Good morning, and welcome to the Neenah Quarter Two Earnings Conference Call. All participants will be listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.I would now like to turn the conference over to Mr. Bill McCarthy, Vice President of Investor Relations. Please go ahead, sir.

Thank you, and good morning. With me on the call today are John O'Donnell, Chief Executive Officer and Bonnie Lind, our Chief Financial Officer. John and Bonnie will provide comments on business and financial results for the most recent quarter, along with thoughts on the remainder of the year. After these remarks, we'll open up the call for questions.Let me start with a few headlines. We released earnings yesterday afternoon, reporting second quarter sales of $253 million. This was down 7% versus last year's record quarter. However, excluding impacts from currency and the December sale of our Brattleboro operation, sales were 2% lower, mostly reflecting softer global and economic and market conditions.Quarterly GAAP earnings of $0.80 per share compared to a loss of $0.29 last year. 2018 included $1.47 per share, primarily for a non-cash write-down of Brattleboro following our decision to divest. In 2019, GAAP earnings included non-routine costs of $0.15 per share. The majority of this was for accelerated depreciation and other non-cash costs associated with plans to idle a fine paper machine in the third quarter as we consolidate and optimize our manufacturing footprint. Excluding these items in both periods, adjusted earnings per share of $0.95 this quarter increased substantially from $0.69 in the first quarter, well below $1.18 per share reported in the second quarter of 2018. Details on adjusting items and a reconciliation to comparable GAAP figures is included in our press release.I'll end by noting that our comments today may include forward-looking statements, and actual results could differ from these statements due to uncertainties and risks outlined on our website and in our SEC filings.With that, I'll turn things over to John.

Thank you, and good morning, everyone. I was very pleased with the progress our team's made in the second quarter despite the weaker global economic conditions. With our daily focus on the drivers of financial performance within our control, I'm confident we'll continue to deliver the improvements we're expecting.A few examples from the quarter include: an accelerating top line growth in key categories like filtration and premium packaging; a 200-basis-point increase in adjusted operating margins versus the first quarter. This was heavily influenced by our cost control and pricing activities, offsetting $4 million of year-on-year input cost increases. And finally, we substantially improved cash flow generation, enabling us to pay down over $20 million in debt. As Bill noted, consolidated sales were 2% lower after excluding divestitures and currency impacts. Each segment was down about that same percentage.In Fine Paper & Packaging, the commercial print market remains pressured, and our teams continue to actively address market representation options to ensure that our selective distribution strategy provides the most effective go-to-market model to serve our customers. Growth in premium packaging partly offset lower commercial print sales in the quarter.In Technical Products, healthy filtration revenue growth was offset by lower sales in backings. Filtration sales in constant currency were up 8%. In addition to the continued ramp-up in transportation filtration, we had a very strong growth in water and industrial filtration products in the quarter. Backings, on the other hand, is our Technical Products category that is the most global and economically sensitive. With about 60% of sales outside of the United States, including 20% of sales in Asia, volumes have been pressured by a strong U.S. dollar, rising nationalism and our customers' tariff concerns.As a result, a few customers with excess saturating capacity have internalized coating of less differentiated products to…

Thank you, John.

You're welcome.

I'll review financial results for each of our business segments, and then wrap up with a few comments on corporate items, starting with Technical Products. Sales were $146 million in the quarter. This was down from a record $154 million last year. About half of the decline was due to a stronger U.S. dollar, and the rest reflected lower volumes that were only partly offset by benefits of increased selling price and a higher value mix. Operating income of $12.5 million compared to $15.8 million last year.Results in 2019 included $400,000 of restructuring and other non-routine costs. And in 2018, there was $1.8 million of costs, mostly for a portion of the Brattleboro impairment charge. After excluding these items, adjusted operating income of $12.9 million was $4.7 million below last year. Decreased sales and fixed costs inefficiencies were the major drivers, along with higher SG&A and unfavorable currency translation. Partly offsetting these items were increased selling prices, which overcame more than $2 million of higher year-on-year input costs and a more profitable mix and lower distribution costs.Turning next to Fine Paper & Packaging. Sales of $107 million were down from $116 million last year. About three quarters of the decline resulted from the sale of Brattleboro, with the rest mostly due to lower commercial print volume and a less favorable mix. Helping partly offset these items were increased selling prices in growth in premium packaging. GAAP operating income of $12.9 million in 2019 compared to an $8.8 million loss in the prior year. Both periods included significant non-recurring costs. 2018 included over $25 million, primarily for the write-down of Brattleboro following our decision to sell this non-strategic business. 2019 included costs of $3 million, with the majority of our actions taken to optimize our operations to maintain the attractive financial…

Thank you, Bonnie. I'll start off with a few thoughts about the remainder of the year. External market and economic conditions are expected to remain sluggish, especially overseas. This volume impact will be felt more in our Technical Products business where about two third of sales are outside of North America. In addition, the strong U.S. dollar will continue to be a headwind. In the most recent quarter, currency translation reduced dollar revenues by about $5 million with a bottom line impact of over $0.5 million. We're responding to these market conditions in a number of ways. First, from a top line perspective, our sales and marketing teams are aggressively pursuing additional business that will more optimally use our available capacity.At the same time, our R&D teams are customizing new products to be more competitive in overseas markets, especially our backings grades. These actions will certainly improve volumes over time. Second, we're actively managing cost and capacity to match them as close as possible to the market demand. This includes longer-term actions like the recent Fine Paper footprint optimization as well as numerous near-term activities underway across the company to generate savings and improve efficiencies.As a reminder, we schedule our annual planned maintenance downs during the seasonally slower third and fourth quarters. While always carefully managing the cost of these downs, they're expected to have an impact of $3 million to $5 million as a result of downtime and increased maintenance spending. Further moderation and input costs in the second half should help us mitigate some of the impacts from seasonality and annual downs and ongoing soft markets.As noted previously, year-on-year input costs are still higher in the first half. However, we will start to benefit in the second half from lower pulp prices and expect our pricing activity to…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]And the first question comes from Steven Chercover from D. A. Davidson. Please go ahead, sir.

Thanks good morning everyone. So could you please give us more details on the pending idling of the paper machine? Where is it at? When is it happening? And what's the capacity?

Yes. So maybe I can even take a step back from that a little bit. As you know, Fine Paper's been -- that business has been declining since 1997 overall. And capacity comes out in chunks while the market and the business has a slower decline over time. So the way we manage our asset base is that we fill up available capacity with marginal products until we can actually make a rational change in pulling an asset out. That will happen in the third quarter -- or everything should be completed in the third quarter. In regards to that transitioning happening, expectation is that they will have $1 million annual impact for us, and that will begin in the fourth quarter. The overall capacity of an asset, 20,000 tons is a good gauge from that standpoint. And again, our process is to fill it with marginal until it doesn't make -- it doesn't justify running an entire asset on marginal business. You shouldn't see it more asset rationalization from Fine Paper for quite some time.

I was writing. Did you say $1 million quarterly benefit?

No. I'm glad you clarified it for me. But what I did say is an annual impact of about $1 million beginning in the fourth quarter. Yes.

Okay, so $1 million annually. And that's to the positive?

Yes.

Okay, that's what I wrote. Mine were seemingly, and then so, and is that just from, are there any more charges with it? What will your operating rates be thereafter? And does it have an impact on headcount?

Yes, we will be fully utilized. So as you would imagine, by moving all that on the other assets, we'll be what I would consider chockablock in the Fine Paper side of the business. Yes, when we do idle a machine and take it out, it will have an impact in Appleton. That's, so part of the value is we're moving to lower-cost assets, and part of the value is reducing the overall operating costs.

So Steve, included in the onetime costs were, they were mostly costs for accelerated depreciation, so that's why we said noncash. There is some severance costs and some write-downs of excess inventory, but mostly noncash. And then what we expect is another $2 million in the third quarter because we're selling, rating the depreciation over the remaining use for the life of the asset, so that $2 million in the third quarter will be all noncash.

$2 million more to come out. And then sticking with paper, did you get any benefit from the commodity free sheet price hike? And is there any risk as the price hikes fades?

Yes. We haven't announced any incremental increases since a small one that we had in the first quarter, I think was the last one. We don't announce this often as the freesheet market does. But when we do announce, it's usually in cadence with that. That's just for the ease of our distribution customers in implementing price changes. Our expectation, also, like I said, we're not like the commodity in that way. As input costs continue to decline as we move forward, we tend to have more sticky pricing in the high end of the Fine Paper business unlike many of the commodity groups.

Sure, yes. And I was going to ask you, can you remind us how many tons of market pulp do you purchase annually?

0.25 million?

Yes.

About 0.25 million.

And mostly split kind of evenly between softwood and hardwood.

Okay. And my last question is what's the operating rate of the Appleton filtration machine?

Well, we're on plan. We talked earlier in the year about our ramp-up plan. We're on plan for this year in regards to Appleton and its ramp up. The expectation is, and when we talked about growth in filtration, our biggest challenge on operating utilization has been in our Europe assets. We have seen more slowing there. But we're on our plan for Appleton.

And one bonus question, sorry.

Bonus? Act now, get two nights.

You used an interesting choice of phrase. I think you said, used the word nationalism as a...

Yes, it's for...

He's a Canadian.

So I mean, is that, do you mean by that, people are trying to keep their purchases in country? Or it's just the slowing trade as the impetus for probably moving economies?

Yes. Probably more keeping and I little bit more. A significant portion of our backings business is in Asia, and a significant portion of our Asian business is in China. And that's where we clearly see a disproportionate amount of the impact. So local purchases is what I'm really talking about. And whether there's a devaluation of currency or even significant local rebates to keep it local, those are the challenges that we're facing. I just wrapped it all in the nationalism word. Felt good.

Our next question comes from Jon Tanwanteng from CJS Securities. Please go ahead.

Nice job on the margin and cash flow given all that's going on in the world. Thanks for taking my question. Bonnie, what went into the increase of SG&A and how do you see that flush -- closing out going forward given -- or assuming that, that was just the timing?

Jon, I couldn't quite follow -- I know it was SG&A, but what was the first part of the question? What cost?

Sure. What went into the increased SG&A, and how do you see that coming out going forward, assuming that the increase was just timing?

Okay. So I mentioned that we have 52 million year-to-date in SG&A. We have $52 million in SG&A year-to-date 2018. So the timing for the quarter just happened to be higher medical costs.

We still look at $25 million a quarter.

Going forward.

And that's the expectation that as we're moving. So, not...

And then the $3 million to $5 million in maintenance costs, is that any different from last year?

No. That's just a reminder. So sometimes, I'm insightful; and sometimes, I just remind. That's just a reminder that third and fourth quarters, we do have those downs. We worked hard to make sure what we anticipated the actual spend during those time period, but it is an event, and I just want to remind you of that. That's all.

And I remember there was a period last year where you idled some factories for a bit longer than expected just given the volumes that were expected to be sold. Is there any plans or risk of that happening this year?

That's a great question. We try to manage our working capital about 15% of our overall sales, and we're right in that realm where we sit today. I think last year, we had higher expectations of volume coming back, and so we probably had a little higher inventory and did more of it in that time period. Today, I feel very good about the cadence of the management of our inventory. And I always say to the group, your inventory goes up like a rocket and down like a glider. I think they've done a nice job managing it every day this year, and I think we saw that in the second quarter as well. As sales were pressured, we continued to keep our working capital around that 15% range.

And then just on the idle machine, I believe you said that was an Appleton facility. Are you keeping that in case things tick back up? Can it be converted like you did with the filtration line? Or could it even be sold assuming that it's actually mobile?

Yes. I don't have -- there's no plans for it to be sold. Obviously, any time you can take something and put it to greater, better use, we'd love to do that. I don't -- there's no existing plans, so I'd hate for you to believe that. Today, what I would say is our Fine Paper business had 7 assets since the last quarter. Paper machine's making the revenue they needed. Today, they can do it on 6. That's where we sit today overall.

And then just a question on the M&A pipeline. What are you seeing out there in terms of valuations, number of opportunities and on the flip side, are there any more assets that you would like to prune?

Yes, I think you've seen us diligently pruning and making sure that if there are assets that are out there that aren't driving the value, we are, and I don't see major changes in regards to that today. I'm answering your pruning question first. From an M&A standpoint, I think starting first with that strong balance sheet and us really driving and making sure that we've got the flexibility, that's the internal part that I can control. What I can't control is valuation still remain fairly high. We have an absolute commitment for real clarity as to why owning another company's going to make sense for us. But we are out and we are engaged. And we've got radar of companies that we continue to work with.Many of them, as we, just almost like all the acquisitions we've made in the past, the best acquisitions for us aren't ones that are in the middle of a process, but more likely parts of other companies or other companies that we deem to be more strategic. So it's a little longer run, but a much more resilient process, if you will. So it's still, our highest use of cash is, everything's for organic growth, and we talked about a number of the catalysts on the call. But second is M&A, and we're in great shape to, if we find the best fit for us, we're in great shape to act on it.

Our next question comes from Dan Jacome from Sidoti & Company.

Two quick questions. First on, just to stay on the Appleton real quickly. It sounds like, yes, I just wanted to clarify. Are you still targeting $70 million revenue run rate once everything's qualified with the customers, the capacity is up 100% fully running. Is that still reasonable for you, guys, just for us thinking forward?

Yes, the total capacity use is still there. Yes.

I didn't hear too much on the packaging line. Can you just give us like 2 or 3 sentences? Your overall assessment of the packaging portfolio, where you're seeing the most benefit. I know there's some box wrap and folding cart in. Maybe some color there? And then if it's even pertinent, do you think there are some areas maybe where you can do slightly better? That was it for me.

Okay. Happy to do that. As a reminder, most of our paper business is domestic from that standpoint. But packaging is not. It also has a large global participation revenue. So that's some of the pressures that you might see, especially when we talked about China a little while ago.

I was just talking about the premium packaging. I'm sorry.

No. That's, and I am talking about the premium packaging as well, Dan. So, and I'll get to yours, I just want to get my little commercial as a reminder.

Yes, sorry.

But gift card and folding card are 2 areas that we've seen a great deal of success. Gift cards are much smaller category, but our real strength is in the ability to create a laminate that lay flat and does a nice job of replacing plastic in a lot of applications. That's an area we're seeing good market enthusiasm regarding that and probably one we'll talk about more as we go forward. Folding cart, and again, any time that we can change the perception of the value of what's inside the package, we always say expensive things in small packages, that has the highest merchandising value for our high-end premium packaging. So that's another area, I think, we would see some good progress.

So I mean though, the folding carton was the new portfolio add-on from the FiberMark acquisition a couple of years ago. See, if I got that. So you guys generally still satisfied with the ROI you're getting off of those assets? I know it hasn't been too long, but just curious on that.

Sure. Two different things. You're exactly right. FiberMark did help us build some capability. It wasmore box wrap that came, I think, as an addition from the FiberMark side of the -- so we had folding carton before. But we are happy with assets that we have in our portfolio and their ability to deliver the volume and the returns that we expect from them. Yes.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Bill McCarthy for any closing remarks.

Okay. Once again, thank you all for your interest in Neenah today. We'll be presenting tomorrow at the Jefferies Industrials Conference in New York, and hope to see some of you there. As always, please reach out to me at any time if you have any questions. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect, and enjoy the rest of your day.