Welcome to the Mativ First Quarter 2024 Earnings Conference Call. On the call today from Mativ are Julie Schertell, Chief Executive Officer; Greg Weitzel, Chief Financial Officer; and Chris Kuepper, Director, 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 call over to Mr. Chris Kuepper. Sir, you may begin.

Good morning, everyone, and thank you for joining us for Mativ's First Quarter 2024 Earnings Call. Before we begin, I'd like to remind you that comments included in today's conference call include forward-looking statements. Actual results may differ materially from these comments for reasons shown in detail in our Securities and Exchange Commission filings, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Some financial measures discussed during this call are non-GAAP financial measures. Reconciliations of these measures to the closest GAAP measures are included in the appendix of the earnings release. Unless stated otherwise, financial and operational metric comparisons are to the prior year period and relate to continuing operations. The earnings release issued yesterday afternoon is available on our website at ir.mativ.com. With that, I'll turn the call over to Julie.

Thanks, Chris. Good morning, everyone, and thank you for joining our call. 2024 is off to a good start, and I'm happy to report that our demand recovery is playing out as expected. We left you on our last earnings call with evidence of positive signs of demand momentum in many of our end markets and the expectation of a meaningful sequential step-up in sales from Q4 to Q1. I'm pleased to confirm that sales in Q1 were $500 million, which was up more than 10% sequentially from Q4, with volume increases across all product categories. While the sequential improvement in Q1 was encouraging, especially after more than a year of customer destocking and economic uncertainty, we are in what we believe to be the early days of demand recovery. And as you can see, our Q1 sales were down almost 9% year-over-year, comping a strong Q1 in 2023. What is motivating is that we have line of sight to continued demand momentum, which, for the remainder of 2024, will drive positive sales. We also mentioned to you during our fourth quarter earnings call that lower fixed cost absorption and inefficiencies in some of our facilities in Q4 resulted in the production of higher cost inventory and that selling through this inventory would have an impact on our bottom line in Q1. That higher cost inventory, in combination with a slightly less favorable sales mix, were the main drivers of our adjusted EBITDA for Q1 coming in at $46 million. Most of the impact on Q1 EBITDA is not reoccurring, and we expect meaningful adjusted EBITDA year-over-year improvement for the remainder of 2024. A few comments on why I'm optimistic about sales and EBITDA recovery this year. Throughout 2023, the combination of destocking and uncertain macroeconomic environment and geopolitical tensions…

Thanks, Julie, and good morning, everyone. Consolidated net sales for the quarter were $500 million compared to $549 million in the prior year, with volume down 7% and selling prices down 2%, partially offset by favorable currency. As Julie also mentioned, while sales were down on a year-over-year basis, we did see more than a 10% step-up on a sequential basis, intangible evidence that the demand pickup is playing out as we expected. Adjusted EBITDA from continuing operations was $45.8 million, down from $48.9 million in the prior year. Volume, mix and manufacturing costs represented a combined $16 million impact, which was partially offset by $7 million of combined net input cost and selling price benefit inclusive of synergies; $4 million favorable impacts from lower SG&A; and $2 million from lower distribution costs, which is also inclusive of synergies. Turning to each of our new segments. Net sales in Filtration & Advanced Materials of $202 million were down 8% year-over-year but up 11% sequentially versus Q4 of 2023. The year-over-year decrease reflected lower volumes due to continued customer caution and the uncertain macroeconomic environment and compares to a strong comp in the prior year. FAM adjusted EBITDA of $33 million was down 23% year-over-year, reflecting the effects of lower volumes, associated fixed cost absorption and the sell-through of higher cost inventory produced in the prior quarter, partially offset by positive net input cost and selling price benefit, distribution efficiencies and cost reduction initiatives. In our Sustainable & Adhesive Solutions segment, net sales of $297 million were down 9% from last year but up 10% sequentially versus Q4 of 2023. SAS adjusted EBITDA of $32 million was up 19% year-over-year while adjusted EBITDA margin for SAS improved 260 basis points year-over-year. Lower volume and associated manufacturing cost impacts in the current…

Thanks, Greg. In closing, I want to reiterate how proud I am of this team and all that they've accomplished in less than 2 years post merger and during a very unusual market environment. We are beginning to see the benefits of the hard decisions and actions taken over the past 21 months, and I'm encouraged by our path forward and the strong team that we have in place. You've heard me mention that to really unleash Mativ's full capabilities and deliver incremental value to our stakeholders, we need demand to return a bit, and I'm pleased to report that we're seeing further signs of demand improvement. I look forward to what lies ahead for us in the coming quarters of 2024. We will continue to focus on reducing complexity and winning with leading customers in the markets in which we compete by exceeding their expectations, providing unique innovative supply chain solutions that connect, protect and purify our world. Thank you for joining us this morning, and please open the line for questions.

[Operator Instructions] Our first question is from Jon Tanwanteng with CJS Securities.

This is Justin on for Jon. Appreciated the color on EBITDA and the puts and takes there. Last quarter, you had previewed recovering volumes, creating a drag, and I think you mentioned flattish EBITDA, but EBITDA was actually down sequentially more than expected. So just wondering if you were surprised by that.

I'd say no, we weren't surprised by it. It pretty much was in line with what we were expecting. So maybe we messaged it a little bit differently. But we knew we had high-cost inventory that we built in Q4 that had to flush through. So that flushed through. And then I'd say we had a little bit less favorable sales mix than maybe what we had originally forecasted. But top line recovery and bottom line and the impacts we're seeing there are pretty much as we were expecting, and we expect that to continue to improve into Q2 and the future quarters as well. As Greg, I think, mentioned in his comments, we expect Q2 to be up close to 30% versus Q1. So we flushed through all that higher-cost inventory, continued top line recovery, and that will start to drop to the bottom line to a greater degree.

Okay. That's helpful. And then last for me, can you just comment on where you're seeing the most strength? And is there any end market where conditions are deteriorating?

Sure. I'd say volume is up over 10% sequentially and in all of our product categories in which we compete. We're seeing the most strength in filtration and across almost all subcategories in filtration with a really strong project pipeline with our customers. So that's inclusive of transportation filtration, HVAC, industrial process, also a really strong recovery in our tapes business. And that's across most categories within tapes, the consumer tapes business, transportation, industrial and construction as well as strong recovery in premium packaging. I'd say maybe a little bit weaker recovery in some of our backings products, dye sublimation and paint protection films. We're seeing volume improve but to a lesser degree than in some of our other categories. We aren't seeing any end markets where, I'd say, we're experiencing a deterioration of demand at this point. So that's the market. And then the team is driving a lot of efforts for how we grow share within the markets in which we compete, including geographic expansion, particularly in release liner, supporting North and South America; vertical integration with holistic supply chain solutions that I mentioned on the call; e-commerce channel expansion in our consumer business with some of our largest customers; global account management and cross-selling, which is easier with our structure, our revised structure and [ much ] aligned incentives; and then market adjacencies and new product applications for existing products like athletic tape, new distribution at retailers in the crafting category and netting that can be used in a lot of agricultural products. So I would kind of sum that up as pretty strong demand recovery across all of our categories and end markets. Not seeing a real deterioration in any of those at this point and a lot of efforts to drive incremental growth as well beyond just market recovery.

The next question is from Daniel Harriman with Sidoti & Company.

I had a bunch of demand questions lined up, but Julie, I think you covered that with Justin's question. But congrats on the first quarter results. And I guess shifting gears a little bit to the debt side of things. Obviously, you're expecting sequential increases throughout the rest of the year in EBITDA and cash flow generation. Do you have a specific target or a level in mind of debt that you're aiming to pay down by the end of the year?

Yes. Thanks for the question, Dan. Yes, with Q1, with the seasonality, we normally would expect, and as we saw here, a change in working capital, which ends up actually elevating the debt and the associated leverage. So again, no surprise there. The expectation at this point is that both the debt and the leverage will decrease. The debt should end up being at a very similar level, slightly below where we had started the year, and then the leverage should also be below 4.0 and very close to where we started the year as well.

Perfect. And then I guess just my last one for me is that it seems like things are going really well from a demand side of things, and you're still targeting to end the year with quarterly EBITDA of $70 million. What are the biggest risks out there to you achieving that goal? And from the demand side of things, what -- I know you already answered this, Julie, but what areas give you any concern, if at all?

Maybe I'll start, and then Julie can add on. Just overall, the biggest variable really is the continued return to demand. We're seeing it. We hit on it in the last earnings call. We continue to see it. It's -- from what we saw then, it's largely stabilized. When we look at our order backlogs, it's a slight increase. It's not coming roaring back right now. It's returning, and it's continuing to grow. I think the biggest variable is going to be at what point does it really increase even at a faster rate than what we see now. We still see the $70 million within sight at this point. But other -- outside of volume, there's really not a lot of variable we see. We're looking closely at input costs. And although we're seeing favorability in the first half, it should end up -- from the year-over-year comps, should end up being -- we should end up seeing some rise in input costs year-over-year. But it's relatively modest when we look across pulps and resins, and we have pricing plans in place to where we're not expecting that to present any risk.

Yes, I would agree with Greg on the biggest risk. I think the actions we've put in place and the things that we can control, I feel really positive about, and we're seeing those play out. We're seeing new business and share gain across a number of our categories. FAM is already delivering high teen to low 20% EBITDA margin. So I'm pleased with that. We have opportunities in margin and staff, and we're seeing improvement in both health care and liners. And that will continue to improve as we ramp up Mexico. And then the restructuring effort announced recently adds about $20 million as we exit the year, one margin point. So margins are coming, and the revenue growth target will happen over time as we migrate to higher-growth categories of filtration and release liner, advanced films as well as the growth drivers that I mentioned earlier to Justin's question. So I feel good about the focus and the efforts we've put in place and the team that we have in place and the restructuring and the cost reduction efforts. So I think right now, we have to execute. We said earlier, this is the year of execution. And that really is true for Mativ, and I think the team is doing a great job of supporting that and driving value and volume in the marketplace today.

We currently have no further questions, so I hand back over to Julie for any closing remarks.

Sure. Thank you for joining us this morning on our Q1 earnings call. I hope what you heard was we're well positioned to continue to capture higher sales and EBITDA as the year continues, supported by a more streamlined and agile structure, improving demand and lower operating costs. I appreciate your interest in Mativ and look forward to our next call.

Thank you. This concludes today's call. Thank you all for joining. You may now disconnect your lines.

Thanks.