Welcome to the Mativ Third 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 third 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. We appreciate the opportunity to share our third quarter results with you, outline a number of initiatives we've undertaken to drive continued improved performance and provide an outlook on the remaining quarter of 2024. Sales were up 1% organically and essentially flat year-over-year on a reported basis. Volume improvements in most of our product categories were partially offset by lower demand in film, which was impacted by ongoing challenges in the automotive and construction end markets, as well as lower productivity in one of our largest film plants. I'll provide more color on this in a moment. For the total Mativ, from a bottom-line perspective, I'm pleased to report that Q3 results showed meaningful adjusted EBITDA improvement, up 10% year-over-year and adjusted EBITDA margin up 110 basis points year-over-year. Primary drivers were increased volume in filtration and our overall SAS segment as well as lower manufacturing costs. Let me touch on SAS first, which delivered adjusted EBITDA up almost 20% and increased margin of 200 basis points. Within SAS, health care was very strong, followed by label, commercial print and release liners. And we see continued solid volume and growth as we enter Q4, particularly in release liners in North America as we ramp up and qualify our newest asset in Mexico. Overall FAM performance in the quarter was mixed with solid results in filtration and challenging results in advanced film. Let me provide a bit more color on this part of our business and what we are doing to improve film performance going forward. First, in our filtration category, revenues were up almost 6% led by growth in air filtration used in HVAC and air pollution control. Our largest end market in filtration is transportation, which was…

Thanks, Julie, and good morning, everyone. Consolidated net sales from continuing operations for the quarter were $498.5 million compared to $498.2 million in the prior year. Sales were up 1.4% year-over-year on an organic basis and selling prices were essentially flat versus prior year, while currency was favorable. Adjusted EBITDA from continuing operations was $60.8 million, up 10% from $55.4 million in the prior year. Improved distribution and manufacturing costs and lower SG&A expenses represented a combined $7 million favorable impact, which was partially offset by $2 million of lower contribution from mix. Adjusted EBITDA margin increased 110 basis points year-over-year. Turning to each of our segments. Net sales in our Filtration & Advanced Materials segment of $190 million were down 3% versus Q3 of 2023. As Julie mentioned, we reported higher volumes in our filtration categories that were more than offset by lower volumes in our advanced films category as well as lower selling prices in the segment. FAM adjusted EBITDA of $36 million was down almost 7% year-over-year, reflecting the effects of lower volumes in our high-margin advanced films category and lower selling prices in the segment. We partially offset these pressures with higher volumes in our filtration categories, lower SG&A expenses and improved manufacturing efficiencies. In our Sustainable & Adhesive Solutions segment, net sales of $309 million were up more than 4% from last year on an organic basis and up more than 2% on an as-reported basis. Organic growth reflect the higher volumes across all of our end markets and higher selling prices. SAS generated strong adjusted EBITDA performance of $41 million, which was up almost 20% year-over-year. Adjusted EBITDA margin increased 200 basis points versus the prior year. The year-over-year performance reflected favorable manufacturing and distribution costs, favorable relative net selling price versus input cost…

Thank you, Greg. What you should take away from this call is that while the pace of demand is slower than expected, we are focused and taking actions to offset the impact, grow share and capture incremental value when markets improve. This includes new programs, resources and products that result in new business with examples provided earlier today and investments in partnerships in key categories of filtration, release liners, specialty tapes and medical and optical films, where we have upside growth opportunities. We continue to simplify and streamline our operations, including divesting noncore business lines and consolidating assets, warehouses and manufacturing plants. And we've outlined our turnaround plan for an underperforming category, advanced films, which mirrors our demonstrated success within health care. And lastly, we are aggressively driving out costs with over $20 million of nonoperating cost reductions this year. All of these actions are the right things to do, and I appreciate the support from our Board in making these decisions and from our teams in making them happen. One last item to highlight. We will be publishing our 2023 ESG report over the course of this month. We look forward to sharing with you our continued commitment to being responsible stewards of the environment, maintaining a diverse and caring culture and having strong corporate governance practices. Thank you for joining us this morning, and please open the line for questions.

Thank you. Ms. Schertell. [Operator Instructions] We have our first question from Daniel Harriman with Sidoti & Company. Your line is open. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. I'll start off with two quick ones, and then I'll get back in the queue afterwards. But Julie, I know you provided a lot of information to us on the tiger team initiative. But I'm just wondering if you could just maybe provide a little bit more information about when that process started and maybe what demand generation ideas you're most excited about within that. And then on the Q4 guide, the increase in revenue and the decrease in EBITDA year-over-year, that disconnect, is that made up mostly just of expectations for poor performance in films? Or is there something else to look for there?

Thanks, Dan. Let me start with your first question on films. From a tiger team standpoint, it really started this quarter. So films is down about 10% this year versus last year, and it's a category that has historically had very high margins. So, it has a disproportionate impact on our bottom line. And the tiger team is really focused around three primary issues: how we battle the headwinds of just weak markets in automotive and construction; the second is increased competition from Asia with lower performance alternatives; and the third is poor operational performance in one of our largest plants in North America. And as I work my way backwards, the most straightforward issue for us to address is the low performance in our own plant. That's all within the four walls of Mativ. We know what good looks like. We know how to operate well. We have a very strong facility that makes these products in China so that we can better share best practices to drive improvements in productivity and speed and quality and in overall performance in the supply chain to our customers. The second one is the increased competition from Asia that has accelerated with a lower cost, lower performance alternative. So, we are working very hard and have developed a mid-tier alternative. I think even more important than that for us is to ensure that we are showcasing the clear differences between a premium product solution and the mid-tier solution because there are clear performance differences that our customers need to have the opportunity to take into consideration. The second really opportunity there, and one that I am most excited about, there's two that I'll talk to you about that I'm most excited about, but one of them is this One Mativ potential solution.…

And then, Daniel, this is Greg. I'll take your second question which had to do with the expectations for the fourth quarter and the increased year-over-year sales, but the decreased year-over-year EBITDA. And you are right, although we're expecting strong sales primarily driven in the SAS segment, for Q4, the films business is definitely weighing down on the EBITDA. That's one of the largest. In addition to that, there is some price input timing, and there are some pockets of pricing within FAM that we're working on to maintain volume and to gain volume. On the cost side, the overhead reduction program that we talked about earlier is flowing through to the P&L. From a comp standpoint, though, year-over-year, we did have a much lower incentive accrual last year that we're comping. And then really finally, to a lesser extent, the timing of the holidays and the outage that I mentioned is really the last impacting item.

Perfect. Thanks guys so much and I'll get back in the queue.

Thank you. The next question is from Jon Tanwanteng with CJS Securities. Your line is open. Please go ahead.

Hi, good morning and thank you for taking my questions. I appreciate the detail on Q4 and all the inputs and the puts and takes going into it. But I was wondering if you could talk about what your customers are telling you as you enter '25, the Q4 shutdowns and everything. Are they ready to pick back up again? Is it too early to tell? How should we think about the velocity exiting the holidays?

Yes. Thanks for the question, Jon. And I would tell you, demand recovery remains sluggish, and I think we're seeing that all around us. The PMI fell again this month. I believe it hit the lowest point since COVID. And that means manufacturing and materials industries are not yet healthy. They're still contracting, and we are obviously directly correlated to that. We're not seeing indicators of a changing demand profile in the near term. It almost seems like we got a false positive in the spring that quickly returned to a very sluggish environment. So, until we see interest rates decrease more in auto, home, DIY, and remodeling start to rebound to a greater degree, we expect to experience this lower level of demand. From a customer standpoint, they're in the same spot. They're not seeing meaningful indicators. They remain conservative in their willingness to build inventory given past supply chain challenges that we had over the last couple of years. There's pockets of strength, I would tell you, filtration remains fairly resilient, particularly air filtration and transportation filtration. But again, that's driven primarily by the aftermarket. And then I'm really excited about the pipeline that we have in our SAS segment. We've got aggressive growth opportunities in release liners particularly in North America and new commitments and agreements from leading customers in the geography that will launch next year. We've got new commitments in our health care business, and we've got big opportunities in our tape business that they may not all hit but we just need a couple of them to hit. That will come mid to late 2025. So I'm excited about the pipeline. I'm excited about and thrilled with all the efforts the teams have put in place, but I would not suggest there's a healthy demand environment that we're seeing.

Okay. Fair enough. And any thoughts on the potential for a more aggressive tariff environment or perhaps a more or less tax environment and how that might affect your business if you're planning for anything like that in your strategic level planning?

Yes. I mean I think if you're talking about potential new administration, I think it's a little too early to speculate what that could do for us. From a tariff standpoint, we have pretty low exposure on the cost side. About 88% of our spend is sourced from a site home region. So that's a really good spot to be in. If we expect incremental tariffs on Chinese-made goods sold into the U.S. is the most likely scenario, that could be an advantage for us, particularly in the films business that I just talked about, where we are seeing an acceleration of lower cost, lower performance products, film products, coming into North America and Europe from Asia. So, there would potentially be advantage for us there.

Okay. Great. And then just lastly, just an update on how much progress do you think you can make against the leverage and the debt in the coming year or so.

Sure. I'll take that, Jon. Our target still remains the same, the 2.5x to 3.5x. Based on the kind of prolonged market recovery, we expect to still hit that, but it probably would be more in the 2026 time frame, and that we'd be making progress toward that over the course of 2025.

Understood, thank you.

Thank you. We have a follow-up question from Daniel Harriman with Sidoti & Company. Your line is open. Please go ahead.

Just two more quick ones for me, if that's okay. First, can you expand a little bit upon the two most recent facility closures? Maybe just a little bit more detail on the rationale there and the potential for more closures moving forward as you optimize the footprint? And then with the reduction in CapEx spend, what are your expectations for the impact on cash flow for the year?

Sure. Thanks, Dan. So, the divestitures that we announced this quarter, the first one was a site in the Netherlands that we sold, which produced paper for dye sublimation products. So, with the sale of that site, we have exited that business. It was a nonstrategic, breakeven type of EBITDA business for us and will be better in the hands of the buyer who has plans to invest in the business. We also exited a site in Massachusetts. We divested it as well, and it supported our paper business, too. I would tell you that both sales support our strategy to reduce complexity, to prune nonstrategic, non-accretive sites and categories and accelerate growth by focusing our efforts in areas where we have unique capabilities to win in the marketplace. The impact of those, the revenue and EBITDA impact of those divestitures combined, is about $50 million in less revenue that we'll see next year and about $1 million in more EBITDA that we'll see next year.

Yes. I'll take your second question, Dan, on the CapEx and the cash flow. So yes, based on the suppressed markets that we've been seeing, we continue to revisit the capital plan for the year, and that is a big reason why we dropped from $60 million to $50 million this year, primarily a reduction in discretionary sustaining and maintenance capital and then also some deferral of IT capital spend. As far as cash flow, Q3 was a relatively strong cash flow quarter for Q4 based on the results that we would expect in that lower CapEx spend from previous estimates. It should be cash flow that's lower than Q3 but still in positive territory for Q4.

Great. Thanks so much, guys. Best of luck in the quarter.

Thank you. We currently have no further questions. So I'll hand back to Ms. Julie Schertell to conclude.

Sure. Thank you for joining us this morning on our Q3 2024 earnings call. We look forward to connecting with you throughout the quarter and on our next earnings call in February. Have a wonderful day.

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