Tredegar : 2023 Annual Meeting Transcript

Today's meeting is being recorded, and a replay will be available on the investor section of Tredegar's website. I would now like to introduce Mr. Greg Pratt, Chairman of the Board of Directors of Tredegar Corporation.

Good morning, ladies and gentlemen.

I'm Greg Pratt, Chairman of the Board of Tredegar Corporation. Welcome to our 2023 Virtual Annual Shareholders Meeting. Here's the agenda for today's meeting. I will move quickly through the annual meeting business items. After that, John sites will kick off the management presentations. Next, Drew Edward's will provide a financial report. And then, he will turn things over to our business unit presidents Bapi DasGupta, Bosco Silveira, and Brook Hamilton for business updates.

We will then conclude with questions.

Before I begin the annual meeting business items, I would like to introduce my colleagues on the board of directors, who are up for re-election to the Tredegar board. In addition to myself, they are George Freeman, Ken Newsome, Tom Sneed, John Steitz, Carl Tack, and Ann Waleski.

Before we move on to business, I'd like to take a moment to thank John Gottwald for his steadfast service to Tredegar. John retired from the board in January of this year, after serving continuously on the board since the company's birth as an independent company in 1989.

The Board is very appreciative of John's dedication, leadership, vision, integrity, and tireless commitment to Tredegar. John's business acumen and deep knowledge of our businesses have been critical to creating value for our customers, employees, communities, and shareholders. I am honored to serve as Tredegar chairman as we continue to build on his legacy of achievement.

Now, for the Annual Meeting items, please note that proper notice of this meeting was given, and the minutes of last year's meeting are available.

Tredegar has appointed Amanda Raimo of Alliance Advisors as the inspector of elections. She has reported that a quorum exists.

The inspector of election has presented me with copies of the Notice of Annual Meeting, the proxy statement, the form of proxy, together with proof by affidavit of mailing on March 24, 2023, to each shareholder record as of the close of business on March 10, 2023.

The inspector of elections has also presented me with the list of Tredegar's shareholders entitled to vote at this meeting, as of the record date. This list has been on file Tredegar's principal office for inspection during normal business hours since April 18th.

Any registered shareholder, who has not voted, or wishes to change their vote, may now do so by clicking on the link provided, in the question chat pane of the control panel. Registered shareholders who have already voted and do not wish to change their vote do not need to take any further action.

There are three items of business at this annual meeting.

They are: first, the re-election of our seven directors to serve until the next annual meeting; second, to conduct a non-binding advisory vote on the compensation paid by Tredegar to our named Executive officers; and finally, to ratify the appointment of KPMG, as our auditors for 2023 fiscal year.

Is the inspector ready to report on the vote?

Yes. Thank you, Greg. Based on the preliminary report of the inspector of election, the proposals presented to the shareholders at this meeting have passed. We will provide you with the report, so that the final vote results can be reported in a Form 8-K to be filed within four business days of the date here.

Online voting will now be closed.

Based on the preliminary review of the votes cast, I hereby declare that all director nominees have been elected. The shareholders approve of the compensation paid to our named executive officers, and the appointment of KPMG, as the company's auditors has been ratified. The final vote tally will be reflected in the Form 8 K to be filed with the Securities Exchange Commission.

I declare the business portion of the meeting adjourned.

And now I'll turn things over to John Steitz to kick off the management presentation.

(John Steitz) Well, good morning, everyone, and thank you, Mr. Chairman, for handling that for us. We appreciate that very much.

Here's our first slide; let me just summarize quickly. This basically says that we cannot predict the future. However, we are very proud of our disclosures. And if you have any need for to answer any additional questions, or any additional information about the company, we urge you to go to our website at www.tredegar.com, and under the Investors label, I think you'll find any information you need to satiate your desires that are along that front.

Now, onto our agenda. First, I'd like to highlight a very important principle for the company which is our safety of all our employees around the world. We had a terrific safety record achieved in 2022. I'm very proud of all our sites and facilities for really striving to achieve zero accidents because we fundamentally believe all accidents are avoidable. And they are working hard to utilize employee engagement to help identify risks and behaviors, which create accidents and unsafe conditions in the first place. They've all done a terrific job in that regard, and keep up the good work, everyone. Thank you.

Suffice it to say that 2022 was one of the most unique years in my career. We had an extremely strong first half of 2022 in both Bonnell and our polyethylene films business, followed by the build-up of excess customer inventories. And we're hearing this almost universally across our businesses and that resulted in a very weak second half for us, which has carried into 2023. It's a very unique set of circumstances.

Terphane -- and you'll hear more from Bosco our business unit president -- had an excellent year in 2022. However, it has experienced some weakening market conditions so far in 2023. And

we really are hoping that these are inventory corrections by our customers, which have extended into our inventory levels, and more about that in a minute.

What we are very uncertain of is, is the timing of turnaround in our markets, not only in Terphane, but also our other two businesses, and you'll hear more about that in a minute.

We're continuing and have worked very hard to settle our pension plan. And we expect to do that by the end of 2023. And Drew will give you more insight into that set of works. Cash flow generation and our net debt have been hurt by our own excess inventory issues. So, we're very focused in 2023 in getting these set of issues under control across our business units.

However, if recovery in our markets and businesses does not occur sometime throughout the course of the summer, we are going to look at all the facts here, and we're going to look at efforts to mitigate any cash generation issues. But we may be faced with an issue of reducing or suspending our dividend until we can get better control of our financial leverage. And we wanted to give you, basically, a heads-up here, as our businesses continue to struggle, and you'll hear more about this in a minute. So let me with that, I'll pass it on to Drew Edward's, our Chief Financial Officer.

(Drew Edwards) Thanks, John. My first chart is EBITDA and EPS from ongoing operations on a quarterly basis for 2022. You can see from the chart, as John indicated, that we had an extremely strong first half of 2022, followed by an extremely weak second half, as demand declined significantly in our businesses, with high inflation, rising interest rates, and the threat of a recession, which collectively resulted in excess inventory at our customers, as well as us. Terphane had another solid year in 2022 but has experienced a downturn during the first quarter. Unfortunately, as John indicated, the weakness in the markets supporting our Bonnell Aluminum and PE Films businesses, is carried forward so far into 2023, with the timing of a recovery uncertain.

My next slide shows the net debt and financial leverage. Our net debt in 2022 climbed $75 million, mainly from two factors. First, the $50 million contribution that we made to the pension plan in February of 2022, which was essentially funded with the December 2021 kaléo sale proceeds; and second, excess of inventory.

The pension plan contribution did eliminate approximately $14 million of annual pension expense from EBITDA from ongoing operations, and we expect to make a final payment of approximately $28 million to settle the pension plan by the end of this year.

We are very focused on reducing inventory and working capital to normal operating levels and are hopeful that great progress will have been made by the end of the second quarter of this year.

We're also very focused on managing costs and capital spending during the current downturn. However, as John stated, if a recovery of our businesses and markets doesn't occur early in the third quarter, and we are unable to get our working capital to normal operating levels, we may also need to take action to reduce or suspend our current quarterly dividend as an additional measure to help us control their financial leverage.

Thank you, And I'll now turn it over to Bapi.

(Bapi DasGupta) Thank you, Drew. Good morning. It's a pleasure to provide you an update on the Surface Protection business, which is part of the PE Films business. First of all, I'd like to express my deepest gratitude to the PE Films organization who throughout the pandemic and into the post-pandemic period have operated with exemplary safety and quality performance and without any disruptions and shipments to our customers.

Safety is in our DNA and owned by every employee in the organization and is consistently well below the industry standard. In fact, up to four times better than the industry, and then in 2022, the total recordable incident rate of 0.3 with one incident and zero incidences year to date. Of course, even one incident is one too many, and we continue to strive daily for zero incidents.

Our excellent safety performance translates directly to a high quality culture. We haven't experienced any major quality defects throughout the pandemic and year-to-date we have zero claims.

So, let me talk about our 2022 performance. And, as John said, it was really a tale of two cities. After a strong first half the industry experienced an unprecedented decline in demand, which I'll get into later. We ended 2022 with $9.4 million in EBITDA in surface protection and $2.4 million of EBITDA from our packaging films business.

After a record year in 2020, we saw the impact of the previously disclosed customer product transition and margin erosion at a key customer due to competitive pricing in 2021. This impact continued into 2022. Now, we partially offset this impact on EBITDA loss via continued execution of our Polaris strategy. This included maximizing cash flow. We ended 2022 with a decent working capital performance at an 11.7% average. Offsetting escalating raw material prices by converting all our customers to a quarterly resin index-based mechanism starting the fourth quarter of 2021, this sealed in $2 million in margin improvement in 2022. We delivered a $22 million contribution margin from new products in 2022 and continue to diversify our customer base. We continued our initiatives from productivity improvements and continuous improvements at our plants. And finally, we focused on entering new market adjacencies. In 2022, we launched our Lithyn series of products for the semiconductor market which I'll talk to later.

So, as I mentioned, in 2022 we saw an unprecedented decline. Beginning in late second quarter, this took the industry, and, frankly, our customers and us by surprise. For context, during the early periods on COVID in 2020, display demand and sales were very strong since people were buying multiple displays as working from remote locations became a mainstay. The display industry was cranking out products to meet the high demand.

And this, coupled with higher panel prices, helped make 2020 a record year for the industry, and the ramp-up in inventories to meet that demand and circumvent global supply chain issues continued through 2021 and into the first half of 2022. Abruptly in the second half of 2022 demand started to slow down due to the convergence of several factors, including: the global economic slowdown; continued factory disruptions from regulations in China; a steep decline in the China mobile market which is a very important market, making up more than 23% of the total mobile phone market; and the Russia Ukraine war.

This left the industry, like many industries, sitting on a lot of inventory. And the display industry, in particular was hit hard when its capacity utilization was set at all-time low.

Previously, when one of these declines happened, this stress usually lasts anywhere from 3 to 5 quarters. After that, the industry comes back strong. However, this time, there are no forecasts on when this turnaround will occur. And while recent data indicates stronger growth in larger TVs in the second half, there are still mixed signals. We believe that a turnaround will start in

Q3 and the industry may get back to normal levels in 2024. Our approach during this period of uncertainty is to focus on things we can control, staying true to our value proposition of providing the highest quality products, while keeping safety as our top priority. We've been through these cycles before and always come off stronger.

Let me now show you what the latest market projections are. As I said, the recovery time is still unknown; as a result, the latest market industry market forecast for 2023 was lowered. The CAGR over the next five years for an area growth is about 4%. In our business area sales is what matters, not units. So, for example, LCD TVs make up about 70% of the total display area but only have 7% of unit shares. We focus heavily on higher-end LCD TVs, mobile displays, and recently on automotive displays, which, although having only 2% share of the total display area, does have a high growth rate of 9%, which leads me to the next slide.

One of the cornerstones of our business is innovation and leading the market with the highest value and differentiated products. This helps us widen the moat against competition. Much of this is driven by staying ahead of the advances in display performance, including high resolution form factors, improved battery life, functionalities like wireless charging, anti-glare, anti- reflection, et cetera.

All this requires high, high quality performance as allowable defect sizes get smaller. For example, we developed our Pearl series of products when the average effect size went from 1.5

1. to 0.3mm. That's a huge jump in a very short time. Today we are talking about defects sizes going to .05 mm, which just for context is roughly the thickness of a human hair.

So, as the industry required increasing high performance, we started developing products to meet those higher performance requirements, such as the next extension of our Pearl portfolio products. In addition to the very successful Pearl series of products, in 2021 we launched our Obsidian line of products, specifically for the growing demand for automotive displays, which continues to take up more real estate in automobiles.

We have been specified into a number of these displays and are working with major providers of optical films and substrates to the automotive industry. In addition, this line of products is also being used in emerging augmented reality virtual reality applications. Which leads me to an exciting new phase for our business, and that is to leverage our innovation capabilities, operational excellence, and customer-facing focus to enter into new adjacencies.

I've already talked about the automotive displays. In addition, I mentioned last year we're actively trying to get into the semiconductor market and are steadily making progress. We launched our Lithyn series of semiconductor tapes and have increased resources for this initiative. The total addressable market for these tapes is over 700 million, and over the past year we have validated our value proposition which is very similar to our value proposition in surface protection, which is essentially enabling our customers to improve their efficiency and yields, which translates to significant cost savings for them.