Neenah : Transcript (opens in new window)

Corrected Transcript

28-Mar-2022

Schweitzer-Mauduit International, Inc.

(SWM)

Schweitzer-Mauduit International, Inc and Neenah, Inc Merger Call

Total Pages: 10

CORPORATE PARTICIPANTS

Jeffrey Kramer

Chief Executive Officer & Director, Schweitzer-Mauduit International, Inc.

Julie A. Schertell

Chief Executive Officer, President & Director, Neenah, Inc.

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OTHER PARTICIPANTS

Chris P. McGinnis

Analyst, Sidoti & Co. LLC

Jon E Tanwanteng

Analyst, CJS Securities, Inc.

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MANAGEMENT DISCUSSION SECTION

Operator: Good morning and thank you for joining this morning's call to discuss the announced merger of SWM and Neenah. At this time, all participants are in a listen-only mode. After management's comments, we will open the line for SWM's and Neenah's sell-side research analysts to participate in the Q&A session. Other analysts and investors are invited to reach out directly to each company to schedule follow-up calls. [Operator Instructions]

I'd now like to turn the call over to Dr. Jeff Kramer, Chief Executive Officer of SWM International; and Julie Schertell, President and Chief Executive Officer of Neenah. Please go ahead.

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Jeffrey Kramer

Chief Executive Officer & Director, Schweitzer-Mauduit International, Inc.

Thank you, and good morning, everyone. I am so excited to join Julie Schertell, President and CEO of Neenah, to announce the merger of our two great companies. This is an important step in the continued execution of the strategies of both SWM and Neenah, creating a leading global manufacturer with strong positions in growing attractive specialty materials and solutions categories. The combination will deliver real value from a top-line perspective, while also providing over $65 million of highly achievable cost synergies. The pairing of our talent, technologies and capabilities will enable the new entity to accelerate its pace of innovation and deliver exciting new products for our customers.

We will tag team the call today. I'll start out by covering the background and high level strategic merits of the transaction, then turn it over to Julie to discuss the new company on a go-forward basis. Following our remarks, we will open the line for questions from analysts, and we look forward to connecting further with the investment community after the call.

As a reminder, our comments include forward-looking statements, and we may be limited in discussing certain aspects of the transaction until after closing. Actual results could differ from these statements due to risks outlined on both of our websites and in our SEC filings.

So, let's start with a snapshot of the merits of the transaction. This combination will create a global leader in specialty materials with approximately $3 billion in sales, attractive margins and $65 million of anticipated run-rate synergies, which we feel are highly realizable. All are important measures. But when we step back and actually look at our complementary products and innovation capabilities, our customers and attractive end markets and our global scale, we find that the potential to create significant value for our employees, our customers and our shareholders is meaningfully larger than what either company could achieve as stand-alone entities. With more than two-thirds of the enterprise now focused to advance specialty products and solutions, the outlook for sustained long-term organic growth is extremely promising.

On a stand-alone basis, each company is financially sound with a strong portfolio of high-value technologies and attractive end markets. Both companies have a track record of successfully transforming themselves. However, it is by coming together that we fully unlock the strategic advantages of our work to-date. As both companies continue to realize the benefits of their stand-alone growth and margin initiatives, we expect EBITDA to increase to approximately $450 million when synergies are added in with attractive mid-teen margins. The combined EBITDA and synergies are expected to add to the already strong cash generation, which the new enterprise will use to fund growth initiatives, pay down debt and continue returning cash to shareholders.

While the financial aspects noted above were very attractive, when Julie and I began our conversations, what stood out to us was the highly compatible nature of our two organizations. We have multiple touch points in shared product categories, but with complementary offerings rather than direct overlaps, giving us confidence that we could bring more to our valued customers. Further, we expect that the combined portfolio should demonstrate low cyclicality, improving the resilience of the top line and the overall financial stability of the enterprise. Ultimately, it was clear that we could be better and stronger together.

Now, as illustrated here, the merger is a transformational step change in the competitive position of both organizations, springboarding us into the upper echelon of materials companies, which would have taken longer and required more resources if each company had continued to go it alone. In addition to the augmented capabilities we bring to bear, our increased relevance in the categories in which we compete will also offer significant commercial and operational benefits, strengthening the company for longer-term success.

Another advantage of this increased scale is that it will improve our visibility and presence in financial markets, one of the challenges for small-scale companies today. As a $3 billion leader in specialty materials and solution, we believe the combined entity is an attractive investment opportunity and should garner increased attention. With scale, we also have the opportunity for increased stock liquidity, improved access to capital markets, and broader investor appeal from a more compelling story.

Turning to the terms of the deal, this will be an all-stock transaction, offering an efficient way to unlock the value potential of this merger to be shared by both sets of shareholders, many of whom own shares in both companies. The exchange ratio of the transaction is 1.358 shares of SWM for each Neenah share, representing an ownership split of 58% and 42% for shareholders of SWM and Neenah, respectively.

On governance, the new board of directors will be comprised of five members from SWM including John Rogers, who will continue as Non-Executive Chairman, and four members from Neenah, including Julie Schertell, who will also assume the leadership role of Chief Executive Officer of the combined company.

To facilitate this transaction, I will serve as strategic advisor after the close of the transaction, allowing me to contribute my experience, while clarifying leadership. Other elements of the merger, including members of the new company's leadership and company name will be announced at a later date. One thing is for certain, headquarters will remain in Alpharetta, Georgia given that both offices currently sit only a few miles apart.

Now, as noted upon closing, I will be stepping down from my leadership role at SWM, a very bittersweet moment. Leaving a winning team is always hard to do. But when I arrived, I promised SWM that we would all work together to grow this company. And with this transaction, I'm proud to remain true to that commitment.

With that, I'll turn it over to Julie.

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Julie A. Schertell

Chief Executive Officer, President & Director, Neenah, Inc.

Thanks, Jeff, and good morning, everyone. Like Jeff, I'm excited about this value-creating merger of equals, and I'm honored to lead this combined organization into the next chapter of our journey. Before I go further, I would like to extend my congratulations to Jeff for all of his contributions to SWM and its success, as well as my appreciation for his partnership throughout this process over the last several months.

Stepping back and looking at the two companies' histories, the stories are remarkably similar. We share a common heritage as spin-offs from Kimberly-Clark, and both companies have meaningfully transformed since becoming independent. What started in 1995 for SWM and 2004 for Neenah as two lower growth companies with limited end market exposure and manufacturing technologies has culminated in separate but similar strategies to evolve our portfolio towards large, growing, defensible categories that value premium, unique solutions.

Over the last several years, each company has demonstrated a strong track record of successful acquisitions, increasingly aligning our business profiles. Each company is now positioned with about two-thirds of the business weighted toward higher growth categories, supporting customers that require innovative solutions to solve some of their most challenging needs. Joining together will make us that much stronger. This complementary combination has touch points in key product categories such as filtration, healthcare, packaging, and specialty tapes.

Individually, we serve critical yet different components of the end product. Together, we become a more significant part of the market solution with greater scale. As an illustrative example, Neenah is a leader in the production of membrane support media used in reverse osmosis filtration. SWM is a leader in spacing media that is used in the same application. There are many such examples which highlight this unique opportunity to increase our breadth of portfolio and increase our value to customers.

Additionally, strong mega trends support the positive outlook of our business, such as the need for clean air and water, personal health and wellness, performance coating solutions and sustainable alternatives. Our specialty paper business, while much smaller than our technical business, will continue to generate strong cash that we use to invest in higher growth opportunities.

Complementary customers and technologies when paired with our deep material science know-how are also a key to unlocking the growth potential of this combination. We each add something different to the equation, but when put together, we create unique opportunities to address our customers' most challenging and complex needs. Both companies excel in advanced coating, engineered non-woven, polymer extrusion and specialtyadhesives, all core technologies that align with our target categories' evolving needs and increasing technical demands.

With a more expansive toolbox combined with our now broader portfolio and extensive innovation capabilities, we have the potential to accelerate sales growth as a trusted solutions provider by delivering enhanced value to our customers. One example is the potential to leverage the strength of SWM's specialty film capabilities to expand Neenah's presence in release liners where film solutions are used for some of the most technically demanding applications like advanced wound care. Another possibility is leveraging the lightweight paper capabilities of SWM to support innovation in Neenah's release liner, premium packaging and dye sublimation businesses. In short, we see numerous opportunities to strengthen our value proposition, better meet the needs of our customers and drive long-term profitability.

Together, the company will have a meaningful access to the key economic regions across the world. In today's environment with increasing regionalization, customers prefer global scale capabilities with local manufacturing presence. The broader footprint and complementary technologies afforded by this combination provide supply chain advantages for our global customers. While our most complementary regions are North America and Europe, this merger also offers a unique opportunity for Neenah to leverage SWM's established manufacturing and sales infrastructure in the rapidly growing Asia-Pacific region.

One of the most compelling parts of this transaction is the meaningful value creation from synergies. We have identified over $65 million of annual run rate cost synergies. And we expect to achieve over half within the first year and full run rate within 24 to 36 months post close. These cost synergies are comprised primarily of SG&A reductions, including redundant C-suite and public company costs, as well as organizational optimization. Supply chain efficiencies including procurement, logistics and operating optimization, and other cost reductions such as purchased services and leased office consolidation.

In addition to these bankable cost synergies, we have significant incremental growth opportunities that will drive our top line, as referenced previously in our discussion of strategic fit. Between cross-selling a broader portfolio to better support our customers' geographic expansion and increased opportunities for innovation, we believe there are numerous prospects to drive incremental growth. We also have the potential to optimize our working capital with payment terms and inventory practices that unlock cash.

We've talked a lot about the financial benefits this combination creates. I'd be remiss if I didn't also recognize the resident talent and shared organizational values of the two companies, including our mutual commitment to safety. I'm confident the fusion of these two like-minded organizations will ensure the anticipated integration efforts progress smoothly and efficiently to set a solid foundation for success.

In summary, this transaction is a compelling and unique opportunity to create significant short- and long-term value for our shareholders and key stakeholders. Through accelerated growth and higher margins, the pro forma enterprise will be a world-class company with the scale to expand and fortify our position in the attractive specialty materials space. These are exciting times and I know Jeff shares my confidence in the path ahead and our ability to realize the full potential of the strategic combination.

We'll now turn the call back to the operator for questions.