increases, both contractual and to the market, were effective as were the increased volumes we were able to secure with certain customers to help further offset higher pulp costs. Total sales increased 7% in the first quarter with broad strength across the portfolio. Traditional products performed well. And we saw continued momentum in reduced risk Heat-not-Burn demand with sales up over 25% in that fast-growing area.

In particular, we are excited about many of the innovative products we have in development for a variety of customers, from sustainable biodegradable filter solutions to innovations in sustainable packaging and replacement of other single-use materials. And while I will discuss the Neenah transaction later, our customers across end markets have shared that they are excited about what the combined capabilities of both companies can contribute to accelerating this innovation.

I would be remiss in not mentioning the ongoing tragedy represented by the Russia-Ukraine conflict. I am incredibly proud of and inspired by the leadership of our SWM European and global community have shown in sending supplies and supporting the people impacted by this action. In regard to our customers, we have also been working with our EP customers as they adapt their supply chains in response to this invasion.

While we can only disclose limited details, we will be able to help certain customers who relied on regional supply chains and manufacturing sites for both reconstituted tobacco and paper products to continue production by switching their volumes to SWM facilities, both in the short term and in multi-year commitments. While we, of course, wish these actions were unnecessary, we are proud to support our customers and act swiftly to address unanticipated changes and challenges with our global supply chain capabilities.

Turning back from Eastern Europe specifically. As we highlighted, we are pleased that the price increases and additional volumes have covered our higher pulp costs. But with the above conflict, energy cost remained a challenge. Much as we detailed in AMS, we continue to engage our customers on this inflationary element, including the implementation of surcharges and other pricing discussions. Given these ongoing actions and early signs of success, we remain confident that the EP segment will deliver stable operating profits in 2022, consistent with what was assumed in our guidance.

With that, I'll turn the call over to Andy to review the financials in more detail.

Thank you, Jeff. Starting with AMS, first quarter sales were up 67% to $273 million with Scapa adding approximately $105 million. Organic growth was 3% versus a very strong prior year quarter as Jeff mentioned. Given current pricing trends and demand levels, we expect organic growth reported for the upcoming quarters to accelerate from this level.

Adjusted operating profit increased 24% or nearly $7 million with the addition of Scapa and higher pricing, which more than offset higher resin input cost. While other cost components are also higher than last year, our price increases have been effective in offsetting those as well. We are pleased with how our price increases have recouped higher costs. And we remain vigilant in watching costs and assessing needs for additional increases as appropriate. Simply put, in recent quarters, we have been and we will continue to be quicker to act than we were last year, when inflationary pressures first began.

While margins were down versus the prior year quarter, we saw strong sequential improvement from the fourth quarter, up 540 basis points, and expect sequential improvements to continue in the upcoming quarters with significant year-over-year margin expansion anticipated in the second half of the year as comparisons ease and normalize. All told, despite some inflationary factors, our pricing is strong, and we remain confident AMS will hit the growth expectations embedded in our guidance.

For Engineered Papers, first quarter sales were up 7% and would have been up 10% if not for unfavorable currency movements. We saw positive pricing and volume growth across the portfolio and expect these favorable trends to continue. Adjusted operating profit was, however, down $5.6 million with year-over-year margin contraction. While higher prices and incremental volumes offset higher pulp costs which remain near peak levels, energy and other inflationary factors drove the profit decline. We have already implemented surcharges to offset this dynamic inflationary environment, which has been particularly acute for energy costs.

We are encouraged with early signs for passing on these costs and, combined with our additional volume opportunities that Jeff referenced, lend confidence in our ability to deliver stable operating profits for EP for the full year, consistent with our guidance. Like AMS, EP saw year-over-year margin compression but delivered 100 basis points of sequential margin expansion compared to 4Q '21 and expect continued sequential improvements in upcoming quarters.

Regarding adjusted unallocated expenses, we saw an increase in absolute dollars, largely due to the addition of Scapa overhead. But as a percentage of total sales, unallocated costs did decline 40 basis points. For the year, we would expect adjusted unallocated expenses to be approximately $65 million. On a consolidated basis, sales increased 41% to $407 million and were up 5% on an organic basis. Adjusted operating profit decreased 7% to $42 million with year-over-year margin contraction. But on a sequential basis, margin was up 300 basis points.

First quarter 2022 GAAP EPS was $0.05 versus $0.68 while adjusted EPS was $0.89 versus $1.02. There were significant GAAP EPS items that were excluded from adjusted EPS, including $0.34 of restructuring and impairment expenses mostly related to a noncash asset write-down in AMS. We plan to divest a relatively small non-core piece of our construction business, thus the assets have been reclassified as held-for-sale and written down.

Another adjustment was the add-back for Scapa integration and Neenah merger expenses, which totaled $0.18 in the quarter. Lastly, noncash purchase accounting increased to $0.28 share from $0.16 per share due to the Scapa acquisition. Please see our non-GAAP reconciliation in the earnings release for additional details on these items and other non-GAAP adjustments as well as our 10-Q.

As discussed, the first quarter was as expected to continue to be our toughest EPS comparison in 2022. Sequential gains are expected near term with year-over-year comparisons becoming increasingly favorable as the year progresses. Given first quarter results, continued price increases already put in place for 2022 and solid demand fundamentals, we are reaffirming our 2022 financial guidance for adjusted EPS of $3.50 to $3.95 and adjusted EBITDA growth of 20% to 30%. After a challenging 2021, we are off to a good start, and we expect even better results still to come, anchored by strong profit growth in AMS and stability in EP.

Echoing our comments from the fourth quarter call, from a quarterly view, we continue to expect adjusted EPS to average approximately $1 per share in the second through fourth quarters, which would put full year adjusted EPS toward the high end of our guided range. Though it's still early in the year and some uncertainties remain about the external environment, the aggressive actions we have taken to combat inflation are beginning to take hold. And we believe we are well positioned to deliver on our financial goals.

Moving to cash flow and leverage. First quarter operating cash flow was $5 million. This reflected a $15 million increase in working capital outflow compared to last year due to the strong sales and higher input costs. First quarter is typically our seasonally lowest cash flow quarter. And we project strong cash flow for the remainder of the year as working capital normalizes and year-over-year profit improvements materialize. Though negative in the first quarter, we project free cash flow in the $100 million range in 2022.

Strong EBITDA growth and free cash flow are expected to support rapid delevering beginning in the second quarter of 2022. While first quarter ended over 5x net leverage, the projected more favorable LTM financials in the near term are anticipated to drive net leverage down towards 4x by the end of the year or approximately a full turn of leverage from where we sit today. I would expect about 1/3 turn of net leverage improvement per quarter as we go from Q2 until the end of the year. Despite leverage increasing, we remain comfortably below our covenants and have approximately $156 million in liquidity, consisting of $56 million in cash and $100 million of availability on our revolver.

Now back to Jeff.

Thanks, Andy. Before turning my comments towards the merger with Neenah, I just want to reiterate the key but simple takeaways from the quarter.

First, we effectively raised price to cover raw material costs and continue to do so to recover other inflationary factors. Second, demand remained strong across all our segments. And we are working to address any of the remaining material supply chain challenges. And finally, with the tough first quarter comparison out of the way, the remainder of 2022 should be very favorable versus '21 with improvements both sequentially and year-over-year. Given the price increases and demand outlook, we are reaffirming our guidance for a much stronger 2022, which will result in improved cash flow and rapid delevering of our balance sheet.

Now shifting to the proposed merger. We couldn't be more excited about this combination. And I know our counterparts at Neenah feel the same way. I'll frame my comments around strategic fit, synergies and then benefits of scale. Together, we will form the ideal specialty materials and solution provider for customers worldwide, generating attractive margins on nearly $3 billion in combined sales. The expanded value proposition and solution offerings we can bring to our customers is at the strategic heart of this merger. Our combined technologies target shared end markets with strong mega trends such as the need for clean air and water, personal health and wellness, performance coating solutions and sustainable alternatives.

If we look deeper at the combined businesses' marketplace touch points, we see significantly enhanced positions in key product categories. For example, in filtration, Neenah's filter media complement our media and support positions in air, water and industrial applications; their medical packaging with our medical materials and health care solutions; their tape backing and coating and saturation capabilities with our specialty tape applications; and their sustainable packaging with our botanical fibers position, to name just a few.

In addition to these fortified strategic positions, we see top line accelerators like cross-selling a broader portfolio, increasing penetration of underserved geographies and increased innovation and product development. Together, we offer significantly more capabilities to solve our customers' most challenging engineering needs in segments with very favorable long-term growth trends, which we believe ultimately drives our ability to win in the marketplace.

Now let's discuss synergies. We have conservatively identified over $65 million of annual run rate cost savings. And we expect to execute on over half within the first year and the remainder over the next 1 to 2. By any measure, delivery of these savings could drive hundreds of millions of dollars in value creation for our shareholders. About half of these synergies are comprised primarily of SG&A reductions, including reduced C-suite and public company costs as well as organizational optimization.

Beyond the duplicative SG&A savings, I would highlight benefits of higher volume purchases of raw materials and improved buying power with vendors and suppliers. We also see multiple opportunities to cross-source materials from each other's production sites and optimize our supply chains, given our global footprint. In addition to our internal estimates, we validated these synergy assumptions using a third-party adviser, who will also help us implement them. So we are highly confident in our plans to realize them quickly.

Finally, in addition to the compelling strategic fit and strong synergy opportunity, we see tremendous benefits of scale. The combined company will have an increased relevance to customers and suppliers up and down our value chains. And our combined capabilities will be the foundation of increased innovation, the most essential component of translating strong demand trends and needs for new products into accelerated top and bottom line growth.

Furthermore, larger scale and expanded presence across markets increases our long-term strategic optionality. And we will have even greater resources to pursue value-creating growth investments to drive value creation. Other benefits of increased scale should be improved visibility in financial markets, a challenge for smaller companies today. We also expect to see increased stock liquidity, improved access to capital markets and broader investor appeal, given the synergy-driven enhanced growth outlook.

So in closing, this combination has a highly complementary strategic fit, substantial synergies and compelling advantages of scale. Our strong base businesses, combined with cost savings, are expected to form a merged company with EBITDA earnings power exceeding $450 million with strong free cash flow, enabling us to make the investments in technology and manufacturing to advance our strategic intent while continuing to pay down debt and return cash to shareholders. I just want to reiterate that each company has a long track record of paying a robust dividend and understands the importance of that dividend to our investors.

Furthermore, after a challenging 2021, we are committed to delevering the balance sheet quickly as a combined entity, expecting year-end net leverage as a combined company to be approximately 4x and trend lower from there. From a process standpoint, we filed our S-4 statement last night in conjunction with our 10-Q. We remain on track for a second half close and have kicked off integration planning with key cross-functional leaders across both businesses collaborating to frame out short-, medium- and long-term plans as we join forces.

While I look forward to staying on as a consultant after the closing of the transactions, one of the reasons I have so much faith in this combination is because of my confidence in Neenah's CEO, Julie Schertell, to lead the combined business. She has the operational expertise to oversee a seamless integration, the institutional knowledge to deliver our synergy commitments and the executive experience to execute the go-forward strategy. The similar cultures of our organization are already apparent as integration planning work streams spring up to life. And our teams are very excited about our future and the possibilities ahead.

In summary, this transaction is a compelling and a unique opportunity to create significant short- and long-term value creation 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.

So that concludes our remarks. Gemma, please open the line for questions.

(Operator Instructions) We have a question in from Chris McGinnis of Sidoti & Company.

Maybe just to start off, since you're closing on the merger, can you just talk about the customer reaction so far? If you did state that, I apologize, I jumped in a little bit late. Just how has that been accepted by the customer base since you've kind of announced that? And I guess, what other maybe -- just now that you've publicly stated this that you're going to merge, what other things that maybe have you found in terms of the overlap of the two companies?

So Chris, this is Jeff, just a couple of things. So the reaction from our customers has actually been pretty overwhelmingly positive because both -- we play in a lot of the same markets, but our products don't overlap, right? They're highly complementary. And most of our customers have really been excited about working with us individually. And so the combination to them, they see just it brings so many benefits from innovation to supply chain capabilities, you name it. So I think it's been very, very positive from that.

In terms of what we've learned since we announced the merger, as I said, we started these integration teams, which are cross-functional with members from both sides. And what's exciting to me is they're coming back with additional ideas about how to create additional value. They're confirming the initial assumptions that we had at the high levels before we were able to announce it. And so, so far, it's been very positive.

I think the other note that I mentioned in our call is that our cultures are actually fairly similar. And so they're finding that as they reach across the table to their potential new colleagues, they're finding them very similar to SWM's approach to people, to innovation, to serving customers, et cetera. And to me, that's a very important success factor that we're confirming as well. So, so far, knock on wood, I think it's been very positive.

Great. And I appreciate that. I guess, just turning to the quarter, is there any way -- do you add up the challenges related to the inflationary cost pressure, supply chain challenges and the sourcing issues to impact both the top and the bottom -- or the revenue and the EBITDA? I know you highlighted that outside transportation, AMS would have been up 7%, if I heard you right.

Yes. And maybe I'll just add a little bit more flavor or color to that. So when we look at some of the supply chain challenges, so I mean, a good quarter, even despite -- even lapping some raw material availability. I'd say the couple of areas that were impacted were obviously the first one being transportation with our TPU film. And as Jeff mentioned, we will see improvement there in '23 and as additional supply is coming online. But the other area where we really saw it was in some of our health care businesses with release liners and some specialty resins. Those sales would have been up much more meaningful.

When I look at just more input costs, I'd say EP really effectively had about $5 million in additional energy cost. So our price increase has offsetted the pulp increase as pulp has been up, I think it's about 30% year-over-year from where we were from Q1 '21 to Q2 '22. So our price increases offset that. But what we're doing to offset these energy costs, and it's been receptive, is passing along surcharges to our customers. So when I look at the pricing actions in place and the order book that we have visibility to, we would feel really confident in terms of our ability to deliver the 20% to 30% EBITDA growth.

And in my script, I think there's potential to be at the high end of the EPS range that we mentioned. So we feel pretty good. We recognize it's a volatile environment. But as we close out this quarter, this was going to be our toughest quarter, and I expect strong year-over-year growth in both EP and AMS as we go throughout this year, and we have pretty easy comparisons.

Great. And I guess, just on the -- one of the things you spoke a lot about last year was changing up the contractual pricing that you had in place. Can you just talk about maybe where you're at across the portfolio with the contractual price increases and how they're accepting that? And do you still have more room to work on that? Just a little bit more color around that.

Yes. Let me do AMS first and then I'll tackle EP. So on AMS, we generally don't -- a lot of that business really isn't contract-based. So we are able to pass on price increases as we're monitoring inflation. And as we sit today, we think we're covered, even at polypropylene, like a little bit higher than -- maybe it's $0.10 higher than what we thought it would be for the year. But it's something we're closely monitoring. And our pricing will have us covered.

We also think that we sort of look at this mix between pricing and volume. So in our forecast and in our budget, we forecasted and budgeted that we would have supply chain challenges for this year. And so we expect those to continue. But we still think we're going to be covered. And so what I'd say is AMS, really no -- effectively no rolled contracts, monitor the inflationary environment, and we think we're covered. And we'll act if we see anything change from where we sit today.

On EP, that is where we have more of the contractual reset. So some of our customers, they'll reset twice a year on -- as it relates to pulp and some on energy. But one thing that we're finding with some customers is that instead of the energy surcharges, we're getting additional volumes. So we sort of look at it in terms of we manage the business on an OP basis.

And that's what gives us stability, where if we were not able to pass along a surcharge for a certain customer, then they're giving us additional volumes. So we sort of get to the same place as we manage the business on an OP basis. So it's a little bit mixed, kind of depending on customer-by-customer. But again, I'd say we feel really comfortable in terms of where we sit.

No, appreciate that, Andy. And then just thinking about the -- some pretty solid growth, especially I think in AMS, when you back out the transportation. Any concerns, just kind of given the external environment, that, that trend could be impacted? Or where are you seeing the strongest pieces of growth across that portfolio?

Yes. I mean, when I look at the portfolio, I mean, filtration was up mid-single digits. I would expect that, that could have gone up even higher if we didn't have some, I'd say, some labor issues in one of our plants that produces some of our air filtration. When I look at health care, I would expect that to accelerate as we get some of these supply chain issues alleviated. And that's really effectively underway right now as we speak. Construction was up strong, as Jeff mentioned. And then industrial had a solid start to the year.

So when I look at the portfolio, I feel pretty comfortable in terms of where we sit. And that's even with the backdrop of understanding that we're going to have some supply chain challenges and we won't get everything out the door. So the results would be even better. But I still feel comfortable in terms of our guidance for the year.

Yes, Chris. With the uncertainty that you're discussing, I mean, that's something now that's become daily stuff for us now. It's weird to be able to say that, but every day is a new day. And so we continue to reflect on that in our sales and operational planning activities.

Right now, we don't see that impacting. That's why we're reaffirming our guidance because the demand in our key markets is just very strong. So even if there's some slowdown in it, we have sufficient cover, I think, to hit it. Now if the world goes to hell in a handbasket and then we'd have to readjust ourselves. But right now, we feel comfortable with where we're sitting.

And then just maybe one last question, just around maybe some newer products coming out of EP. I know you've talked about it before, maybe some of the newer technology that you have out there and then maybe some single-use in Europe. Can you just talk maybe about some of the newer products coming from there and what you're seeing for demand?

Yes. I could talk to you about trends without getting into too many details. So the filters currently in most of the tobacco products are considered single-use. And there's legislation in Europe to remove those. And so we're actively working with our customers to work on paper-based solutions. And we have close innovation ties to them. And so that's something that's underway. There's also single-use materials in packaging for many of these materials. Interestingly, there's a strong sustainability play by many of our EP end-use customers. And that plays directly into the capabilities we have.

But as I mentioned even in the call, they're really excited by us combining with Neenah. Because Neenah also has these great capabilities and these types of sustainable solutions. And so one of the customer feedbacks that you were asking earlier is actually coming out of our EP customers about the excitement about the kind of sustainability plays we can help them with in addition to all the reduced risk innovation we're continuing to do with them. So it's actually a positive story there.

Thank you. We have no further questions from the lines, so I'll hand back to Mark and the team for closing remarks. Thank you.

Okay. Well, thank you very much, everyone. It was a little bit longer than normal because we wanted to talk extensively about our first quarter but also to share our excitement about our combination with Neenah, more to come on that. But we're excited about our future, and we really appreciate your support. Thank you.

That concludes today's call. You may now disconnect your lines. Have a great afternoon. Thank you very much.