Good day, and welcome to the Neenah Q4 and Full Year 2019 Earnings Call. All participants will be in listen-only mode. [Operator Instruction] After today's presentation, there'll be an opportunity to ask questions. Please note this event is being recorded.I would now like to turn the conference over to Bill McCarthy, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to Neenah's 2019 fourth quarter earnings call. Joining with me today on the call are Chief Executive Officer, John O'Donnell; Julie Schertell, our Chief Operating Officer; and Chief Financial Officer, Bonnie Lind. John, Julie and Bonnie will provide comments on business and financial results for the fourth quarter in the past year. And after these prepared remarks, we'll open up the call for questions. As usual, I'll start with a few headlines.Fourth quarter sales were $214 million, down from the prior year as a result of soft market demand, the divestiture of a fine paper mill in late 2018, and a mid-year change with a major fine paper distributor. Margins and earnings, however, increased significantly in the quarter. Adjusted earnings per share of $0.87, grew 64% from $0.53 a year ago, while GAAP earnings of $0.92 per share rose 21%. Details on adjusting items for both the quarter and full-year along with the reconciliation to comparable GAAP figures are included in our press release.In closing, I'll note that our comments today include forward-looking statements and actual results could differ from these statements due to uncertainties and risks outlined both on our website and in our SEC filings.With that, I'd like to turn things over to John.

Thanks, Bill, and good morning, everyone. Looking back at 2019, I'm very pleased with what our teams accomplished. With external factors, challenging demand in many of our markets, our teams were focused on items within their control. These included in implementing long-term strategic decisions that will make us stronger in the years to come, as well as actions that had a more immediate positive impact in the year. The success of these activities can be seen in our results.First and foremost, we reinvigorated safety efforts and ended the year with our lowest quarterly recordable incident rate in almost two years. We delivered record free cash flow of $76 million and use this to reduce the debt by almost $40 million, and returned $37 million of cash to shareholders, through an increased dividend and modest share repurchases. We carefully managed costs and pricing activities and exited the year as promised on a more normalized basis with operating margins increasing over 400 basis points and finishing the year at double digits.And last but not least, return on invested capital, a key metric for us, also improved, rising about 30 basis points. While this metric has been pressured, it's always remained well ahead of our cost of capital and we're now near targeted double-digit levels.As we start off 2020, one of the things I most encouraged about is the potential of our new organizational structure. As you may recall, in December we announced a functional reporting alignment with our Global Head of Sales and Marketing, as well as our Global Head of Operations reporting to Julie as Chief Operating Officer. The intent of this change is to provide added focus to accelerate our top line growth rate and improve the speed and quality of our operational performance. For example, in sales, this change will allow our R&D teams to better utilize our many technical capabilities to unlock the potential of our global customers. While in operations, it will facilitate the global implementation of a Neenah operating system to drive continued improvements in safety, customer satisfaction, asset efficiencies, and cost reductions. You're probably aware there was another recent organizational announcement that there's a little closer to home for me. I'll talk about that later in the call, but now I'm pleased to introduce our Chief Operating Officer, Julie Schertell.

Thank you, John. It's my pleasure to join you and Bonnie on today's call. I'd like to begin by talking about some of the results and activities underway in each of our business segments. In Fine Paper & Packaging, our team took a number of actions to strengthen our leading market position we store and protect margins and position as better for the future. These included the sale of unprofitable and nonstrategic mill and Brattleboro, Vermont, at the end of 2018, and more recently a significant change in our relationship with a major distributor that was underperforming. While both actions negatively impacted the top line in 2019, we were clearly the right long-term move.Regarding the distributor repositioning, this began in the third quarter, and we've seen a positive response both from the market and in the performance of other distributors who represent our most valued fine paper brands. This has reaffirmed our confidence that the change will result in better support of our brands and consequently better business results. We’ve got several other initiatives underway to drive the top line in the segment. Recent premium packaging innovation efforts have delivered more environmentally preferred products as customers increasingly look for alternatives to plastic. We're seeing growing demand for our paper-based gift cards and our wealth positioned in this category with a unique asset and innovative market solution.We're also launching a recyclable wide-format signage portfolio that has an environmental alternative to competitive made styrene products and provide lower cost and use for customers. In addition to these packaging efforts, we're making new commercial print products with sustainable fibers to meet market needs, most recently introducing hemp-based products. And we’re improving our supply chain capabilities to reduce lead times and improve order management, engagement and efficiencies with all of our customers.Looking to the…

Thanks, Julie. Good morning, everyone. Fourth quarter results, again reflected improving margins and good cash generation. I'll review financial results for each of our business segments, and then finish with comments on corporate items and 2020 expectations.In Technical Products, quarterly sales of $124 million were down from $134 million in the fourth quarter of 2018. More than half of this decline was due to lower industrial backings in Asia resulting from rising nationalism and trade disputes in 2019. Currency translation due to weaker euro also contributed to $2 million to the decline. Partly offsetting these items were a higher value sales mix and higher net selling prices. The improved sales mix reflected increased sales of our filtration products.Operating income was $11.3 million in 2019, up from $6.7 million in the prior year with margins increasing over 300 basis points. After excluding adjusting items in both periods, income in 2019 rose $3.6 million or almost 60%, as a result of improved manufacturing efficiencies, the more profitable mix and lower input costs.Now moving to Fine Paper & Packaging. Quarterly sales of $90 million were down from $106 million at 2018. About a third of the decline resulted from the Brattleboro mill divestiture, with the rest due to lower commercial print volume, which was impacted by weaker market demands and the distributor change, we previously mentioned. Partly offsetting this were higher year-on-year selling prices and modest growth in premium packaging.GAAP operating income of $15.2 million increased from $14.1 million in 2018, which included a $3 million benefit from a favorable adjustment to the Brattleboro impairment loss. After excluding adjusting items, operating income in 2019 was $15.6 million, which is up $4.6 million from the prior year, primarily due to the net favorable impact from input costs and selling prices. Adjusted operating margins in…

Thank you, Bonnie. I'll begin by recapping three of our top priorities as we start the year. First is continued improvement in our safety performance. As John noted, we ended the year with one of our safest quarters in a long time. However, for the full year, we were still far from our world-class performance expectations.In 2020, we'll continue to build out our safety management and hazard identification system and we'll be engaging with DuPont Sustainable Solutions to learn from and implement their proven methodologies. Nothing is more important than ensuring our coworkers return home injury-free to their families each and every day.Next is accelerating our sustainable top line growth rate. We'll continue to pursue the organic opportunities we have in attractive growing markets like filtration, digital transfer and premium packaging. I shared earlier some of the success from our innovation efforts and the new products that we're launching. It's important to our organic growth efforts to maintain a vital innovation pipeline. And I'm very pleased with the progress we're demonstrating in this area.In addition to organic activities, we pursue acquisitions in growing and defensible categories that will add to our growth rate. I've been highly involved in our M&A process, which remains very active. We're focused primarily in technical products where there are opportunities to broaden our portfolio, specialty materials and technologies to meet the needs of expanding customer base. With any potential acquisitions, we ensure there's a clear strategic fit and touch points with our core competencies, and we have a disciplined process to make sure that our investment generates attractive financial return.Our third strategic priority in 2020 is to deliver meaningful manufacturing performance improvements. Under the leadership of our Global Head of Operations, we're in the process of developing a Neenah operating system and expect to implement…

Thank you, Julie. I recently announced my retirement as President and CEO of Neenah, effective in May. We've diligently worked on succession planning activities during the past couple of years, and I'm extremely competent in Julie's ability to successfully lead Neenah. I'm committed to working closely with her over the next few months as we complete the final steps of the plan to ensure a seamless transition. It's been an honor and a pleasure to lead this company in the past 10 years.Over the past decade, Neenah has delivered returns to our shareholders of almost 20% annually as we execute the strategies to transform into a more profitable and growing specialty materials company. While external conditions make some years more challenging than others, as you saw in 2019, our teams continue to move forward. As evidenced, the record of cash flows, improved margins and enhanced innovation pipeline delivered in the past year did not just happen by accident. Neenah is in a very good place today. Our competitive standing is solid, our financial position is strong, and we have a number of catalysts and capabilities in place to propel growth into the future. Importantly, Neenah also has a deep and experienced leadership team, and outstanding employees that have shown they understand what it takes to win.I'm grateful for my time here and for the support I've received through the year for my shareholders, our dedicated employees, and our Board of Directors. I'll be cheering for all of you as I watch Julie and her team unlock Neenah's endless potential in the years to come. Thanks for your time today. And I'll now open up the call for questions.

[Operator Instruction] Our first question comes from Steve Chercover with D.A. Davidson. Please go ahead.

Well, thank you and congratulations to both of you, John and Julie.

Thank you.

Thank you.

So, I guess, I'll start with the obligatory question about the coronavirus. Do you expect to impact either your sales or your supply chain?

I'll pick that one, Steve. I think the supply chain is rarely where we're seeing a little bit of an impact slowing in some of the ports, but we're just managing it very closely. We do very little revenues direct to China. And so while it's contained right now, we see very minimal impact.

Okay, great. Well, kind of keeping with China, the trade dispute last year, I think slowed global demand. And do you see that reversing course or should we just refer back to question one, which is not much impact?

Last year, in 2019, when you think about some of the impact that China had, it was really in the performance materials and in our backings category. And we had a significant impact. We're starting to lap that in the first quarter and in the second quarter of 2020, and would not expect that level of decline to continue. We also were somewhat impacted in our packaging business -- premium packaging. So when you think about luxury goods and the amount of those that go into Hong Kong, that had a negative impact on our revenue.

Okay. And then switching gears, maybe this is more for Bonnie. But from the remarks in the press release, you exited 2019 in much better shape than you started. So can we infer that the Q1 results for 2020 will have a similar improvement versus last year, kind of similar to the Q4 versus Q4 comp?

I think the similar part is why she's hesitating. There should be definitely an improvement.

Yes, Steve, as we mentioned in our prepared remarks, the input costs are going to be in the inverse of what at least what we expect -- in the inverse in 2020 is where they were '19, just like they were in the inverse of '19 versus '18. So we would expect that we would come in with significantly lower input costs in the first half versus the first half of '19, and then it'll flip.

Okay. I want to get to that. And then, also in the press release, I guess, what John said that you'll recommend capital efficient growth, and I guess Julie kind of addressed it. The end markets are growing so slowly. We kind of need bolt-on acquisitions in order to truly generate growth or maybe you can just elaborate some new product development.

We've talked about the catalyst for growth whether it's in transportation, filtration, digital transfer papers, packaging and so on. But Steve, you're absolutely right. The M&A is a critical component of our strategy to change the growth trajectory. And that process is, we talked about also in our prepared remarks, it’s very active. And you should definitely take into consideration that that's our big part of our future growth strategy. So yes, that's the short answer there.

Okay. And last question. Pulp is down so much year-over-year that I thought, I guess, it will be a tailwind. But that said, you're still talking about inputs higher year-on-year. So what is it that should drive that? Maybe you could tell us what are the commodities you have real sensitivity to?

So Steve, when you say year-on-year, so are you talking about 2020 versus 2019?

Yes, I would say like the full year average for market pulp or even …

For 2020?

Yeah, it should be lower than 2019?

Yeah. We expect it to be a fairly neutral environment. We don't expect an increase in input costs overall in 2020 versus 2019. We don't expect a big decrease here. We do expect them to be lower in the first half relative to the first half of the other years, and then higher in the second half relative to 2019, but overall neutral.

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

John, congrats on the retirement, Julie, on promotion, and looking forward to working with you. I wanted to drill down on the comments on the organizational changes in the projects you mentioned. First on the R& D kind of improvements, and then synergy unlocking there, and second, the global operating system. Have you quantified what you think those benefits might be both in growth and profitability? And are they just going to be costs associated with implementing those?

I would tell you we're still early in the process, John. And from Neenah’s operating standpoint, it's encompassing of more than just costs, its safety and quality and service and productivity as well as costs. We'll be talking more about it as we get further along in the process, but we're just now really starting that journey. We've always had cost reduction efforts in place. And so while that's not new, I do think this will unlock additional opportunities for us in the future. But we'll spend more time on the details of that as we get further along.

Okay. Great. Thanks. And then Bonnie, can you quantify just the impact of the distributor transition in Q4, if there was any, and if that's completely done as you enter Q1?

Yeah. So when you look at Fine Paper, we break the decrease in the top line of Fine Paper. We said basically a third, a third, a third. So a third of that is attributable to the Brattleboro divestiture. A third of it is attributable to general market conditions, lower weakness say in volumes, and then the remaining third is the distributor change. We do expect -- we've got it before that we think it's about a 2% top-line impact, maybe $0.5 million EBIT per quarter impact. But when you think that what that's going to be is a more severe impact early on, and then lessening as we go on until we wrap.

Okay. Is that’s through 2020. I’m sorry. Go ahead.

Yeah, just as a reminder, John. We implemented that in the beginning of the third quarter. So we have, as Bonnie said, the first two quarters of this year we'll be taking effect. But in the long run, and the team was very, very thoughtful about how they implement in the long run, our expectation is that the financial results and our market strength will be enhanced.

And then just the comment on Fine Paper margins, I mean, you ended the year on a really high note. Is that 17% sustainable as you head into the quarter given your comments on input costs and FX and other things that are going on? Just how we should think of it compared to Q4?

John, we've talked a lot about the impact of input costs over time. The expectations I think for Fine Paper was should be in that high-mid teens, so 14 to -- we've said 14 to 16, yeah, they over-delivered. And I think that's a lot of the Verativ piece. The team is doing a great job retaining the valuable brands in the marketplace, and that might be temporarily helping their margins a bit. But I would stick with the expectation of mid-teen margins for this business and it'll move through that range given the timing of the input costs.

Okay. Great. And then the last one that in terms of the capital structure, you mentioned refinancing with a higher principle, but what are your capital structure targets and goals for the cash you raised? Is this just M&A or was there other stuff that you're earmarking it for?

So our priority uses of our cash haven’t changed. And one, it would be organic capital that would be returning both growth and cost savings. Then M&A is a high priority for us. We've been delevering because we just want to get our balance sheet in the best possible position. No surprise that we liked dry powder because M&A, again, back to number two, is super important to us, and then we've been increasing our total shareholder return. So we don't -- we have $175 million of bonds right now. We don't know until we actually hit the market what the actual rate is going to be. We're thinking in the 5% to 6% range. And then the sizing will also be determined by the -- when we hit the market.

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

Great. Well, I'd like to thank everyone again for your interest in Neenah today. And as always, please reach out to me at anytime if you have questions. Thank you.

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