Welcome to the SWM Second Quarter 2018 Earnings Conference Call. Hosting the call today from SWM is Dr. Jeff Kramer, Chief Executive Officer. He is joined by Andrew Wamser, Chief Financial Officer and Mark Chekanow, Director of Investor Relations. Today's call is being recorded and will be available for replay later this afternoon. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Mr. Chekanow. Sir, you may begin.

Thank you, Catherine. Good morning, I'm Mark Chekanow, Director of Investor Relations at SWM. Thank you for joining us to discuss SWM's second quarter 2018 earnings results. Before we begin, I'd like to remind you that the comments included in today's conference call include forward-looking statements. Actual results may differ materially from the results suggested by these comments for a number of reasons which are discussed in more detail in our Securities and Exchange Commission filings including our quarterly reports on Form 10-Q and our Annual Report on Form 10-K. 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 this presentation and the earnings release. Unless stated otherwise, financial and operational metric comparisons to the prior year period and relate to continuing operations. This presentation and the earnings release are available on the Investor Relations section of our website www.swmintl.com. I will now turn the call over to Jeff.

Thank you, Mark, and good morning everyone. Yesterday, we reported second quarter results with sales up 6% to $270 million and adjusted EPS up 13% to $0.99 a share. We were pleased to deliver good performance despite significant inflationary pressures and expenses related to our AMS site consolidation. For the quarter, the key takeaways are solid sales growth coupled with good manufacturing operations driving top and bottom line performance in EP and continued strong organic sales growth in AMS offsetting short-term expenses acquired to realize the Conwed synergies, and finally a positive lift from lower taxes. Year-to-date free cash flow was tracking as planned toward our expectation of exceeding $100 million in 2018. AMS delivered 5% sales growth with no acquisitions benefit, which I'd like to highlight, was on top of an already strong second quarter last year when organic growth was 10%. Overall, performance was propelled by strong growth in both filtration and medical sales, while the transportation segment was down slightly due to a difficult year-over-year comparison. The business remained solidly positive year-to-date. Our infrastructure, construction and industrial sale segments were flat versus last year. To share more detail, our filtration business performed well across its sub-segments. RO water filtration was up double digits, as we continue to benefit from the return of the replenishment cycle and our customers maintain a bullish outlook for the remainder of the year. After being somewhat guarded on this expected rebound at the end of last year, our confidence in the sustainability of this near-term trend has increased. We also saw continued momentum in process filtration driven mainly by gains in semiconductor manufacture and use of our products in heavy equipment, such as components of fuel and hydraulic liquid filters. In medical, we continued its strong momentum from the first quarter. While…

Thank you, Jeff. I’ll now review our financial results starting with segment performance. In the second quarter, AMS net sales increased 5% to $124 million. Adjusted operating profit was $22.6 million or 18.2% of sales, down 160 basis points versus last year. As a reminder, second quarter of last year's results benefited from a favorable mix effects in segment margin was a record 19.8%. Consistent with the first quarter of 2018, the market contraction in AMS was primarily driven by the inefficiencies of our Austin plant, which is scheduled for closure later this year. As anticipated, we flesh through high cost inventory incurred redundant labor costs as we transferred production line and added new engineering capabilities at the sites that are expanding their capacity. The second primary driver of margin compression was higher resin costs. Though as Jeff highlighted, during the quarter we were able to recapture much of the cost through pricing actions. On a sequential basis, adjusted margin improved from the 14.1% level we delivered in the first quarter to 18.2%. This improvement is due to moderating site quarter expenses as well as the price increases that went into effect during the second quarter. We believe the price increases to customers will provide an offset to higher resin costs though we caveat that the recent uptick in polypropylene prices may require further actions. Regarding a site quarter the annualized synergies from the Austin consolidation in the fourth quarter will exceed these short term pressures. The Engineered Paper segment net sales were up 6%, positive foreign currency movements of 5% and favorable price mix of 6% more than covered the volume decline. Given the current euro exchange rate we do not expect a meaningful benefit from currency for the balance of the year given the late 2017 rally in…

Thank you, Andy. At mid-year, we are pleased with our financial performance and we believe we are generally on track to deliver adjusted EPS within our original guidance. We are delivering solid sales growth particularly the organic growth in AMS with most of our key markets showing strong momentum and continued sales strength will be a key factor in delivering on our 2018 plans given our cost pressures. Unfortunately, the raw material cost increases have been higher than our original forecast and the tariff activities are somewhat cloudy in the immediate future. Regarding our Austin site closure, we are nearing project completion and the expected synergies are around the corner. Completing this project on time will set us up nicely for 2019 and the incremental savings should be a solid boost during our fourth quarter. Overall, 2018 has been an active year of strategic projects between commissioning our new Chinese facility, our U.S. footprint rationalization activities, construction of a new European film line for AMS, and the ongoing development in commercialization of heat-not-burn. While executing on these projects and driving toward our operating plan, we also continue to screen for additional inorganic opportunities that will complement our current capabilities. We believe demonstrating our ability to execute against our original commitments is critical to pursuing further deals given the synergy plan we've targeted, which should ultimately result in AMS be in a more scaled integrated and profitable platform on which we can continue to build. We appreciate your continued interest and support. And that concludes our remarks. Catherine, please open the line for questions.

Thank you. [Operator Instructions] And our first question comes from Dan Jacome with Sidoti. Your line is open.

Good morning.

Good morning.

Couple questions here. First, let's stay on the Austin site. Sorry if I missed it. What was the exact operating profit drag in the quarter?

Yes. So Austin, we did some framework for that, so we have high cost inventory running through the system. We also have just a general inefficiencies of running a site that is in wind down. And then lastly, we had accelerated depreciation. But when you look at it in aggregate, it's about a 1.5 million headwind.

1.5 million. And I should know this, but that was inherited with the Conwed?

I think that was a dull start facility.

Dull start, okay. All right. Now let’s turn to the construction markets. What are those keep lagging? Any high level thoughts there?

Yes. The construction markets are lagging primarily because if you recall in the first quarter the weather patterns in the United States were terrible. There were a lot of blizzards and then a lot of rain. And so the first quarter was a downturn for the entire construction industry. We've seen those conditions moderate and the business is gaining momentum, and we believe the Board look for the construction industry will be much more positive.

Okay. That's helpful. So in second quarter there was no weather headwinds, what was there if anything?

There were probably some slight ones, you've seen a lot of rain and things of that nature, but it's materially moderated.

Okay, great. Then turning to HnB, so you did mention that the markets are lumpy and it is still very early, let's call it growth phase, but do you have any high level comments, is PMI pretty tepid outlook from – on their last call, anything you could help me clarify there?

Yes. It's going to be hard for me to comment directly on what our end use customers are saying. I think we've been pretty consistent in our view how the market will develop. We're still very excited about it, but we also were clear in our expectation that it's still a new product introduction. And that means supply chain, billing, and execution sometime were little lumpy. As they go to more test markets, they're starting to see their flavor characteristics or other performance characteristics that they might need to tell or et cetera. So it's going the way we expected it to be in the way we've actually been planning for it to be. We're continuing to have a lot of new product development commercialization work done with many of the customers. And so many of these trends are actually a reinforcement of the positives of working with SWM, because it's not a simple thing, you are going to need to tell it just like normal products. You are going to need to tell, it’s a local conditions, meet local regulations et cetera. So overall, we’ve remain positive on it. I think we've been pretty clear also that this is going to be a game changer for SWM in terms of volume in the short-term because of many of these issues as we scale up.

Got it, and that make sense. Okay. So long-term is still rather favorable and then two quick housekeeping questions. Why is CapEx going to be more second half weighted? And then on tax, I think you’re the first company I've heard talk about a lot of variability in the tax rate. Maybe I'm wrong, but maybe can just talk a little bit about those two?

Sure. So at the beginning of the year we did say that we thought CapEx would be approximately $40 million for the year and we are trending below that. But that being said, just a cadence of certain projects, in the back half of the year, we knew would be able to more back half weighted and so you know our expectation is that, we'll be close to that $40 million or maybe slightly below from where we are today. But that still our expectation.

Okay.

With regards to tax, so – beginning of the year, we talked about how tax would be a few 100 basis points like we below from where we started the year. So think of it in that 26% to 27% sort of rate. If you looking us, if you think about our different jurisdictions, based on where we earned profitability. That rate can vary. And then also I think many other corporate, they talk to other companies as well that they are seeing how they're – making sure that they are incorporated in U.S. tax reform and that they're getting the proper deductions. So I don't expect a meaningful swing in our tax rate. But I just caution that we're at 25.2% today and it could go a little bit lower to go a little higher, but our expectation is in and around like 25.2% where we landed now.

Okay, fantastic. That helps. Maybe I’ll throw in one more, I mean, so transportation I know you are lapping a stiff comp, but year-to-date seems to be in good shape. Is there – can you remind us again what you think the long-term run rate, growth rate, normalized growth is for these end markets as we think about the business beyond the one quarter?

Yes, I mean for us as you said, we're really lapping at just a very positive quarter last year. We recall we – that was when we introduced our new Asian distribution agreement. We’re still very positive on this. We think its 5% to 7% growth rates long-term.

Okay.

It's one of our more positive market trends I think.

Okay, great. Thank you, guys.

Sure.

Thank you. [Operator Instructions] And we have a follow-up from Dan. Your line is open.

Hi, just let me one more, can you comment a little bit more of what you're seeing, if there was any significant change quarter-to-quarter kind of in filtration and market product replacement cycle, I even phrase it correctly. Was there any thing to comment on or kind of steady as it goes?

Yes, if you recall, we actually have two major categories in our filtration business. We have one that's reverse osmosis focused and one that is more processed industries focused. On the reverse osmosis, if you recall, last year we were a little disappointed in the growth rates of that marketplace. It was below the long-term trends. And we’d indicated at the time that that is really being driven by an extension of the replenishment cycles as low energy prices enable them to be able to put that off for a while. But we always said that that would trend differently and eventually you would need to see that replenishment cycle increase. The combination of that extension and energy prices starting to creep up, we're starting to see that replenishment cycle increase. We're hearing our customers talk much more confidently about their forward projections around that. And so that has been a good performing segment for us over the last couple of quarters, and we're hoping that will continue to see that same trend going forward. On the process industry side, we've just seen very strong orders coming in through semi – use of our products and semiconductor manufacturing and also in hydraulic vehicles where they play a role in a lot of the filters that are used for the fluids in those construction equipment et cetera. So overall those two key segments are operating well our air business is stable and so the filtration marketplace has just been good for the quarter.

Okay. That's good. Is there any reason to think there's a differential in margins between process in RO or about the same?

No. It's about the same. I mean they're good margin products for us [indiscernible].

Terrific. Thanks again.

Okay. Thanks Dan.

Thanks Dan. End of Q&A

Thank you. And I am showing no further questions at this time. I'd like to turn the call back to management for any closing remarks.

I appreciate everybody participation we're working hard and we hope to speak with you again in a positive light in the coming quarters. So thank you.

Thank you, Ladies and gentlemen for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.