Earnings Call Transcript - MATV Q1 2026

Operator, Operator

Hello. Welcome to Mativ's First Quarter 2026 Earnings Conference Call. On the call today from Mativ are Shruti Singhal, President and Chief Executive Officer; Scott Minder, Chief Financial Officer; and Chris Kuepper, Director of Investor Relations. Today's call is being recorded and will be available for replay later this afternoon. The operator will now provide instructions for the question-and-answer session. It is now my pleasure to turn the call over to Mr. Chris Kuepper. Sir, you may begin.

Chris Kuepper, Director of Investor Relations

Good morning, everyone, and thank you for joining us for Mativ's First Quarter 2026 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 SEC filings, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Some financial metrics discussed during this call are non-GAAP financial metrics. Reconciliations to the closest GAAP metrics are included in the appendix of the earnings release which, along with the accompanying slide deck, is now available on our website at ir.mativ.com. With that, I'll turn the call over to Shruti.

Shruti Singhal, President and Chief Executive Officer

Thanks, Chris. Good morning, everyone, and thank you for joining our call. We appreciate your time and your continued interest in Mativ. I am delighted to share our financial results, provide operational updates and formally introduce the next phase of our strategic evolution. Before we discuss the Q1 performance, I would like to pause and reflect on a meaningful milestone. This marks my first full year as Mativ's CEO. Looking back at the last 12 months, I am deeply inspired by our global workforce's resilience, adaptability and unwavering commitment. Having navigated complex macroeconomic and, more recently, geopolitical landscapes, the transformation we initiated a year ago is bearing fruit, placing us on a firmer foundation today. The cultural shift driven across the organization fundamentally altered our operational DNA. We are no longer reacting to the market. We are actively shaping our outcomes and focusing aggressively on things we can control. This pivot is evident enterprise-wide: widened margins, optimized SG&A expenses, transformed cash flow and a unified team culture. Our actions remain swift, deliberate and impactful. Over the trailing 12 months, we transformed Mativ into an agile and more capable organization by holding firm to the following foundational priorities. First and foremost, we are an integral part of our customers' value proposition and the engine that powers their innovation efforts. Our highly engineered solutions are critical to our customers' success and our collaborative and co-creative relationships have never been stronger. Usually, our solution is only a small portion of their final product's cost, but it is key to enabling its value and performance. Second, our rigorous cost-cutting initiatives yielded nearly $20 million in realized savings across SG&A, operations and procurement in 2025, and our 2026 cost savings target of $15 million to $20 million is proceeding on schedule. The aggressive steps we are taking—simplifying operational workflows, removing bottlenecks and cutting inefficiencies—directly impact our bottom line. Third, we made significant progress in our deleveraging efforts, enabled by improved profit margins and cash flow generation. In early April, we successfully refinanced the majority of our debt tranches. Scott will share more details but this transaction solidified and simplified our capital structure, de‑risked our balance sheet and enhanced Mativ's financial flexibility. Lastly, a year ago, we announced a strategic portfolio review of our assets and business lines to better balance the contribution of our product categories across a variety of financial and market dimensions. As a result, we took decisive actions on facilities, products and assets. We optimized our operational footprint by closing an underperforming plant in Wilson, North Carolina. We successfully streamlined our SKUs to reduce complexity and improve supply chain efficiency. Furthermore, we optimized our R&D initiatives and purposefully reallocated resources towards the highest-return projects that directly support our commercial pipeline. By rigorously evaluating our business lines and taking these necessary actions, we have strengthened our foundation and positioned ourselves for the next phase of strategic transformation. We will now shift our focus to accelerating growth, better aligning our broad capabilities with the strongest markets and opportunities to drive sustainable long-term value. As part of our strategic planning process, we will continue to evaluate opportunities to create value by optimizing assets, costs and capital allocation. Transitioning to our Q1 performance. This was a solid opening to the year. By maintaining a relentless focus on commercial excellence, pricing implementation, financial and operational discipline, we achieved year-over-year profitability growth despite the surrounding economic headwinds. Scott will walk you through the financials in detail, but I'll point out that the true highlights of this quarter lie in our profit margin expansion and cash flow performance, marking our strongest consolidated Q1 margin and cash flow performance since our mid-2022 merger. Both segments generated significant adjusted EBITDA and margin increases. Our strategic pricing initiatives and stringent cost controls are working in tandem to create value. Looking past the P&L, our free cash flow narrative remains a point of immense pride, building on phenomenal cash flow generation from last year. Historically, Q1 is our most demanding quarter for cash flow due to seasonal working capital buildups. Nonetheless, we achieved significant year-over-year improvement, which is a substantial step change from the heavy use of cash in the prior year. Our tactics have become highly cash-flow centric, providing us with liquidity to navigate uncertainties while paying down debt. This also lays a solid foundation for another year of strong cash flow performance. While incredibly proud of our adjusted EBITDA margin and cash flow performance, we operate in a volatile macro environment where the overall demand picture remains mixed across our portfolio. In Q1, we experienced a few discrete pockets of volume weakness across our diversified business portfolio, most notably within our health care vertical. First, customer destocking actions in Q1 2026 compared to customer inventory building in the prior year to support their product plans. Second, we experienced supply chain inefficiencies related to a temporary outage late in the quarter at our Knoxville, Tennessee facility. Beyond health care, demand remains soft in our release liner and labels businesses. Despite these headwinds, Mativ's strength lies in diversification. Our global reach and varied product portfolio allow us to accelerate on pockets of growth to offset weakness. As evidenced in our FAM segment, our European filtration business demonstrated solid momentum, particularly in aftermarket transportation, water and industrial applications. We also captured gains in paint protection and industrial films. In our SAS segment, we saw growth across all finished tape categories and in commercial print. Lastly, I'm pleased to report that we recently earned a sizable new commitment for specialty films from a new aerospace customer. This is another proof point for our strategy of applying existing process capabilities and product knowledge to grow in adjacent markets. In addition, we are focused on extending our commercial pipeline by increasing wallet share via cross-sell opportunities with existing customers and leveraging our broad product portfolio in adjacent applications. I'll highlight that the FAM sales pipeline has materially increased versus a year ago—an important tool to offset sluggish market demand going forward. Switching gears to the impacts related to the global macro landscape. We saw limited direct impact from the Middle East crisis in the first quarter, primarily due to our localized supply chains. Looking ahead, given the elevated oil and derivative prices, we expect input cost increases in resins, polymers and select chemicals. Our commercial and procurement teams work in lockstep, leveraging our pricing agility and remaining proactive on further pricing actions to maintain a favorable price-versus-cost ratio for 2026. We had already implemented pricing actions in January due to the expected raw material inflation forecasted for 2026. When the subsequent Middle East crisis amplified this forecast, we announced the second pricing action in March to cover those incremental input costs. Although the direct impact of the current Middle East crisis on Mativ is minimal and well within our control, we recognize that the broader indirect impact on market demand and overall commercial activity remains uncertain. Our pricing agility allows us to capture the benefits sooner and more evenly, preserving margins during times of stress. Our strategic pricing efforts ensure that we realize higher margins over time. Pivoting to the future, as introduced on our last earnings call, we have formalized a new strategic blueprint that will guide how Mativ grows its top line, operates and wins in the marketplace. We have defined a clear unified vision for Mativ to be the preferred global partner for customers, delivering performance-critical material solutions. At the heart of this strategy is our core purpose: our materials and solutions are the key components that enable and elevate our customers' innovations. Whether we are purifying air and liquids, protecting surfaces in harsh conditions, ensuring materials stick and release on demand or ensuring life-saving devices stay attached to your body, our solutions are the critical components that make this progress possible. We succeed by playing to our strengths. We go beyond just supplying products by transforming materials into performance. With uncompromising quality, global reach and deep customer collaboration, we help solve their most complex challenges. In today's dynamic environment, we must relentlessly pursue ease, speed and reliability. We are actively focusing our sustainability and innovation efforts, leveraging our technical capabilities to accelerate progress across our key growth areas. We are continuing to optimize operations to run a faster, more efficient business. We want to make it effortless for customers to work with us, ensuring we exceed expectations every time they engage with us. We are making deliberate strategic choices to invest where we can win and grow. This means aggressively advancing our go-to-market strategy, unlocking the full integrated value of our diverse portfolio and concentrating our resources on high-growth, high-return markets. As we continue to refine our go-to-market strategies, over the coming months, we will keep you informed on our progress and impact. We have the right talent, the right portfolio, and we have refined our strategy blueprint to lead Mativ into its next phase of profitable growth and on a clear path to long-term value creation. With that, I'll turn the call over to Scott to provide a more detailed overview of our financial performance.

Scott Minder, Chief Financial Officer

Thanks, Shruti, and good morning. With solid first quarter results, Mativ laid a strong foundation to achieve our 2026 strategic and financial objectives. Starting with our financials. Mativ net sales were $480 million—nearly flat year-over-year on an organic basis and down about 1% as reported. Favorable selling prices and currency were offset by lower volume and mix. Q1 adjusted EBITDA was $47.5 million, up 28% versus prior year; a favorable price-to-input cost ratio, lower manufacturing expenses and favorable currency were partially offset by unfavorable volume mix. Our adjusted EBITDA margin was 9.9%, which was up 220 basis points versus prior year. This represents our strongest Q1 margin performance since the mid-2022 merger. Looking at results by segment: FAM net sales of $188 million increased by more than 2% on an organic basis and were up modestly on a reported basis versus prior year. This growth was driven by favorable currency and slightly higher selling prices. These benefits were partially offset by lower volume and mix. FAM adjusted EBITDA of $27 million increased by 41% year-over-year, while margins of 14.6% improved by 430 basis points over the same period. These gains were led by a favorable price-to-input cost ratio, lower manufacturing costs, favorable currency and lower SG&A expenses. Marginally lower volume and mix partially offset these benefits. SAS net sales of $291 million were down 2% year-over-year. Lower volume and mix were partially offset by favorable currency and selling prices. As Shruti mentioned, this was driven mainly by lower-than-expected health care volumes. SAS adjusted EBITDA of roughly $31 million increased by approximately 16% year-over-year with margins of 10.5%, improving by 160 basis points. Earnings benefited from a favorable price-to-input cost ratio and reduced SG&A expenses. This was partially offset by lower volume and mix. Before I cover corporate, I want to highlight a reporting change that we implemented this quarter. As a legacy of our 2022 merger, a portion of our overhead costs remained unallocated at the corporate level. To better reflect the underlying costs of our business, we'll now allocate certain centralized expenses—specifically IT infrastructure, finance and accounting shared services, and regional HR—directly to our segments. As a result, adjusted EBITDA margins for both segments are approximately 100 basis points lower than originally reported. This change represents an internal expense reallocation. Consolidated adjusted EBITDA and margin remained unchanged. To assist with modeling and to ensure accurate year-over-year comparisons, we recently published an 8-K providing restated quarterly figures for 2025. Now looking at corporate items: unallocated expense of roughly $11 million increased by nearly $2 million versus prior year due to higher advisory expenses. Other income of roughly $2 million compared to an expense of $2 million in the prior year. This improvement was due to foreign currency gains. Our Q1 tax rate was negative, driven by our geographical earnings mix and our inability to benefit from losses in certain jurisdictions that have a full valuation allowance. Q1 interest expense of roughly $18 million decreased slightly versus prior year, primarily due to lower debt balances. Q1 2026 free cash flow was a use of $7 million, improving by more than $22 million versus prior year. This represents our best Q1 performance since the merger in mid-2022. It was driven by a year-over-year operating cash flow improvement of more than $16 million due to lower restructuring expenses and capital expenditure timing. At quarter end, net debt was approximately $954 million, representing a slight seasonal uptick as we invest in inventory ahead of our increasing Q2 and Q3 production schedules. Our liquidity was roughly $499 million on a reported basis, while our net leverage as defined in our credit agreement was 4.1x. This marks a slight decrease versus the 2025 year-end level. We continue to expect material progress towards our leverage goal of 2.5 to 3.5x as we move through 2026. Debt reduction remains our primary capital allocation priority. After a comprehensive review of our capital structure, we refinanced our existing credit facilities in April, ahead of an early May go‑current date for a significant portion of these facilities. As a result, we simplified our capital structure—reducing the number of outstanding debt tranches as well as the number of bank group participants from 15 to 8. We rightsized our revolving credit facility to $305 million, reducing unused borrowing fees as a result, and we eliminated our delayed draw term loan. The revised cash flow revolver and new $90 million term loan A facilities mature in 2031 and the new $500 million term loan B matures in 2033. While the Middle East conflict added an element of volatility to our capital raising efforts, we chose to move quickly and de-risk our upcoming maturities with new capital at market-prevailing terms. We expect our annual interest expense to be approximately $76 million going forward, marginally above the $74 million we estimated for our previous capital structure. With our new facilities in place and no debt maturities until late 2029, we're focused on executing in the marketplace, generating strong free cash flow and addressing our prepayable debt tranches to further delever and strengthen our balance sheet. Next, I'd like to spend a few minutes providing some context on recent geopolitical events and how they've impacted our markets and our business. The current Middle East conflict has heightened volatility and increased our input costs. Oil prices have risen sharply since early March, and we're facing higher costs for many of our crude oil-based inputs, namely polymers, resins, and some chemical feedstocks. Coming into 2026, we estimated full-year raw material inflation to be $20 million to $25 million across our basket of purchases with increases weighing more heavily on the second half of the year. We took pricing action in January to fully offset this inflation within 2026. Based on today's forecasted input costs, we now estimate total full-year inflation impact to be $40 million to $50 million. As a result of this revised view, we took incremental pricing actions across all product categories in late Q1 to fully recover these additional costs. While these actions are challenging for our customers and our teams, they're clearly linked to underlying inflation. Similar to our efforts and results in 2025 and Q1 2026, we expect our pricing actions to fully offset the $40 million to $50 million of forecasted input cost inflation in 2026. Our input cost inflation estimates are subject to material changes depending on geopolitical events and market expectations. We'll remain vigilant and nimble with our pricing, and we'll keep you updated over the coming months. Now I'll share our Q2 2026 outlook. Our first quarter results built a strong foundation for the year, highlighted by solid profitability, margin growth and improved cash flow performance. As we look ahead, the market volatility created by geopolitical events and its impact on our business reduces our forward visibility. As Shruti outlined earlier, we expect direct business impacts from the Middle East crisis to be manageable as we take steps to mitigate challenges quickly. This includes price increases to offset additional input cost inflation. We're closely monitoring for any potential indirect impact on broader market demand. Our new strategic growth blueprint is designed to counteract fluctuating market conditions by unlocking our portfolio's integrated value and by focusing our resources on high-growth, high-return opportunities and market adjacencies. Bottom line, we're taking actions on things within our control, and deploying mitigation strategies for those things beyond our control. As a result, we expect Q2 adjusted EBITDA to be down a mid-single-digit percentage compared to a strong prior year as a result of lower volumes, largely due to near-term demand weakness in our health care business. As Shruti discussed earlier, growth in FAM's films and filtration businesses, a favorable price-to-input-cost ratio and SG&A savings should provide partial offsets. A year ago, we successfully adapted to a new tariff-based macro environment and improved the resilience of our operations. Today, we're confident in our ability to manage through the input cost volatility and demand uncertainty created by geopolitical events. With that, I'll hand the call back to Shruti for her closing remarks.

Shruti Singhal, President and Chief Executive Officer

Thank you, Scott. In closing, our first quarter results clearly demonstrate that the cultural and operational transformation we set in motion over the past year is working. We delivered our strongest Q1 consolidated margin and cash flow performance since our mid-2022 merger. This was comprised of significant margin improvements across both segments and a substantial step change in cash flow generation, setting us up for another year of strong free cash flow. While we are closely monitoring the broader macroeconomic environment and geopolitical headwinds, particularly the recent inflationary pressures on our input costs, we have proven our ability to be nimble, proactive and adapt to the world around us. Our commercial agility, value-based pricing strategies, and rigorous operational discipline give us the confidence that we can successfully navigate this volatility and continue to deliver consistent results in times of uncertainty. Looking ahead, our newly formalized strategic blueprint is actively guiding our growth trajectory. We are not waiting to see how the market evolves; we are leading it. Our commitment is to unlock the full integrated value of our diverse portfolio and to be the preferred global partner for customers, delivering performance-critical solutions. By concentrating our resources on high-growth, high-return markets and relentlessly focusing on quality, performance and reliability, we are charting a clear path towards profitable growth and sustained long-term value creation. With that, let's open the line for your questions.

Operator, Operator

The operator will now provide instructions for the question-and-answer session. Your question comes from the line of Daniel Harriman from Sidoti.

Daniel Harriman, Analyst

Congrats on the continued progress. I've got quite a few this morning so please bear with me, but I'll start out with two. First for Shruti: you mentioned customer destocking and supply chain inefficiencies within the health care vertical. I was hoping you might be able to provide a little bit more detail on this development and when we should expect conditions to normalize? And then Scott, as it pertains to price-to-cost: you've done a really good job of offsetting costs with some pricing, and it sounds like you were able to get ahead of some expected inflation thus far in 2026 through these price increases. Do you think you'll be able to continue driving favorable pricing should input costs continue to rise? And conversely, should cost come down quicker than we expect, do you expect to reduce prices?

Shruti Singhal, President and Chief Executive Officer

Thanks, Dan, for your question and your kind words. I appreciate it. Regarding our health care vertical, we had two specific challenges. One was around customer destocking actions, which created a tough comparison to the prior year when customers were building inventory and we supported them in their product launch plans. We're lapping that right now. Secondly, we had an issue with a temporary operational outage in our Knoxville, Tennessee plant, which is now fully resolved, and the plant is fully operational at this time. On the point about normalization, we don't have an exact timeline on that—normalization will depend on end-customer demand. But this is only a near-term issue for us. We do expect that in the back half of the year things will start to get better and we see an improving trend. One thing to keep in mind, which I mentioned during my remarks as well, is the strength in our portfolio and its diversity. So if one category softens, we are offsetting these near-term headwinds with, for example, our European filtration business, which is strong, and our finished tapes business, which is strong. The commitment we mentioned in specialty films with the aerospace customer is another offset. So we have other growth areas to mitigate this near-term demand weakness in our health care category.

Scott Minder, Chief Financial Officer

Sure, Dan. First, thanks for the recognition. Pricing is not easy work for our teams. It requires a lot of analysis and back-and-forth with the customer and being proactive when costs are rising quickly to preserve margins. On to your question about what's next: it's important to appreciate that the ongoing conflict in the Middle East has created some significant longer-term disruption to oil and related markets for a couple of reasons. There's been pretty significant infrastructure damage in the region, it has created elevated logistics and insurance costs, and I think those are going to be with us for a while. Even longer term, I think there will remain a lingering risk premium in the market for some time. As a result, we expect input cost inflation to be pretty sticky in 2026, regardless of the timing for a resolution. A quick reduction to a lower baseline price is not likely in our view. On the flip side, if the conflict intensifies and oil prices rise and settle at a higher level, we're going to follow the same playbook and take further pricing actions to preserve our margins. That's the tactical view. If we take a step back, I think pricing plays two important roles at Mativ. In the near term, it is critical for margin management. Over the longer term, it's a critical part of our customer and shareholder value proposition. Over the last 12 months, this company has been on a mission to improve our margins. We've taken hard but needed actions to reduce our footprint and SG&A costs, and we've improved our operations and supply chains to reduce complexity. We're really focused on preserving this foundation and making progress on our long-term margin objectives. To get there—and to stay there—requires pricing actions to offset inflation. Long term, we strongly believe margin management is a critical component of our value creation. For customers, it enables longer-term investments in innovation and capabilities. For shareholders, it improves the health and stability of our financial results. We'll continue this approach regardless of external conditions.

Daniel Harriman, Analyst

That's really helpful, guys. Moving on: Shruti, we were excited to hear about the commitment of specialty films from a large aerospace customer. Can you quantify for us the expected revenue impact that commitment will have and the timeline for when we should see results contributing to the overall business? And Scott, going back to you, free cash flow generation in the first quarter was up significantly year-over-year. Given the seasonal working capital build as the year progresses, how should we think about the cash flow cadence for the balance of 2026?

Shruti Singhal, President and Chief Executive Officer

Thanks, Dan. I'm excited about this new specialty films commitment with the aerospace customer. This is a great example where cross-functional teams within Mativ come together: we take our existing product- and process-based technology, innovate to customers' unmet needs, and grow in adjacent and high-value markets. Due to customer confidentiality, I can't disclose the financial terms or be precise on timing for revenue contribution. What I can say is that we expect the commercial relationship to commence in Q2 and that it will ramp up slowly with shipments starting later in the second quarter. This is a great example of our strategic blueprint in action: strong foundation, customer-driven innovation, and expansion into high-value markets. We are very excited about it and proud of our team's work with the customer.

Scott Minder, Chief Financial Officer

Okay, on the cash flow question. A little about our seasonal pattern: historically, Q1 is our most demanding cash flow period for a couple of reasons. We generally have seasonal working capital build ahead of higher Q2 and Q3 production levels, and we also have outflows in the first quarter related to the payout of the prior year's incentive compensation. In Q1, free cash flow was a use of $7 million, which was a $22 million improvement year-over-year. That improvement was largely due to improved earnings and the nonrecurrence of business realignment costs of $9 million in the prior year. Looking ahead across 2026, we expect a normal cash flow seasonality to the business. By that, I mean we expect to generate our strongest cash in Q2 and Q3 and close out the year on a positive note. As a reminder, in February we said we plan to invest additional cash in 2026 for growth—approximately $10 million of additional working capital and $5 million of additional CapEx—and you can think about that spending as being proportional across the remainder of the year. It's important to recognize that Mativ has intensified its focus on free cash flow over the last 12 months. Our teams have worked hard to improve profit margins, increase working capital efficiency and show discipline around capital expenditures. As a result, we generated record free cash flow of $94 million in 2025 amidst challenging market conditions. As we said last quarter, we're on track to generate significant free cash flow again in 2026 despite market volatility. The bottom line is the team is highly focused on delivering value through cash generation and disciplined capital allocation across all market environments.

Daniel Harriman, Analyst

Great, guys. I appreciate that. If I may, Shruti, just one last one: you mentioned moving to the next phase of the comprehensive portfolio review you've been undertaking. To the extent you can discuss it, should we expect any divestitures of noncore assets as you complete the first phase and move on to the next?

Shruti Singhal, President and Chief Executive Officer

Thanks again, Dan. As I've mentioned over the last 12 months, we did a very rigorous portfolio analysis with the Board and the management team across all our facilities, product categories and assets. We wanted to make sure we strategically balance each category's contribution based on many factors, such as the impact on the bottom line, our competitive position, margin profile and product diversity. As I also mentioned, this resulted in decisive actions such as closing our Wilson, North Carolina plant and significant SKU rationalization. Those moves improved plant efficiency, reduced complexity, and positively impacted working capital. We also aligned R&D resources to projects with the highest return and customer need. Those are some of the decisive actions we've taken. As we continue this work, we have strengthened our foundation over the last four quarters and positioned ourselves for the next step: our strategic transformation and blueprint to guide top-line growth while maintaining operational and financial discipline. Of course, the Board, management team and I will continue to evaluate our businesses for opportunities to optimize assets, facilities, costs and cash utilization that Scott referenced. But today, we believe Mativ has a broad portfolio well-positioned to win in the market, and we intend to pursue the areas we see as the strongest for long-term, profitable growth.

Operator, Operator

We have reached the end of the Q&A session. I will now turn the call back to Shruti Singhal for closing remarks.

Shruti Singhal, President and Chief Executive Officer

Thank you. Finally, a sincere thanks to all our Mativ employees. Your dedication and adaptability over the past year were key to delivering this quarter's success. A big thank you from myself, the Board and the management team. We really appreciate it. Thank you, everyone, for joining us today. We look forward to speaking to you again on our next earnings call in August. Have a great day. Thank you.

Operator, Operator

This concludes today's call. Thank you for attending. You may now disconnect.