Ladies and gentlemen, thank you for standing by. And welcome to the Neenah Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to the speaker today, Bill McCarthy, Vice President, Investor Relations. Thank you. Please go ahead.

Great. Hello. And thank you for joining Neenah’s 2020 second quarter earnings call. With me today are Julie Schertell, Chief Executive Officer; and I have the pleasure of introducing for the first time, Paul DeSantis, our Chief Financial Officer. Julie and Paul will cover business activities and financial results for the quarter in detail, including impacts from the Coronavirus pandemic and actions we have taken to respond. In addition, we will share a few thoughts on our outlook for the rest of the year and following these prepared remarks, we will open up the call for questions. As usual, I will start with a few headlines. Sales in the quarter were $161 million down 36% versus prior year. This was in line with our communicated estimate than the drop in the U.S. economy. Operating income declined due to the lower sales, as well as from the impact of reduced operating schedules to manage inventories. On an adjusted basis, operating income was $0.5 million in the quarter down from $23 million last year. We booked $59 million of mostly non-cash adjusting items related to asset write-offs and impairments and other restructuring and non-routine costs. In the second quarter of last year, there were $3.5 million of non-routine charges. We will cover these items later in the call and complete details, along with a reconciliation to comparable GAAP figures can be found in our press release. GAAP EPS in the quarter was negative $2.98. Excluding these adjusting items, EPS was negative $0.08 and compared to $0.95 in 2019. Lastly, I will note that our comments today include forward-looking statements and that actual results could differ from these statements due to the risks outlined in our website and in our SEC filings. With that, I’d like to turn things over to Julie.

Thank you, Bill, and good morning, everyone. While we started out the year strong, there was no avoiding the significant impacts from the pandemic in the quarter and I am very pleased with how our Neenah team has responded. In this time of great uncertainty, we responsibly managed operating schedules and inventories, aggressively reduced spending and delivered strong cash flows, all while continuing to support our customers with the highest level of quality and service. I am confident with the work we have done we will emerge in a strong position. Last quarter, I shared our plans to address the pandemic covering five key areas, maintaining the health and safety of our employees, exceeding our customer’s expectations and working with them on future needs, driving operational excellence in manufacturing and reducing costs in all areas, preserving our strong liquidity position and continuing to execute our long-term growth strategies. I will update you on our progress in each of these areas. Our top priority is always the health and safety of our employees. With enhanced protocols and practices, we have implemented numerous changes to the ways we operate. Our employees quickly adapted to these changes while remaining focused on delivering the high quality and service our customers expect from us. Most importantly, they have done all of this while working safely. In fact, we reduced injuries by almost 30% this year, as we continue our progress to ensure that no one gets hurt while working at Neenah. Second, is serving the needs of our customers, who have also been impacted to various degrees by this year’s unpredictable environment. Neenah is known for our flexibility, speed, nimbleness and responsiveness in the marketplace. During these times of increased volatility, our customers value these characteristics more than ever and our global footprint has helped…

Thanks, Julie, and good morning, everyone. I’d like to start off by saying how pleased I am to be here at Neenah. Although starting in the middle of an unprecedented pandemic is not ideal, I have been impressed with the can-do attitude of the team and how well Neenah has responded to the crisis. I am confident we are on the right path. As I go through each segment’s results, I think, you will hear it’s a pretty consistent story. Significantly reduced demand due to COVID, coupled with our efforts to responsibly manage operating schedules and reduce inventories, lowered results. And we partially offset this with a broad range of cost improvements and benefits from lower input costs. We also focused on initiatives to deliver our targeted $50 million of cash flow benefits by the end of the year. A very important element of this has been working capital management, our efforts resulted in cash generation of almost $30 million from operations for the quarter and further contributed to our sound liquidity position. As Julie mentioned, we recorded $59 million in impairments and other non-routine charges, almost all non-cash. This was primarily triggered by the COVID impact on demand, which extended our U.S. filtration ramp-up curve. If you are not aware, in determining impairment the accounting treatment is to measure cash flows over a fixed period weighted to near-term results. To be clear, it’s a great business for us and our expectations continue to reflect filling this asset with profitable business. A list of adjusting items by segment is included in our earnings release. So I’d like to review segment results excluding these and then discuss a few overall items including liquidity and our recent refinancing. In Technical Products, net sales of $106 million were down 28% as the global…

Thanks, Paul. I will wrap up with a few comments on our outlook. As everyone knows, the global situation is still very fluid. However, there are some things that have more visibility and many areas under our control. So I will start with those. First, as usual, we will take our annual maintenance downs in the third and fourth quarters, while we continue to carefully manage spending, this work is required to ensure our assets continue to operate safely and efficiently, maintenance expense in the third and fourth quarters will each be about $1.5 million more than the second quarter. As global economies recover, input costs are projected to rise modestly and favorable year-on-year comparisons will diminish. The euro has strengthened recently and this will benefit us from a translation standpoint, with each $0.05 change moving quarterly sales by $2.5 million and operating income by $0.5 million. As a reminder, currency impacts are almost all in Technical Products due to our large European presence. Recent rates of around $1.18 compare to a rate of $1.10 in the second quarter. While those items are a bit easier to predict, the pace of demand recovery is more challenging, including impacts of seasonality and back-to-school demand. As noted earlier, I have been encouraged by the steady improvement in both segments that we have seen over the past few months. Third quarter sales will still be below prior year, but the percentage decline should be much improved. Transportation filtration is improving in Europe as their economies recover and miles driven increases and other Technical Products categories are picking up as well. Fine Paper and Packaging is also bouncing back from the steep decline in the second quarter, helped by their short supply chain. Looking beyond that, I expect the sequential improvement to continue. Technical…

[Operator Instructions] Our first question comes from Jon Tanwanteng with CJS Securities. Your line is open.

Hey. Good morning. Thank you for taking my questions.

Good morning.

Maybe first off, I was wondering if you could talk about the inventory situation and your customers, I know you mentioned supply chains in paper are short. But just, overall, did you see restocking tailwinds heading out of Q2 or into Q3, and if so, how long that may be sustainable for?

Yeah. So it’s a little bit different by segment. We -- I would say, customer inventories have right-sized for the most part. Where we see probably some inventories that are still a little bit heavy at our customers would be in our backings category and performance materials and so the recovery there might lag just a little bit as we head into Q3. But for the most part, I think, our customers have righ-tsized their inventory levels at this point.

Got it. Thank you. And then just in terms of general trends, have you seen any places where demand is still sluggish, maybe, like you said, backings inventories might still be high versus the general improvement that you have seen in many other places?

Well, I think, the first place that is, I would talk to you about is probably commercial print. The nice part about Fine Paper and Packaging is we have nice diversity even within Fine Paper and Packaging. So we have a commercial print part of that business and it’s driven by advertising. And as you recognize, as soon as the economies start to be challenged, many companies reduced their advertising budget and we are feeling that. And so when economies start to open up and advertising budgets start to open up, we expect that to rebound back. But in commercial or in Fine Paper and Packaging, we also have our consumer business, which goes to large retailers like Amazon and Target and office superstores, and that’s driven by school and crafting and teachers and we have packaging, premium packaging, both of those have been more resilient. So, commercial print is probably a little bit more challenged. The diversity gives us more opportunity to rebound because of the end-use markets and we have the leading position in the space, both in the B2B channel and the B2C channel, but that’s probably where we are feeling the most pressure. And then backings, as I mentioned, just from a -- that’s more from just what we talked about the customer stocking and from an inventory standpoint and I think that’s timing as much as anything.

Got it. Thank you. And that’s a good set for my next question, in prior calls, I think, you have discussed the possibility of demand destruction in the commercial print business, depending on how long the pandemic lasts. Are you seeing any evidence of that so far as companies are relying more on a digital offering and/ or is it maybe too early to tell there?

I think it’s too early to speculate at this point. I think the longer the duration and the deeper the decline, the greater the risk of just what you described moving to different advertising modes and that would be mostly from a commercial print standpoint. Like I said, what I like about our business is the diversity within Fine Paper and Packaging, that we have the consumer side that is healthier and rebounding a little bit quicker and the packaging side, which is a nice growth platform for us. We are also aggressively supporting customers to help with new products and programs to drive demand. And I think the other thing that’s important to us is that fine paper as a category has been under the pressure of secular decline since the mid-90’s. So that’s nothing new to us. We know how to manage this business and we know how to manage it well and it generates a lot of strong cash flows that we then -- we invest into other growth platforms and we will continue to manage it in that way so that it adds value for Neenah and for our shareholders.

Got it. And nice job on the cash flow. That was impressive work. One last one for me, just given the scale of cost reductions, both on the SG&A and on the manufacturing. How should we think of your incremental margins here as volumes recover?

Yeah. Hi, Jon. I will take that question. So a couple of things, one of the things we quoted was about $7 million of permanent cost savings that we expect to get on an annual run rate going forward. So we -- I think we actually quoted three sets of numbers. So we have $15 million worth of cost coming out of manufacturing and that was a combination of variable costs and some fixed costs that we really drove out. So that variable cost will stay out while volume is down, we are going to continue to control the fixed cost where we can. But one of the reasons, when you look at our overall margin in the second quarter of this year from last year is unabsorbed fixed cost and so it’s still a big number when volume is down as much as we are. So as we start to move up in volume, which we are expecting to do, we are going to see some margin improvement in that. So then talking about some of the things we have learned on a sustainable basis. One of the numbers we have talked about was $7 million of benefit. Of that, we think about $4 million of that is permanent in SG&A and we think about the other $3 million is going to be permanent up in manufacturing above cost of goods sold. So we didn’t experience a lot of that in the quarter because a lot of that got implemented during the quarter. So we will get some benefit from that as we roll forward, but the primary driver really seeing margin improvement, when we are down as much as we are, is improvements in volume.

Got it. I appreciate the color. Thank you.

Your next question comes from Steve Chercover with D.A. Davidson. Your line is open.

Thanks. Good morning, everyone. So the decline in paper is obviously a source of concern and I have heard you say that demand for commercial print should recover. But is there anything you can do to accelerate the migration towards printing, sorry, towards packaging and other uses, labels or is that kind of pushing on a rope if you try and accelerate things?

Well, no, not accelerating growth towards those end-use applications isn’t pushing on a rope. We really focus on the end user. And so as we think about, particularly in Packaging, we are selling to the brand manager. So if you think about that iconic Tiffany’s Blue brand that everyone knows or that maker smart label. We are selling to that end brand user because it’s their image that matters and that pulls demand. And so our selling process, how we go to market, the supply chain we use, the capabilities we have for colors and textures and supporting their brand imagery, that’s what really matters for Packaging. And just recently within the last few years, we implemented a design center within Neenah that helps create prototypes and design to help demonstrate for those brand users, specifically in packaging, how we can support their brand imagery, which is where they gained -- they gain equity in value. So there’s definitely effort that we can continue to drive from a Packaging standpoint. I think the pushing on the rope would be more if we tried to pretend there wasn’t secular decline in commercial print. And then there’s also additional effort, as we focus on plastic replacement alternatives. And I would tell you even more so during this time of COVID and where health is of major concern that oftentimes leads into environmental concerns very quickly for people and so plastic replacement alternatives, which Neenah is often the preferred alternative or our media is often the preferred alternative has been an innovation focus area for us as well.

Well, an effort you had against plastics. Good luck there. And then can you tell us about the financial opportunity within European face mask filtration, can you quantify the…

Sure.

…size of the market?

Sure. So for us, it’s not a significant amount of revenue, it’s probably up to $20-ish million annually. And that’s on our existing assets in Europe, we have not invested in new assets in Europe. I think what that really did for us is it really demonstrated our technical capabilities and how quickly we were able to develop a product and qualify a highly Technical -- it’s an N95-equivalent face mask product in Europe to meet the demand and then we have added throughput through organic projects to grow that. The nice thing about that business for us is two things, it’s disproportionately more profitable on the bottomline even in the topline impact it has. And secondly, it just helps accelerate our growth into greater air purification, which is a growth platform and market for us that we have continued to evolve into. And it’s very defensible, we have longer-term contracts to make sure that it stays with us for a while. So it’s been a nice win for Neenah. But I don’t see it as a significant big market for us in the future.

Okay. And then with respect to the North American automotive filtration, I assume you are talking about Appleton, well, I think, I know you are talking about Appleton?

Yeah.

Will you in the long run be able to achieve the original financial goals, I mean, when you take a charge, does that mean it’s no longer attainable or it’s just a longer ramp?

It’s really driven by the longer ramp. So we manage our filtration business like we do any business where we have redundant capabilities and we optimize the system versus optimizing a particular asset or facility. And so over the last few years, as we have unlocked latent capacity in our European facility and we have worked on responsibly managing entry into the U.S. and qualification has extended, we have optimized the profitability in that system versus a particular asset by loading some on our lower cost assets in Germany. Now I would tell you then what happened was when COVID hit and the decline in the market became more significant, and we did an accounting impairment test, it barely triggered the accounting impairments level. And then from an accounting standpoint, once you trigger that, it changes the calculation to an NPV calculation and then the number became much larger. But putting that accounting part aside, the important part for us is we are still bullish on the market, on the geography, on the asset, the footprint, our technologies, the customer support and engagement that we have. We hit a timing challenge because of the ramp-up it has extended and then COVID hit. But it’s a strong business for Neenah and a catalyst for growth and we expect to grow to the original sales of $70 million plus that we had and with attractive margins that support our overall Technical Products margins.

Okay. And the last two, I guess, we will call on housekeeping just because I am a slow writer. Do you say maintenance in Q3 and Q4 is $1.5 million higher each quarter than it was pre…

Yes. That’s correct.

…in the first half of the year? Okay. And then…

That’s shutdown driven.

And then the FX benefit, sorry, just repeat what you said there I guess?

Yeah. What we said was for every $0.05 change, we would pick up $2.5 million of sales and $0.5 million of profitability in the quarter in which that occurs.

And did you say that the euro delta was $0.08?

Yeah. So we closed the quarter at $1.10 million and so right now, the euro is trading in the $1.18-ish range. So if that were to continue through the entire quarter then would be $0.08 over $0.05 and you can do the math I guess.

Got it. Okay. Thank you. Be safe.

Sure. Thank you.

Thanks.

Our next question comes from Chris McGinnis with Sidoti & Company. Your line is open.

Good morning. Thanks for taking my question.

Good morning.

I was just wondering if there was -- yeah. Good morning. I was just wondering if there was more opportunities that you are seeing just like you went into the face masks, is there other opportunities that the pandemics opening up for you that maybe we have -- you haven’t talked about or can you just maybe think about, I guess, when you look at your product line, do you need to add more, is there opportunities to kind of grow to offset kind of what’s happening in the marketplace?

Yeah. I think there’s a couple of things, a couple of opportunities that the pandemic has opened up and we have been really focused on ensuring we don’t waste the crisis, both short-term and long-term. We talked about face masks and then more broadly, I think, that category of air filtration, where our technologies lend themselves well, to expanding into greater air purification efforts, whether that’s HVAC or industrial air, I think, I mentioned, a couple of those in my prepared remarks. Those are accelerating in demand. Those are for data storage is one of the end-use applications there. And then the other one that I think is worth mentioning is just what I touched on earlier, it’s the trend towards when health efforts and health concerns become larger share of mind, it’s quickly followed by environmental concerns. And Neenah is often the preferred alternative and so we are working closely to ensure we have the right paper-based gift cards, styrene alternatives, packaging and label applications to meet that demand. And then, lastly, there’s been this acceleration of people wanting to customize, whether that’s for their in-home use and apparel and furniture and things like that and our digital transfer products and new innovative products that we have launched on the natural fibers, which is a proprietary technology. That is an application that lends itself very well into those markets as well. So some of the macro trends have been accelerants that have been helpful and that will be helpful for Neenah in the longer term.

Great. I appreciate that. And I guess just with the expectation hopefully things start to normalize a little bit. I know you took out some capacity or made some rationalization in Q1, just kind of given the run rate, where would you need to do another step down or another round of rationalization to the network depending on where trends go on the client purpose there?

Yeah. We are always evaluating our footprint, and we -- I mentioned that, we are in the middle of implementing a Neenah operating system and a big part of that is improved productivity. And one of the larger mills that we are starting implementation in is one of our larger Fine Paper and Packaging mill. So there’s a lot of variables there. But what we have seen is that if we get to the point where we need to rationalize another asset, as much as I hate to do that from an employee standpoint, it’s been of value to Neenah from a bottomline standpoint, because it just means we are able to then switch volume to assets where we have redundant capacity and capabilities. So we will continue to manage that closely, and when I said earlier that, we know how to manage this business that’s in secular decline, I think, that’s been a part of it. We have been responsible in when we needed to move assets into and out of the system and we have even started assets back up when it made sense to do so.

Okay. Great. No. I appreciate that. Thanks for taking my question and good luck in Q3.

Thank you.

Our next question comes from Adam Silver with ArrowMark Partners. Your line is open.

Hey, guys. Just a housekeeping item in terms of revolver, I don’t know if I missed this during the call, but what was the balance at the end of the second quarter, how much LCs were drawn, what was the availability and then did I hear that right that it’s been paid down since?

Yeah. So the balance was around $10 million at the end of the quarter and it’s been paid down through liquidity that we generated in the month of July, so the balance is zero now.

Okay. What was the LCs at the end of the quarter?

The lines of credit at the end of the quarter, I will have to look that up, I don’t have that number handy right now.

Very low.

Very low, I would think. Yeah.

Okay. Thank you.

There are no further questions at this time. I will now turn the call back over to Bill McCarthy for closing remarks.

Okay. Well, once again, thank you for your time today. Please reach out to me if you have any questions and we hope to have the opportunity to talk to many of you at upcoming virtual conferences hosted by Jefferies, D.A. Davidson and Sidoti. Thank you again.

This concludes today’s conference call. You may now disconnect.