Good day, and welcome to the Neenah Q3 2019 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Bill McCarthy. Please go ahead.

Okay. Thank you, and good morning, everyone. On the call with me today are John O'Donnell, Chief Executive Officer; and Bonnie Lind, 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 prepared remarks, we'll open up the call for questions.I'll start with a few headlines. Excluding impacts from currency and the divestiture of our operation in Vermont last December, quarterly sales of $232 million were down 6% compared to last year. Adjusted earnings per share was $0.95, up 25% from $0.76 last year. GAAP earnings were $0.84 per share and also up from $0.75 a year ago. Details on adjusting items and a reconciliation to comparable GAAP figures are included in the press release.Finally, I'll note that our comments today may include forward-looking statements. Actual results could differ from these statements due to uncertainties and risks outlined both on our website and in our SEC filings. And with that, I'll turn things over to John.

Well, thank you, and good morning, everyone. As a result of the many actions our teams have underway, Q3 results versus prior year, again, demonstrated significant progress in a number of areas. Operating margins increased by over 250 basis points and are returning to more normalized levels. Earnings grew 25%, and operating cash flow was a very solid $33 million, up $10 million as we relentlessly focus on capital efficiencies. While our bottom line increased significantly as we closely manage costs and pricing initiatives, revenues reflected weaker market conditions in both segments.In addition, short-term results were negatively impacted by 2 strategic actions we've taken. As you should expect from our teams, we're working aggressively across the businesses to address short-term issues and position us for long-term success.In Fine Paper & Packaging, commercial print volumes remain under secular pressure. And higher-value products, like ours, even -- are even more pressured when prices are elevated. In addition, short-term results were negatively impacted by 2 significant strategic actions taken to strengthen our long-term position. First was the 2018 divestiture of our Vermont mill, reducing sales but improving our bottom line. And second was a more recent change to our market representation, which I'll talk about next.Our strategy has been to selectively maintain the very best distribution in each market we serve. And Neenah is the market leader, and we believe limited distribution of our well-known brands help support the value of these products and rewards the loyalty of our customers. However, one of our historically larger distributors radically changed their strategic focus, choosing to no longer actively promote premium Fine Papers.As a result, over the past few quarters, we've seen accelerating declines in sales through this distributor. While we recaptured some of this business through other customers, we recognize the need for a…

Thank you, John. Hello, everyone. As you heard, we delivered good bottom line results that translated into strong cash flows in the quarter. I'll review the financial results for each of our business segments and then finish with a few comments on corporate items.Starting with Technical Products, quarterly sales were $132 million compared to $142 million last year. Currency impacts from a weaker euro generated about 1/3 of the shortfall. Excluding this, sales were down 5%. And as John mentioned, lower backings in Asia accounted for most of the decline, though this was partly offset by growth in filtration and digital transfer media as well as benefits from increased selling prices and a higher value mix.Operating income of $9.5 million in 2019 increased 15% from adjusted income of $8.3 million last year. Adjusted income in 2018 excluded $2.6 million of net favorable items. Higher profits in 2019 resulted from lower input costs, higher selling prices and a higher value mix that more than offset negative impacts from reduced sales and production volumes and higher SG&A.Moving to Fine Paper & Packaging, sales of $100 million were down from $113 million last year. About half of the decline resulted from the Vermont mill divestiture, with the rest due to lower commercial print volumes, including impacts from the distributor change that John discussed and a less favorable mix.In addition, sales benefited from increased selling prices. Premium packaging sales were down slightly in the quarter, reflecting timing of orders as well as the slowdown in overseas markets, though this was partly countered by increased sales in our retail channel as a result of excellent performance during the back-to-school season.Operating income included about $2 million of nonroutine costs in both periods. In 2019, this was mostly for accelerated depreciation on the machine we idled in…

Thank you, Bonnie. I'll start off with a few thoughts as we look forward. As you might imagine, current global market and economic conditions make it difficult to predict future demand, and we've seen no indication that the situation will change significantly in the near term. Our teams are focused on what they can control, taking actions to drive added volume while prudently managing costs and capital. Looking ahead, our annual filtration maintenance down at Germany will occur in the fourth quarter, like it did last year, and we expect normal top line seasonality.Fourth quarter sales are typically the weakest of the year as year-end demand softens and customers manage down their inventories. We expect this to influence demand in both businesses, and Fine Paper & Packaging will also see a short-term impact from our change in market representation. As we've mentioned in past calls, this year, we expect to recover, at a minimum, the $10 million of input cost increases that we did not offset with selling prices last year. We're clearly on track to deliver against that forecast, which will allow us to enter 2020 on a much improved and more attractive margin profile.So let me wrap up. In the third quarter, our teams continue to demonstrate progress by increasing margins, delivering meaningful improvement in capital efficiencies and cash flows, strengthening our balance sheet by paying down debt and providing our shareholders with an attractive dividend. Our strategies remain sound and are being executed with a disciplined internal decision-making process. And catalysts and capabilities for long-term growth are in place as we grow in filtration, both gaining share in transportation filtration and expanding in other filtration categories; increase our global presence and product portfolio and digital transfer media; growing premium packaging to mitigate Fine Paper volume declines; and recover margins as we overcome last year's unprecedented run-up in input costs.Our customer support and competitive standing remains strong. And as the global demand recovers, we're well positioned to grow in a capital-efficient manner. From a peace of mind standpoint, our conservative balance sheet and meaningful cash generation give us financial strength and flexibility to weather unforeseen economic impacts, yet also allow us to act on strategic investment opportunities that can accelerate our growth rate and add value.We appreciate the talent and dedication of employees, the strength of our customer relationships and the support of our shareholders as we continue to emerge from a challenging period and unlock the potential of our company.Thank you for your time. I'll now open up the call for questions.

[Operator Instructions]. Our first question comes from Steve Chercover with D.A. Davidson.

I just got on the game show. So in Fine Paper, your sales were down sequentially $7 million, while EBIT was flat. So obviously, margins were up. And I'm just wondering we attribute that to better productivity or falling pulp? Because it doesn't sound like the machine closure really is a benefit until, I guess, Q4.

That's correct. The idling of the paper machine won't impact until Q4. We saw improved cost positions, clearly, as pulp came down. The stickiness of the pricing actions that we had in place before -- this is actually the first quarter where we've started to see an improvement over our pulp cost increases from the prior 2 years. So a lot of it has been that. And there was some mix enhancement as well. Don't want to leave out SG&A and distribution work because that's a lot of hard work activity. So it's a variety of areas that drove that. But we're now starting to see the pricing overcome the pulp. It's a big part of the margin restoration.

Yes. Because it occurs to me that of your peers who also buy market pulp, the benefits really only just started to accrue and should accelerate. So is it fair to say that, that would be consistent with your view in the way it should flow through?

Yes. I think -- so you would love to believe that as high as it goes up, it will come down. I don't know. A minute exercising isn't the same thing as a minute doing something you enjoy. So on the -- going downside, I believe we're going to have continued improvement in overall pulp. I also think it's a very challenging volume period for most of the markets where we participate. That in itself, you rarely see a lot of holding on to price when volumes are challenged. So it's going -- that's going to be one of the things that we're going to be very focused on as we move forward in the next 6 to 12 months.

Okay. And if I heard you correctly, John, and you're a pretty articulate guy, you said in Technical Products, you should be lapping most of the headwinds that you encountered in 2020.

Yes.

So does that mean we can start to see a modest revenue trajectory, absent some kind of unforeseen currency move that I wouldn't be able to predict?

Yes. That was my half-full guy. And I said I expect that from that standpoint because I think the impact that Asia had on us -- the significant impact that the Asia volume had on us this year, we're starting to see that being mitigated. So our expectation is that the impact that we've had from Asia will likely be completed. And we have growth categories there, as we talked about, our transportation filtration as we roll out the incremental capacity. And our digital transfer media is just doing very, very well there as well.

Okay. And just to try and parse out that $10 million tailwind as you recover costs that weren't recouped last year. I mean, is that separate of pulp? And then can you -- I know you sound like -- trying to sound like an analyst, give us the cadence and the split between the two segments? Like how much was captured this year? And how much is still yet to come?

Yes. So my $10 million that I'm referencing is the difference between the increases and the difference in selling price. So last year, we had $32 million increase in pulp, and we recovered $22 million in price. So then I gave you an IOU. This year, we're going to come in with significant price movements to make sure that we address that. Q3 was the very first quarter that we saw that impact. As a reminder, from a pricing strategy, Fine Paper has a lot of net pricing. So they tend to capture theirs earlier as they move it through. And that's why you saw a nice margin improvement in the last quarter and, again, in this quarter. Technical Products is a much longer recovery run, if you will. So you should expect that, I would say, in this quarter, more disproportionately associated to Fine Paper than tech going forward.

All right. And then finally, obviously, Q4 is seasonally weakest protectable products, coupled with the maintenance down at Germany. So stay tuned for 2020.

That's correct. I mean, Q4, we're not done yet. So I'm -- we're running all the way to the end of this one. It is definitely one of our weaker periods from that standpoint. And as a reminder, we always take our down in Germany in the fourth quarter. So it's just more of a reminder of the activity than anything else. We expect it to be similar to the prior year.

Our next question comes from John Tanwanteng with CJS Securities.

Can you be a little bit more specific in terms of what your expectations for input cost are in Q4 and also your ability to hold prices given the prospect of further moderation? When is your next price change expected to be?

Yes. So John, we've known you for a long time. So you know I hate the prognostication mode, but we're definitely on the decline. So if you look at -- actually, if you look at this year, our pulp pricing actually, this year and even going to next year, will still be higher than we were in '17 -- 2017. So I'm expecting pulp to continue to add to our margin restoration. So we said we're looking for double-digit margins in both of these businesses. Input costs, coming down.

We're down $5 million in the third quarter.

In the third quarter, overall. Around pricing activities, input costs is the largest driver for pricing efforts into the marketplace. So as they're coming down, there won't be any announced price increases from that standpoint and that we manage each of the -- our overall pricing in accordance with the competitive markets that we participate in. So there isn't any timing for when will it impact your overall pricing or your ability to retain pricing. It has to do with the competitive market we're in and those that we compete against. We are committed to ensure that we are at market levels from a pricing standpoint. And our expectation going into 2020 is that we'll continue -- both in the fourth quarter and as we enter into 2020, we'll continue to enhance and restore the margins that we've historically had in both of these businesses.

Okay. Got it. And just to expand on that, are you seeing that increased competitive pressure yet?

There's competitors out there every day, John, from that standpoint. I think just where we are today, we're holding on to pricing where it makes a great deal of sense. And in certain areas, yes, we've had significant pressure on pricing. But my expectations is net-net of all of that, margins will continue to enhance fourth quarter and going into next year. And our pricing activity should outstrip any of the cost elements that we're seeing.

Okay. Great. Just in terms of freight cost, I know those have been an issue for you over the past two years. As you look into 2020, I was just wondering how much do you pay out of marine freight every year? And is there an expected impact from this roll-in of IMO 2020 and how that might impact shipping rates?

Yes. I don't know the marine rates off the top of my head because -- which I would tell you right there that it must not be very much because, otherwise, I'd have it sitting in front of me from that standpoint, almost nonexistent in Fine Paper and very low from what we pay anyway going into 2020. So I don't expect that. But as a reminder, because you mentioned that freight has been a big issue because of -- we were up $8 million with the regulatory changes. We offset 2 of it with our policy changes, and we've seen rates come more in line. While we still think there's a minimal headwind of $2 million or $3 million overall than where we were back in '17 before the regulations, the teams have done a nice job of really pressing on the optimization of that freight.

Okay. Great. And then, Bonnie, I think you mentioned a timing impact in Premium Packaging. Can you size that and if you're expecting that to rebound?

Well, John, we typically expect that we have mid- to high single-digit growth in packaging, and yet, we didn't have any growth in the third quarter. So I would just say we still have the same annual expectation for it.

Okay. Great. What was it year-to-date just to -- if you have that?

I think it's at the low-single digit.

We saw the rates up, 2% to 3%.

Yes. Low single digit. So this is a business that's very -- and we've talked about it in the past. We use that real technical word, lumpy, as it follows order from that standpoint. We're trying to make sure that as we communicate our expectations for the category that we take a long-term perspective of its growth. And for us, the high-single digits is clearly where we see this business.

Okay. Great. And then Bonnie, one last one. What should the normalized depreciation, amortization look like as we go into Q4 and beyond once you lap this accelerated piece?

So once I lap that? I'm thinking $30 million.

Once you finish this idling?

Right. I'll just get that out. I'm thinking $30 million or so.

30? I'm Sorry.

I'm thinking $30 million.

Yes.

$30 million. Okay. Great. On an annual basis?

Well, that was just depreciation, not amortization.

Okay. Great. And the combined?

It would be another $8 million.

Yes.

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

Okay. Once again, thank you for your time and interest in Neenah today. As a reminder, we'll be presenting tomorrow at Baird's Global Industrial Conference in Chicago and hope to see some of you there. But as always, please reach out to me at any time if you have questions. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.