Mativ Holdings, Inc. (MATV) Q2 2022 Earnings Report, Transcript and Summary

Hello everyone and welcome to the Mativ Second Quarter Conference Call. [Audio gap] …Chief Executive Officer. She is joined by Andrew Wamser and Executive Vice President and 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. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. [Operator instructions]. It is now my pleasure to turn the floor over to Mr. Chekanow. Sir, you may begin.

Thank you. Good morning. I am Mark Chekanow, Director of Investor Relations at Mativ. Thank you for joining us to discuss our second 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 operations metric comparisons are to the prior year period and relate to continuing operations. The earnings release is available on our website ir.mativ.com as are the slides for today's presentation. You can download the slides and/or click through these slides at your own pace during the call using the webcast interphase. To clarify some nuances, of how Mativ results were reported and how we'll be discussing them, we'd first remind everyone that the SWM and Neenah merger closed on July 06, 2022, after the second quarter ended. Thus we'll be discussing second quarter results for the legacy company separately. Given the legal and accounting structure of the transaction, Mativ results include only the legacy SWM business. The Neenah results we'll discuss are not included in the Mativ results for the second quarter. Beginning in the third quarter of 2022 results for both businesses will be reported together as Mativ results with the previously disclosed reporting structure, which Andy will review shortly. Please follow up with us for any further needed clarifications, as we want to make sure you understand our business trends, financial results and reporting processes. With that. I'll turn the call over to Julie.

Thanks Mark. We appreciate everyone joining the call today from Mativ first earnings call as we have a strong transition from separate legacy companies to a more powerful emerged enterprise. There's a lot to discuss and I'm eager to share color on our positive second quarter results, our profit outlook, and some important capital allocation topics. I'll lead off by highlighting that both legacy companies delivered solid second quarter results. Pricing and inflationary costs remain key themes and actions across both companies have offset input cost pressures and demand remains robust across our portfolio. Bottom line, the second quarter and year-to-date results track with each company's previous full year guidance. And we enter the second half of 2022 with good momentum on many fronts. I want to take a moment to commend our global teams for great execution on the base business; operating safely and delivering outstanding product quality and service to our customers while still facilitating the close of the merger and integration planning. This transformational merger between SWM and Neenah closed in early July and Mativ of employees are full of optimism about our future. Our organizations have come together with the ambition and energy to deliver on the incredible potential of this merger. And I'm encouraged by our progress, cultural fit and early stage integration plans. We know integration can be a long and complicated process, and we have set up a transformation office dedicated to planning, tracking and coordinating across all functions to ensure open communication and alignment as we move forward to deliver the expected synergies of this transaction. That said, rest assured that we have not and will not lose focus on delivering in the near term with continued excellence in our day-to-day execution. We will elaborate shortly, but I'd also highlight that we are already capturing some early synergy value with more on the way as the year progresses. As we have consistently communicated our $65 million synergy plan is well vetted and as I like to say, bankable. I want to reiterate a few points about our plan. First, we expect our run rate synergies to exceed half of the total plan by the end of year one. So we will have executed on over $30 million in the first 12 months. Second, these are all cost synergies, about half from SG&A and organizational spend and the other half from procurement and supply chain related opportunities. The synergy plan does not require assets or facility footprint rationalization to achieve the $65 million. Third, the longer term we see top line growth synergy opportunities that would be incremental to that $65 million. Beyond the exciting potential for longer term value creation of the merger, I am also pleased to share our near-term outlook. In the second half of 2022, we project adjusted EBITDA in a range of $210 million to $230 million. This is consistent with previously issued annual guidance of SWM and Neenah, plus some early stage synergies. Although the external environment continues to present challenges and uncertainties, our combined portfolio positions us with greater diversification and resilience for a variety of economic backdrops. Given us strong order books, customer campaigns and current cost structure, we are confident we can execute against these plans. Pivoting to some capital allocation topics, we have announced our first quarterly cash dividend, which annualizes to a $1.60 per share, or approximately $88 million annually. This dividend cash outlay is consistent with both companies' previous total pay-outs and provides investors with a compelling and reliable return of capital. With respect to leverage, Andy will elaborate further, but I want to assure investors that delivering is a key priority. I'd like to now provide some high level commentary on quarterly results. Legacy SWM delivered a solid quarter with strong demand and improved operations, particularly within the advanced material segment. Consolidated sales increased 13% with adjusted EBITDA up slightly year-over-year and up 5% sequentially. This profit growth came despite continued inflationary pressures as revenue growth from pricing actions and volume gains covered input cost pressures on a companywide basis. Within AMS, sales were up 14% with double-digit organic growth at 11%. The portfolio delivered outstanding overall growth on top of a very strong quarter last year through a combination of pricing and volume. Transportation sales grew the fastest, anchored by rapid growth in paint protection films. Demand remains very strong and we are seeing slight improvements in availability, especially compared to last year's second quarter when TPU resin shortages first emerged, plus we have qualified an additional global supplier to help us meet demand. We delivered strong performance infiltration as well, particularly in water and industrial process filtration categories. Construction sales grew nicely as did industrial products. Price increases were effective, and our teams delivered for our customers. In these times, while pricing conversations are never easy, security of supply and reliability are paramount and emerging as customers top priority and we executed well on both fronts during this quarter. In Engineered Papers, volumes were robust, driving 10% sales growth. The portfolio delivered across the board with the fastest growth coming from reduced risk products. Overall, we were pleased with sales. However, energy costs have been escalating and hit our paper business in a significant way. While our pricing actions and negotiated volume increases covered higher material costs, the spike in energy impacted margins for the quarter. Looking forward, we expect further pricing actions, as well as some contract resets to provide increased inflationary offsets in the second half of the year. While price recovery lags with these contracts, ultimately they do catch up and result in improved margin performance. On the legacy Neenah side, results clearly demonstrated excellent price cost recovery with sales and adjusted EBITDA each up 14%. While price increases began to exceed input costs during this first quarter, as expected, we gained a lot of ground in the second quarter and are well on our way to achieving our $25 million price cost improvement target previously communicated for Neenah. We are pleased to say that our price increases have been affected and accepted by the market and our demand remains strong. Our outstanding service during this unusual supply chain environment has proven to our customers that they can rely on us, especially in times of uncertainty. Within our segment, sales growth was led by fine paper and packaging up 21% in the quarter. All three categories; packaging, consumer products and commercial prints saw double-digit growth with segment volume and pricing each contributing to strong sales performance. Technical products also had double-digit growth. The release liner business continued to outperform as well as strong gains in water filtration and industrials. Importantly, profit margins in both of Neenah's operating segments increased meaningfully year-over-year. Our growth platforms are continuing to perform well, delivering strong volume, well executed pricing actions and improved margins. We are also on track with previously announced capacity expansions in both our filtration and release liner businesses. These organic investment projects unlock needed capacity to continue to grow at expected rates. In summary, both companies performed well and delivered as expected in Q2. Pricing and volume remains strong, and we continue to improve margins and deliver quality to our customers. There's good momentum in our business. We are taking action on planned synergies from the merger and we are on path to our previously announced guidance plus some early stage synergies. Now I'll turn it over to Andy to discuss Q2 results in more detail, as well as provide updates on other key financial topics.

Thanks, Julie. For Legacy SWM, sales were up 13% or 11% on an organic basis. We saw gains essentially across the entire portfolio through a combination of strong pricing and good volume performance. Within AMS, the fastest growth came from transportation films while most of the other areas grew as well, which resulted in 11% organic growth for the segment. For EP, we also saw strong volume and sales performance in many product lines. Total segment sales were up 10% with reduced risk products continuing their strong momentum in leading the portfolio higher with total segment sales up 10%. We saw slight year-over-year gains for adjusted consolidated operating profits and EBITDA and mid-single digit sequential increases, which is consistent with our previous guidance. AMS adjusted OP grew 25% as margins expanded 120 basis points year-over-year and 170 basis points sequentially, with successful price actions more than covering higher input costs. Polypropylene prices are well off their peak and are expected to continue a downward trend into the second half of the year, which is an encouraging sign. Energy prices are not as meaningful of a variance for AMS given the asset concentration in the US and more reliance on electricity than natural gas. We were very pleased with AMS' sales and profit growth for the quarter and remain quite bullish on these favorable trends continuing for the balance of the year. Recall that adjusted operating margins for the full year in 2021 were 11.5% and our goal for 2022 was for margin expansion in the range of 200 basis points. We feel this is very achievable given year-to-date results and the continuation of current trends. EP adjusted operating profits were down 19% versus last year. Price increases and volume gains offset higher pulp and other material cost increases, but escalating energy costs impacted EP disproportionately given their asset concentration in Europe and consumption of both natural gas and electricity. We continue to implement surcharges and we have contracts resetting at midyear to reflect higher costs, but the inherent lag is pressuring segment profitability thus far this year. We see improved margins in the back half of the year as more pricing comes through to mitigate higher pulp and energy costs. Looking at our results overall, we are very pleased with the quarter other than the energy cost that impacted EP, which we are addressing. Adjusted EPS of $0.86 per share versus $0.90 last year reflected the growth in operating profits, but was offset by a few below the line items like income from our JVs, which is a timing issue. For Legacy Neenah, total sales were up 14% or up 17% on an organic basis, excluding the effect of [indiscernible] and the Appleton site shutdown. Overall, organic volume growth continued to increase in the 3% range while pricing drove the majority of this sales gains. As you would expect, given our actions to recoup higher input costs. Within tech products, lease liners, water filtration, and industrials led the gains driving overall growth of 11% or 15% on an organic basis. In fine paper and packaging, we saw double-digit sales gains in all three of our categories as Julie mentioned. All told, demand remains very healthy across the business and our price increases have proven effective. On a consolidated basis, adjusted operating profits increased over $5 million or 28% while adjusted EBITDA grew over $4 million or 14%. Operating profits increased significantly in both reporting segments versus last year with margins increasing both year-over-year and sequentially. Technical product's operating margin increased 120 basis points year-over-year and 240 basis points sequentially while fine paper and packaging operating margin increased 230 basis points year-over-year and 130 basis points sequentially. These profit trends show clear success in raising prices to recover higher costs while Neenah's first quarter results showed pricing as effectively turning the corners to offset higher costs. Second quarter price versus raw material and input costs was firmly positive and the business is well positioned to deliver on the original plan for price cost recovery this year. On the unallocated side, the increase is related to some inflationary pressures, incentives given good year-to-date, performance and investments to support our growth. Turning to our guidance for the second half of the year, let me provide some general direction on a few financial items to help with modeling. We project adjusted EBITDA in the range of $210 million to $230 million. We see continued benefits from price increases as both businesses recover inflationary cost pressures that began in 2021 and many of which persist into this year. We are actively assessing all cost buckets, especially raw materials, energy and distribution and pricing actions to offset increases as quickly as possible. We expect demand to remain strong across the portfolio while there are some potential concerns of a macro slowdown. We have not yet seen signs of this in our business, but remain in closed talks with our customers on order books and outlooks. However, in the case of a macro slowdown, we feel our diversified portfolio should demonstrate resilience given our end markets. For example, we don't expect significant cyclicality in our replenishment driven filtration business, nor healthcare or release liners, given much of those materials go into non-cyclical consumer personal care products. Furthermore, the engineered papers business has demonstrated resilience across economic cycles, given its inherent stability. While difficult to claim recession proof, we feel comfortable that our portfolio is recession resilient with a possible silver lining of an economic slowdown being the potential for stabilizing supply chains and declining input costs. Our EBITDA guidance also reflects some early stage synergies. By the end of the year, we expect to be on an executed run rate of approximately $20 million per year of the $65 million plan. Naturally, only a portion of the annualized $20 million will be realized over the next two quarters, but we are highly confident in the staged actions that will deliver savings as the rest of the year progresses. We also remain confident that we will have executed on the actions to exceed half of the $65 million plan on a run rate basis over the coming year and will provide updates with how we're progressing. As you may recall, both legacy companies provided 2022 adjusted EBITDA guidance, which sum to the range of approximately $385 million to $415 million. While there's many puts and takes in this dynamic environment, our businesses are performing well and our second half guidance is consistent with that original range. On interest expense, to give some high level parameters, we are starting with $1.83 billion of total debt. Assuming 4.5% under roughly $1.5 billion outstanding on our credit facilities, coupled with the six and seven coupons on our senior notes, you would arrive at approximately $90 million of annualized interest expense. While our credit facilities have floating rates, our target is to have 75% of our total debt at fixed rates utilizing swaps. This would take interest expense to the mid $90 million range on an annualized basis. For detail on our debt structure, we have included a slide in the appendix of this presentation. For taxes, probably best to assume, low 20% range, for CapEx combined annualized a $100 million is a good assumption at this stage and our total share count is approximately 54.7 million. While our reporting structure will change starting in Q3 when we consolidate our results and report on our newly aligned segments, there are a few things to note. First, while our new segments will be generally aligned with our existing reporting segments, there may be some small changes as we align where certain products are reported in on allocation of cost across the business. As a general guideline, SWM's AMS segment and Neenah's technical product segment will essentially be the new advanced technical material segment or ATM. SWM's engineered paper segment and Neenah's fine paper and packaging segment will be rolled into the fiber-based solution segment and unallocated corporate cross will be aggregated. However, the methodology of how some of these costs are allocated to the business segments may change. Also when we report financials, the prior results will not be restated as pro forma; rather will be simply be shown as historical SWM results. We will be as clear as possible to help us set year-over-year trends across the combined business and financial results. Switching to leverage and capital allocation, we want to be clear when we say de-levering is a key priority. Our net leverage for the terms of our credit agreement, post close is 4.1 times. Given the significant upcoming improvements in trailing 12 month EBITDA for both legacy businesses as lower profit quarters from the second half of 2021 roll out of the calculations, we expect a natural de-levering to 3.75 times or below by year end and believe that net leverage will trend below 3.5 times in 2023 and within our target net leverage range of 2.5 times to 3.5 times. One important element of our net leverage to understand when assessing our reported financials is that our adjusted EBITDA as defined in the credit agreement makes an adjustment to reflect synergies for which we have clear and actionable plans to execute. In connection with the merger, we have also put in place an attractive debt structure that extends our maturities and increases liquidity at favorable terms. At close, we had $1.83 billion of total debt and $148 million in cash for net debt of $1.68 billion. We have $306 million of availability under our revolver and combined with cash, we have over $450 million of liquidity. All told, we are confident in our path to delivering with an attractive debt structure and ample liquidity. Regarding other aspects of capital allocation, specifically share buybacks and M&A, those will be determined by our pace of delivering. Furthermore, as we said, since announcing the merger, our increased scale does allow for more strategic optionality. As we assess our end markets products and business units, our ultimate goal is to concentrate our resources and efforts into our fastest growing and most profitable product areas. We executed a small divestiture from the legacy SWM business at the end of July, and we'll continue to explore portfolio optimization activities, both small and large. To conclude our capital allocation discussion, we are pleased to announce Mativ's first quarterly cash dividend, which we know has been another key topic of interest for investor base. Our Board of Directors recently approved a quarterly cash dividend of $0.40 per share for an annualized dividend rate of $1.60 per share. This equates to approximately $88 million of cash returning to our shareholders, a compelling and reliable value proposition in our view. While we examined several dividend policies, we ultimately concluded that maintaining a consistent total dollar payout across the two legacy companies made the most sense. Our business fundamentals remain positive, and we see limited value and a meaningful change from the current total cash payouts. We hope this decision signals the confidence we have in our near and long-term outlooks as we commit to this newly established dividend formative. We expect our long track record of strong cash flow from both companies to continue into the future, providing a large and resilient source of cash to return to shareholders, invest for growth and pay down debt. While free cash flow in 2021 and 2022 have been clouded by working capital outflows from strong sales, inflation and acquisition-related expenses, we see long-term normalized free cash flow in the $200 million range. Bottom line, we believe Mativ represents a very attractive total return opportunity for investors. Now back to Julie to wrap things up before we take your questions.

Thanks, Andy. In closing, I'd like to reiterate a few key points from today's call. Top line and bottom line performance in Q2 were equal to or better than expected. We expect in the second half of the year, continuing strong demand, additional pricing actions and operational improvements resulting in margin expansion. We have a clear and natural path to de-lever to 3.75 or below by year-end and expect to be well within our target range in 2023. We have announced our post-merger dividend, and it's consistent with current cash outflows providing a meaningful return to our shareholders and demonstrating our confidence in our future. Turning to the merger. The transformation office is in place and staffed and working with a third-party consultant to develop and implement integration plans, lead priority projects and ensure delivery of synergies. The $65 million of synergies are on track and we have clear plans in place to capture them. We are clearly stronger and better together in our efforts to offset the ongoing supply chain constraints and uncertainties in the market. We have a more diversified and resilient combined portfolio and the benefit of scale. I'm very pleased with our current business performance, early integration progress and the cultural fit between the 2 teams. We are working together to unlock the value of this transformational combination. This concludes our prepared remarks. I want to thank you for your time today, and I'd like to now open the call for questions.

[Operator Instructions] Our first telephone question today comes from Jon Tanwanteng of CJS Securities. Jon, please go ahead.

Hi. Good morning, everyone and thanks for taking my questions and congratulations on completing the close and having a strong second quarter results. My first question, I was wondering if you could talk about the [ weighting ] of Q3 versus Q4 within the guidance? How is it compared to your normal seasonality and all the puts and takes you're seeing in the [ merger ] right now?

Yes, I would say -- there's not a tremendous amount of seasonality as we go forward, especially as our portfolio has become more diversified. So we're not seeing that kind of seasonality we would have seen historically maybe 10 years ago. So they're fairly evenly split. Part of that is, as input costs can start to moderate a little bit. I think fiber goes up still slightly, but some TPU and resins may be coming down a little bit. We'll see some of that continue to advance.

And the only thing that I would add is just the importance and the relevance that when we look at Q3 and Q4 for the balance of this year in terms of what the year-over-year improvements were for last year. So to Julie's point, I think it's pretty balanced between Q3 and Q4, but the year-over-year improvements will be significant.

Understood. And then my second question, could you talk a little bit more about your total energy exposure especially to natural gas in Europe? And what's in your forecast compared to the voluntary reductions that people have started talking about and then what happens if their actual reductions in the supply from Russia?

Sure. So about 2/3 of our manufacturing assets are outside of Europe. So we have a smaller footprint in Europe where we're experiencing, as you mentioned, the greatest pressure. And we have different plans, John, depending on the country and the business. So if I think about Germany, where we have 2 large manufacturing sites supporting filtration and industrial, about 75% of our energy needs are locked or in place for the next 2 years from a pricing standpoint. We've also continued to invest in technologies that reduce our energy usage. A few years ago, we invested in a reverse thermal oxidation asset that helps reduce the amount of energy we need. So we'll continue down that path. In the U.K. and Spain and France. We've also had some preset agreements primarily focused on '22, and we have redundant capacity to optimize across different geographies as needed. So in the short term or the near term, I'd say about 75% of our energy needs are established -- at established pricing. Longer term, we're going to work to continue to lock those in and expect to recover pricing through a combination of our ops excellence programs and sales price. If there is energy rationing, we have the opportunity, as I mentioned, to have some redundant capabilities in America and in Asia. For many of our assets, and we have the opportunity to minimize the energy needs by operating site by running fewer assets at those impacted sites. But it varies quite a bit depending on the country and the site that we're talking about. We're definitely running ahead as much as possible to lock in energy where we can and then have plans in place to manage it should there be any kind of rationing.

Understood. Is there actual a rationale in your guidance? Or are you on plan to run at today's rate so far?

There's not any rationing in our current guidance. No.

Got it. Okay. And last one for me. Just how confident are you in demand, given what you -- what everyone's saying is recession periods? I know you're not seeing anything yet -- but are people talking about plans in the future? [indiscernible] hesitating at all just given what you're seeing out there, number one. And number two, as you're pushing pricing through, have you been seeing any more elasticity than normal in your demand? And how is that flowing through?

Yes. So let me take the demand on first. I think overall, as we mentioned, demand remains very strong. Our assets are running at healthy utilization levels, and our order backlog remains very strong. And I would think about that primarily in our Engineered Papers business, our Paper and Packaging business, Filtration, particularly water and industrial, and then in our Print Solutions business, where we're seeing maybe a little less strength in some pockets in industrials and health care, but still stronger demand than prior year in most cases. Those are also the areas, particularly in industrials, where we've taken the most pricing. So to your point, we walked in with some of those pricing actions knowing that we may be giving up a little bit on volume and we're seeing some of that. From a pricing standpoint, I would tell you, the teams have done a really great job of putting together multiple vehicles and differences in how we go to market with pricing. We've implemented pricing structures that really give us greater agility and flexibility. We've expanded the basket of goods that we include in our modifiers, and that's primarily in our Industrial business. We have more frequent contract resets. So we have shorter agreements that gives us greater agility, particularly in filtration in parts of our paper business. And we've added surcharges for fuel and energy in many parts of our business. And then particularly in Engineered Paper, we have some volume agreements that are helping to offset some of the inflation as well. So we'll continue down that path. Customers, I would tell you that the conversation has shifted from less about pricing, although no customers like the price increase but less about pricing, more about continuity of supply and ensuring we have the right supply chain in place to meet their needs. So my belief is, and we've seen that both companies have a history of offsetting input costs with pricing and that will continue, and you should see that in our margin expansion year-over-year in the back half of this year.

Okay. Great. If I could sneak in one more, just the initial reactions from your customers [ post close ]. Have you seen any early signs of cross-selling synergies or anything like that?

Yes. Customers have been extremely positive, even customers in some areas that I was not anticipating. So understanding customers are learning to understand the breadth of the portfolio and the capabilities that we generate when we come together from a technology standpoint. So we've got some great customer overlap opportunities and cross-selling opportunities. Part of that is also becoming a more holistic solutions provider, particularly in areas like filtration and tapes and backings and adhesive solutions. And then lastly, I'd say vertical integration is an upside opportunity as well as we look at the different technologies across the portfolio. So very, very positive. But still very early.

Our next telephone question today comes from Mitra Ramgopal of Sidoti. Mitra, please go ahead.

First, just wanted to touch on the macro environment. The demand is very strong right now. But just curious how we should think, assuming there is a significant softening in a potential recession next year, as you look at your portfolio, how resilient you think it is? And maybe remind us how the business has shared in the past when we've had sort of an economic downturn?

Sure. So I would say, over time, both companies have improved the diversity of our end markets where we compete, which has led to greater resiliency. So for example, if I think about Fine Paper and Packaging, we've really expanded into a much greater portion into packaging and consumer products, which has greater resiliency than commercial print. In filtration, we've expanded more into water and air filtration, which has very strong macro trends and greater resiliency. In health care, the hospital needs and wound care needs continue during economic downturn. And then in industrial, the breadth of that portfolio, we have areas like medical packaging and tape and abrasives for do-it-yourself and commercial applications that can offset one another during different economic cycles. Historically, our most resilient businesses have been Engineered Papers and silicone release liners and filtration. So overall, I would say about 60% of our portfolio, I would consider to be resilient, semi-resistant to economic downturn. The risk is more commercial print and parts of our industrial business. I would also say that as we think about recession potentially this is a team, both teams have demonstrated the ability to really execute very well during an economic downturn. Most recently, COVID, where both companies emerge with strength and with a very solid balance sheet. And then the only other thing I would tell you is sort of a silver lining standpoint, seeing some economic slowdown can help some of our businesses from a supply chain availability standpoint and potentially some of our input cost infrastructure.

And maybe just one thing to add. I think it's important to maybe reference what happened during COVID in 2020. So when you look at the legacy SWM AMS business, that was down on an organic basis, about 2%, EP was down about 3%. And when you look at the legacy Neenah business on the filtration side, it was really resilient. It was up about 2%. So that sort of gives you a feel and flavor in terms of the last -- sort of downturn we've had. So I'd just encourage you to sort of look at those results.

Okay. No, -- that's great. Thanks for the color. And you've obviously had a really nice first half. How should we think about the second half in terms of margins, especially in light of the success you're having with price increases despite higher already inflationary pressures?

Sure. So let me take that one. The -- I'll start referring to the business in terms of ATM and then [ FBS ]. And so when I think about the FBS business going forward, I would expect continued sequential improvement in terms of margins for the back half of the year. And those will be up meaningfully again year-over-year. When I look at the ATM business, again, that's technical products and the legacy SWM AMS business. I would expect the margins were really decent here in the second quarter, and I would expect those to be relatively stable going forward. But the key point to understand is those year-over-year comparisons from that margin comparison in Q3 and Q4, they're going to be pretty dramatic.

Okay. And as we look at the guidance, obviously, there's a huge benefit coming from the restructuring or integration and cost synergies you're going to realize. But are you assuming any revenue synergies in the initial guidance?

As of right now, for the -- any revenue synergies, I would say no, not at that point. Those are more later stage. The synergies that we're talking about in terms of being on a $20 million run rate. So again, not all of that we still have a lot of duplicate costs right now as we sort of integrate. So I think it'd be a fraction of that, frankly. But that run rate would be about $20 million, and that's all cost. And I would just emphasize, there's clear line in sight of that. And -- we're exceptionally confident in that.

Yes. So the majority of that step-up in the back half is our base business. The minority is synergy realization in the back half.

Okay. And then finally, I know it's only 1 month since the mergers have been closed. But just curious in terms of what you're seeing initially in terms was it as expected or even better than expected?

Sure. I would tell you, it's going really well. Now we still are early days. I'm sure we'll hit some bumps in the road as everyone does. We established a transformation office in recognizing that this is a big integration. It can't be a hobby. And so that team really provides strong process and project management. That's the first thing. The second thing I would say is our org design is well underway and ahead of schedule. So that helps focus the organization and align everyone on priorities. The third element would be integration teams are in place and working really well together. So there's identified synergies have been vetted, aligned to each team. So everyone knows their functions, targets and goals. The early face synergies are on plan or ahead of plan, and we'll provide updates in the future each quarter. As far as any surprises, I'd say there's some really nice positive how similar our cultures are. We came from -- both came from [ Kimberly-Clark ], so it's probably some heritage similarities. We compete in similar markets. So there's some similarities there that drive common culture. The strength of the combined talent, the collaboration and focus of the team, they continue to find new opportunities and synergy opportunities. If there's any one different at our operating models were a little bit different, and we're aligning to be very market-facing, focused on the business units and our customers and we'll continue down that path. So all very positive so far, and we're really everyone's very energetic and excited about how we move forward together.

Okay. That's great. Congrats. And again, thank you for your question.

Thank you for your question. The Q&A session has now concluded. On behalf of our listeners, thank you for today's presentation. I would now like to hand the call over back to the management team for any closing remarks.

We appreciate your time today and your interest in Mativ and look forward to talking to you further.

Thank you all for joining. Have a lovely rest of your day. You may now disconnect your lines.