Q2 2019 Earnings Call

August 7, 2019

Good morning.

Welcome to the Nina corridor to <unk> earnings Conference call.

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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too.

Please note this event is being recorded.

I would now like to turn the conference over to Mr., Bill Mccarthy, Vice President 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 one with thoughts on the remainder of the year.

After these remarks, we'll open up the call for questions.

Let me start with 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 the impacts Recurrency and December sale of our gravel borough operation sales were 2%, lower mostly reflecting softer global and economic and market conditions.

Quarterly GAAP earnings of 80 cents per share compared to a loss of 29 cents last year.

2018 included $1.47 per share primarily for a noncash write down of Brattle borough following our decision to divest in 2019 GAAP earnings included non routine costs of 15 cents per share.

The majority of this was for accelerated depreciation and other non cash cost associated with plans to idle a fine paper machine and the third quarter as we consolidate and optimize our manufacturing footprint.

Excluding these items in both periods adjusted earnings per share of 95 cents. This quarter increased substantially from 69 cents 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.

Oh and 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 web site 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 has 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 were expecting.

A few examples from the quarter include an accelerating topline growth in key categories like filtration 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 up year on year input cost increases.

And finally, we substantially improved cash flow generation, enabling us to pay down over $20 million in debt.

[noise] 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 and 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 and backings.

Filtration sales in constant currency were up 8%.

In addition to the continued ramp up in transportation filtration with 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.

What 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 coding have less differentiated products to optimize their installed base. Our teams are working aggressively to restore the volume needed to fill our assets by customizing new product solutions.

Optimizing our market approach to Asia, and relentlessly pursuing additional volume opportunities with key customers.

So it's primarily due to lower volumes that were laid the fixed cost inefficiencies as we reduced operating schedules to manage production in line with demand.

As I mentioned earlier in this quarter, our pricing at cost control actions overcame year on your input cost increases of $4 million, which were split equally between the businesses pulp prices, while still up year on year are beginning to fall from year end peaks well cost for energy, particularly in Germany, and other chemical inputs are still elevated.

We also remain focused on improvement in distribution costs. They continued to be higher than they were in 2017 prior to the regulatory changes and we're seeing a benefit this year as rates have level, then appeared to be listening.

In some lines.

Operating margins increased significantly versus the first quarter as expected fine paper margins recovered more quickly.

And with EBIT margins near 15%, they're more in line with historical averages.

And technical products, even though pricing activity offset input costs and margins did improve they remain more pressure.

By volume fueled fixed cost inefficiencies.

Including effects during the ramp up of our U.S. filtration asset.

Finally, as I mentioned earlier, we generated substantial cash flow in the quarter carefully managed inventories and capital spending cash was used to reduce debt, helping us to maintain our strong balance sheet.

I said on the call in May that I was comping up our ability to improve margins as we go forward I'm glad to report that we delivered on that promise while working to address the near term volume challenges with today's weaker market conditions. We're also executing on our long term growth plans as we expand our U.S. filtration business.

Increase our presence in digital transfer products and grow in premium packaging.

I'll talk more about our outlook later in the call, but will now turn things over to Bonnie to cover second quarter financial results in detail.

John you're well Hello, everyone.

Oh 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 us dollar and the rest reflected lower volumes that were only partly offset by benefits of increased selling price and a higher value.

Operating income of 12.5 million compared to 15.8 million last year results and 2019 included $400000 of restructuring and other nonrecurring costs.

And in 2018, there was 1.8 million of cost mostly for a portion of the bridal partial impairment charge.

After excluding these items adjusted operating income of 12.9 million was $4.7 million last year.

Decreased sales and fix cost efficiencies were the major drivers along with higher SGN a unfavorable currency translation.

Partly offsetting these items were increased selling prices whichever came more than $2 million of higher year on your input cost.

And a more profitable mix and lower distribution costs.

Turning next to fine paper and packaging sales of 107 million were down from 116 million last year about three quarters of the decline resulted from the sale of our attleboro with the rest mostly due to lower commercial print volumes and a less favorable mix.

Helping partly offset these items were increased selling prices and 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 nonrecurring costs 2018 included over $25 million, primarily for the write down of Brattle borough following our decision to sell this nonstrategic business.

2019 included costs of 3 million with a <unk> majority for actions, we're taking to optimize our operations to maintain the attractive financial returns we see in this segment.

We continually analyze our manufacturing footprint and have determined that we can meet demand with one less asset by consolidating volume to our most cost efficient operation.

This is expected to generate savings of up to a million dollars per year.

We booked approximately 2 million of non cash charges in the quarter related to accelerated depreciation and an inventory write downs for this idle machine and we expect another 2 million it related costs in the third quarter at which point this will be complete.

Excluding non routine costs in both periods fine paper and packaging adjusted operating income was 15.9 million, which is down $800000 from the prior year. The decline was primarily due to lower volumes and a less favorable mix as selling prices were able to recoup $2 million an increase in cost in the quarter.

Oh live next to a few corporate items.

Consolidated <unk> expense was just under 27 million compared to 25 million last year.

Year to date spending was about 52 million in both years.

As you know is typically higher in the first half and I mentioned in our last call that it should average around 25 million per quarter, we'd expect to be just below that run rate in the second half.

Unallocated corporate SG night was 5.6 million compared with 5.1 million last year and slightly above our average expected spending of 5 million for the quarter.

Moving to interest expense quarterly interest expense of $3 million was down from 3.3 million in the prior year prior year due to lower debt levels.

Debt at the end of June was 224 million, which is down 23 million from March.

All of our debt is pre payable without penalties or fees and we're using excess cash flow to reduce borrowings against our revolving credit facility.

As a reminder, most of our debt is in 175 million dollar U.S. note. That's due to mature in may of 2021.

A book tax rate was 19% in the second quarter.

As we look at the second half of the year the rate is likely to be closer to 20% and 2018. The book tax rate was negative due to the impairment charge that I previously mentioned.

Ongoing cash tax rate should be well below book right and in the mid teens for the next several years as we can see prior period R&D credits.

We carefully manage our pension and retirement plans through the years and these plans remain well funded.

Cash contributions and payments for all post retirement plans were 4 million in the quarter.

And for the full year cash needs are expected to be around $15 million that compares with the associated expense of 9 million.

Cash outlays in 2019 should be $6 million below last year as a result of the previous actions weve taken.

Last year and our attractive returns on planned investments.

Cash from operations in the quarter was a seasonally strong 38 million and up from 32 million last year.

We continue to carefully manage our working capital and improved inventory efficiencies was a key driver of the increase cash flow.

We're also closely managing capital spending prioritizing those projects that deliver attractive cost savings.

And with weaker market conditions delaying growth investments.

Well as always continue to minimize spending on sustaining projects.

Second quarter capital spending of 5 million was down from 8 million last year and year to date, we've spent 9 million.

We typically spend more in the second half of the year with our annual maintenance Downs and currently expect 2019 capital expenditures of around 30 million, which is on the low end of our normal 35% of sales target range.

Well, let me say that Nina has maintained a very strong financial position.

Our leverage levels are conservative that the EBITDA below two times when we can easily utilize currently available excess capacity at compelling opportunities arise.

Our solid cash flows allowed us to reduce debt and is supported meaningful increases in our dividend through the years.

Consequently, our current dividend yield and payout ratio or both more in line with our targets.

We also have an approved share repurchase program that allows us to opportunistically buy back shares.

And last but not least we are disciplined internal decision, making processes with a clear capital allocation strategy is focused on generating the most value in a capital efficient manner.

With that I'll turn it back to EBITDA and wrap things up.

Thank you Bonnie.

I'll start off with a few thoughts about the remainder of the year.

External marketing economic conditions are selected to remain sluggish, especially overseas.

This volume impact will be felt more in our technical products business, where about two thirds of sales are outside of North America.

In addition to 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 the bottom line impact of over half a million.

We are responding to these market conditions in a number of ways first from a topline perspective, our sales and marketing teams are aggressively pursuing additional business that were more optimally use our available capacity.

The same time, our R&D teams are customizing new products to be more competitive in overseas markets, especially our backings grades.

Second we are 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 on Digitization as well as numerous near term activities underway across the company to generate savings and improved efficiencies.

As a reminder, we schedule our annual plant maintenance downs during the seasonally slower third and fourth quarters.

Well always carefully managing the cost of these downs, they're expected to have an impact of three to 5 million as a result of downtime and increased maintenance spending.

Further moderation in 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 than the first half. However, we will start to benefit in the second half from lower pulp prices and expect our pricing activity to fully offset the run up in these costs by year end. Consequently, we will enter 2020, and an improved and much more normalized 40.

[noise] speaking of making things better I'm pleased that Ron Lane joined our executive team in July as senior Vice President of operations, Ron has a proven track record and broad experience in specialty materials companies and global manufacturing operations. He brings expertise and leadership in the manufacturing improvement processes, and we plan to leverage at Neenah as we build on our commitment towards world class operational performance.

So you can see we're continuing to make meaningful progress as we emerged from a period, where our results have been pressured on multiple fronts.

With the addition of our filtration capacity.

The recovery of unprecedented input cost increases.

And the eventual rebound from softening global demand, we're well positioned to deliver continued improvement in our financial results, we've maintained a conservative balance sheet and meaningful cash generation.

We have the financial strength and flexibility to act on investment opportunities well continue to explore ways that can both add value and allow us to maintain responsible financial position, especially given todays ever changing external environment.

As I said on our last call, we never lose sight of the fact that our shareholders expect and deserve value from their investments and Nina.

Our teams are focused unrelentingly on.

Managing costs.

Strengthening our market position.

And providing our customers with winning products and outstanding service.

Our strategies are sound and are being executed with a disciplined internal decision, making process to drive capital efficient growth and restore our double digit return on invested capital.

We've invested for the long term and as a result have meaningful growth opportunities available and the organizational talent to unlock that potential for our company. Thank you for your time and I'll now open up the call to questions.

Thank you.

I'll now begin the question and answer session.

Again.

You asked a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then kids at this time, we will pause momentarily to assemble our roster.

And the first question comes from Steve Chercover from D.A. Davidson. Please go ahead Sir.

Thanks, and good morning, everyone.

Hey, good morning, Steve.

So could you please give us more details on the pending idling of the paper machine Where's that happening and what's the capacity.

Yes so.

Maybe I could even take a step back from that a little bit as you know fine papers been that business has been declining since.

1997.

Overall and capacity comes out in chunks, why the market and the business as a slower decline.

Overtime, so way, we manage our asset base is that we fill up.

Available capacity with marginal products Intel we can actually make a rational change in Poland asset out that'll happen in the third quarter up everything should be completed in the third quarter in regards to that transitioning happening.

Yes.

Expectation is that that will have a million dollar annual unpack for us and that will begin in the fourth.

The overall capacity of a of an asset 20000 tons is a is a good gauge.

From that standpoint, and again, our processes to fill it with marginal Intel it doesn't make doesn't justify running an entire asset our marginal business.

You shouldn't see it more.

Asset rationalization from fine paper for quite some time.

Okay sorry.

Oh I was writing do you see.

Million dollars quarterly benefit.

No both [laughter] side, you I'm glad you clarified before me, but what I did say as an annual impact of about a million dollars beginning in the fourth quarter, yes.

Okay, so million annually and that's.

To the positive.

Yes.

Okay. That's what I wrote approach miners were seasonally.

And then.

So is that just from.

Are there any more charges with it.

But we are operating rates be thereafter, and have an impact on head count.

Yes, we will be we will be fully.

Utilized so as you can imagine.

By moving all that on the other assets will be what I would consider chock a block in the in the fine paper side of the business, yes, when when we do idle a machine and take it out it will have an impact in Appleton that's.

So part of what part of the value as is we're moving to lower cost assets and part of the values were reducing the overall operating costs.

So Steve included in the onetime cost where they were mostly cost for accelerated depreciation. So thats why we said non comp cast there is some severance cost and some write downs of excess inventory.

But mostly non cash and then what we expect is another 2 million in the third quarter, because we're actually rating the depreciation over the remaining useful life of the asset so that $2 million in the third quarter will be all non cash.

Okay, two more many more to come at US and then sticking with paper did you get any benefit from the commodity freesheet price hike and is there any risk as the price hike fades.

Yeah.

We haven't announced any incremental increases since a small one that we had in the first quarter I think as was the last one.

Yes, we don't announce as often as the freesheet market does but when we do announce it usually in cadence with that that's just for the ease of our distribution customers and implementing price changes.

No. Our expectation also said were 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 any of the commodity goods.

Sure, Yes, and it was going to ask you can you remind us how many tons market pulp you purchased annually.

A quarter of a man.

Yes, a quarter of a man and mostly split kind of evenly between softwood hardwood yep.

The.

Okay. Thanks, and my last question is what's the operating rate of that the Appleton filtration machine.

Well were on plan, we talked earlier in the year about our ramp up plan. We're on plan for for this year in regards to.

Apple been and its ramp up.

The expectation is.

And when we talked about growth in filtration are our biggest challenge on operating.

Utilization has been in our Europe assets as we have seen some more slowing there, but we're on we're on our plan for Apple then.

Okay, Thanks, and one bonus question sorry.

I can now get nice interesting choice phrase I think you said you used the word nationalism.

As a.

You know usually for 18 years.

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 the impetus.

For probably moving economies.

Yeah, probably more keeping.

And I'm, not and I will even single it out a little bit more you know a significant portion of our bakkens businesses in Asia and a significant portion of her Asian business in China, and that's where we clearly see a disproportion amount of impact. So local purchases is what I am really talking about there.

Whether there is a devaluation of the currency or even significant local rebates to keep at local.

Those are those are the challenges that we're facing I just wrapped it up in that nationalism or felt good.

Okay. Thank you.

Thanks, Steve.

Our next question comes from John .

From CJS Securities. Please go ahead.

Good morning, guys nice job on the margin and cash flow given all that's going on in the world. Thank you for taking my question.

Thanks, John .

Bonnie what went into the increase that you had and how do you see that flush filling out going forward given or assuming that that was just the timing.

Jami couldn't quite follow I know it was yesterday, but what was the first part of that question you true called what.

What went into the increase that you now and how do you see that coming out going forward assuming that the increase was just timing.

Okay. So I mentioned that we had 52 million year to date NSG name, we had 52 million in ESG in a year to date 2018, so the timing for the quarter with just it just happened to be higher medical costs, we still look at $25 million a quarter going forward and thats expectation as were moving so.

Okay great.

Yes. Thank you and then a three to 5 million and maintenance down costs.

Is that any different from last year.

No no. That's I'd say, that's just a reminder, so sometimes I've been siphoned, sometimes I'd just remind us and that's just a reminder, that third and fourth quarters, we do have those downs.

We work hard to make sure what we anticipate is the actual spend during those time periods, but.

It is an event and just want to remind you of that that's okay understood 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 are at risk of that happening this year.

That's a 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 the cadence of the management of our inventory and I always say to the group here 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 continue to.

Key bar.

Working capital around that 50% range.

Okay, Great and then just on the idle machine I believe you said that was the Appleton facility are you keeping that in case things pick back up kind of be converted like you did with the filtration line or could even be sold at the you know assuming that it's actually mobile.

Yes, I don't have there's no plans for it to to be sold.

You know, obviously anytime you didn't take something to put its greater.

Better use we'd love to do that I don't there is no existing plants I'd hate for you to believe that today, what I would say is our fine paper business had seven assets as last quarter paving machines, making the revenue they needed today. They can do it on sex, that's where we said.

Today overall.

Okay Fair enough and then just.

A question on the M&A pipeline as you know what are you seeing out there in terms of valuations number of opportunities and on the flip side are there anymore.

Assets that you would.

Like to prune.

Yes, I think I think you've seen us diligently pruning and making sure that if there are assets that are out there and driving the value. We are and I don't see major changes in regards to that today as they were in them entering 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 flex flexibility. That's the internal part that I can control what I can control is valuation still remain fairly high we.

Have a an absolute commitment for real clarity as to why owning another company is going to make sense for us but.

We are out and we are engaged when we've got radar of companies that we continue to work with many of them.

As Weve just almost like all the acquisitions, we 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 its a little longer run by a much more resilient.

Process. If you will so it's still are.

Our highest use of cash is evidence for organic growth and we talked about a number the catalysts on the call.

But second is M&A and I were in great shape to if we find the best fit for US we are in great shape to act on it.

Great. Thanks, a lot.

Thank you Jeff.

Our next question comes from Dan Jacome from Sidoti <unk> Company. Please go ahead.

Yes, hi, good morning, two quick questions Hey, yeah. Thanks for taking my questions.

First on just to stay on the applicant real quickly. It sounds like you asked I just wanted to clarify are you still targeting 70 million revenue run rate.

The wine everything qualified with the customers that capacity is up 100% probably running is that still reasonable for you guys just thinking forward yep.

Yeah, the coupled with a total capacity use is still still there yes.

Okay, perfect and then I Didnt hear too much on the packaging line can you just give us like two or three tenants in your overall assessment.

Packaging portfolio, where you're seeing the most benefit I know, there's some box wrap and folding carton, maybe some color there and then if you can Ferdinand do you think there are some areas, maybe where you can where you can do a slightly better that was it.

Okay.

Happy to do that.

As a reminder, most of our.

Paper business is domestic.

From that standpoint, the packaging is not it also has a large global participation revenue. So that's that's some of the pressures that you might see especially when you talked about China little while ago.

I was just talking about the premium packaging I'm, sorry, I know, that's that's and I'm talking about the premium packages as well then so and I'll get to yours I just want to get my little commercial as I wrote that it got sorry, [laughter], okay, but gift card and folding carton are two areas that I that we are seeing a great deal of success gift cards are much smaller category, but.

Our real strength is in the ability to create a laminate that.

They flattened does a nice job of replacing plastic and a lot of applications and that's an area that we're seeing good market.

Enthusiasm regarding that and probably when we'll talk about more as we go forward folding carton.

Again anytime 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 good progress.

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

Sure there are two different things that you're exactly right Fibermark did help us build some capability. It was more box wrap that that.

Okay.

I think as an addition from the Fibermark shop side of that so we had folding carton before but we have yeah. We are happy with the assets that that we have in our portfolio and their ability to deliver the volume and the returns that.

We expect from them yes.

Okay, great. Thank you.

Thank you Dan.

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 will be presenting tomorrow at the Jefferies Industrials Conference in New York and hope to see some of you. There as always please are yet reach out to me at any time, if you have any questions. Thank you.

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

All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your telephone keypad to withdraw your question. Please press <unk>.

Star then two please.

Please note. This event is being recorded I would now like to turn the conference over to Mr. Bill Mccarthy, Vice President Vice President of Investor Relations. Please go ahead Sir.

Thank you and good morning.

Let me start with 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 operations sales were 2% lower mostly reflecting softer global and economic and market conditions.

Quarterly GAAP earnings of <unk> 80 per share compared to a loss of <unk> 29 cents last year 2018 included a $1 47 per share primarily for a noncash write down of Brattleboro. Following our decision to divest in 2019 GAAP earnings included non routine costs of <unk> 15 per share.

The majority of this was for accelerated depreciation and other noncash 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 <unk> 95, this quarter increased substantially from 69 in the first quarter, though 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.

Im very pleased with the progress our teams 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.

A few examples from the quarter include an accelerating topline growth in key categories like filtration and premium packaging.

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.

Sales in the quarter.

In technical products healthy filtration revenue growth was offset by lower sales in backing filtration.

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.

<unk> on the other hand, our technical products category that has 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 rise.

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 optimize their installed base. Our teams are working aggressively to restore the volume needed to fill our assets by customizing new product solutions.

Optimizing our market approach to Asia, and relentlessly pursuing additional volume opportunities with key customers.

Turning to Neenah is bottom line adjusted operating income up $23 million was up almost $6 million from the first quarter, though still down when compared to prior year. This was primarily due to lower volumes and related fixed costs inefficiencies as we reduced operating schedules to manage production in line with demand.

As I mentioned earlier in this quarter, our pricing and cost control actions overcame year on year input cost increases of $4 million, which was split equally between the businesses pulp prices, while still up year on year are beginning to fall from year end peaks, while cost for energy, particularly in Germany, and other chemical inputs are still.

Elevated.

We also remain focused on improvement in distribution costs. They continue to be higher than they were in 2017 prior to the regulatory changes that were seeing a benefit this year as rates have leveled and appear to be loosening in some lanes.

Operating margins increased significantly versus the first quarter as expected fine paper margins recovered more quickly and with EBIT margins near 15%, they're more in line with historical averages.

In technical products, even though pricing activity offset input costs and margins did improve they remain more pressured by volume fuel fixed costs inefficiencies.

Including FX during the ramp up of our U S filtration asset.

Finally, as I mentioned earlier, we generated substantial cash flow in the quarter and carefully managed inventories and capital spending cash was used to reduce debt, helping us to maintain our strong balance sheet.

I said on the call in May that I was confident of our ability to improve margins as we go forward and glad to report that we delivered on that promise.

While working to address the near term volume challenges with today's weaker market conditions. We're also executing on our long term growth plans as we expand our U S filtration business increase our presence in digital transfer products and grow in premium packaging I'll talk more about our outlook later in the call, but we'll now turn things over to Bonnie to cover second quarter final.

Results in detail. Thank you anytime Youre welcome Hello, everyone 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 $400000 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.

Right.

After excluding these items adjusted operating income of $12 9 million was $4 7 million below last year.

Decreased sales and fixed cost 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 cost.

And the more profitable mix and lower distribution costs.

Turning next to fine paper and packaging sales of $107 million were down from $116 million last year.

About three quarters of the decline resulted from the sale of plateau apparel with the rest mostly due to lower commercial print volume and a less favorable mix.

Helping partly offset these items were increased selling prices and growth in premium packaging.

GAAP operating income of $12 9 million in 2019 compared to $8 $8 million loss in the prior year.

Periods included significant nonrecurring costs 2018 included over $25 million, primarily for the write down of Brattleboro. Following our decision to sell this nonstrategic business 2019 included costs of $3 million with the majority for actions were taken to optimize our operations to maintain.

The attractive financial returns we see in this segment.

We continually analyze our manufacturing footprint and have determined that we can meet demand with one less asset by consolidating volume to our most cost efficient operations.

This is expected to generate savings of up to $1 million per year.

Booked approximately $2 million of noncash charges in the quarter related to accelerated depreciation and inventory write downs for this idled machine and we expect another $2 million of related costs in the third quarter at which point this will be complete.

Excluding non routine costs in both periods fine paper and packaging adjusted operating income was $15 9 million, which is down $800000 from the prior year.

Decline was primarily due to lower volume and a less favorable mix as selling prices were able to recoup $2 million of increased input costs in the quarter.

I'll move next to a few corporate items.

Consolidated SG&A expense was just under $27 million compared to $25 million last year year to date spending was about $52 million bulk years.

SG&A is typically higher in the first half and I mentioned in our last call that it should average around $25 million per quarter, we would expect to be just below that run rate in the second half.

Allocated corporate SG&A was five 6 million compared with $5 1 million last year and slightly above our average expected spending of $5 million per quarter.

Moving to interest expense quarterly interest expense of $3 million was down from $3 3 million in the prior year prior year due to lower debt levels.

At the end of June was $224 million, which is down 23 million from March.

All of our debt is pre payable without penalties or fees and we're using excess cash flow to reduce borrowings against our revolving credit facility.

As a reminder, most of our debt and 175 million dollar U S. Note. That's due to mature in may of 2021.

Our book tax rate was 19% in the second quarter as we look at the second half of the year the rate is likely to be closer to 20%.

In 2018, the book tax rate was negative due to the impairment charge that I previously mentioned.

Ongoing cash tax rate should be well below book rate and in the mid teens for the next several years as we consume prior period R&D credits.

Okay.

We've carefully managed our pension and retirement plans through the years and these plans remain well funded cash contributions and payments for all post retirement plans were $4 million in the quarter and for the full year cash needs are expected to be around $15 million.

That compares with the associated expense of $9 million.

Cash outlays in 2019 should be $6 million below last year as a result of the previous actions we've taken.

Last year and our attractive returns on planned investments.

Cash from operations in the quarter was a seasonally strong $38 million and up from $32 million last year.

We continue to carefully manage our working capital and improved inventory efficiencies was a key driver of the increased cash flow.

We're also closely managing capital spending prioritizing those projects that deliver attractive cost savings.

And with weaker market conditions delaying growth investments, while as always continue to minimize spending on sustaining projects.

Second quarter capital spending of $5 million was down from $8 million last year and year to date, we've spent $9 million.

Typically spend more in the second half of the year with our annual maintenance Downs and currently expect 2019 capital expenditures of around $30 million, which is on the low end of our normal 35% of sales target range.

I'll end by saying that Neenah has maintained a very strong financial position our leverage levels are conservative with that.

The EBITDA below two times.

We can easily utilize currently available excess capacity as compelling opportunities arise.

Our solid cash flows allowed us to reduce debt and supported meaningful increases in our dividend through the years.

Consequently, our current dividend yield and payout ratio are both more in line with our targets.

We also have an approved share repurchase program that allows us to opportunistically buy back shares.

And last but not least we have disciplined internal decision, making processes with a clear capital allocation strategy, that's focused on generating the most value in a capital efficient manner.

With that I'll turn it back to you John to wrap things up thank you Bonnie.

I'll start off with a few thoughts about the remainder of the year extra.

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 thirds 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 half a million.

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 the.

At the same time, our R&D teams are customizing new products to be more competitive in overseas markets, especially our banking's grades.

These actions will certainly improve volumes over time.

We're actively managing costs 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 are expected to have an impact of $3 million to $5 million as a result of downtime and increased maintenance spending.

<unk> to fully offset the run up in these costs by year and consequently, we will enter 2020, and an improved and much more normalized footing.

Speaking of making things better I am pleased that Ron Lane joined our executive team in July as senior Vice President of operations, Ron has a proven track record and broad experience in specialty materials companies and global manufacturing operations.

He brings expertise and leadership in the manufacturing improvement processes, and we plan to leverage at Neenah as we build on our commitment towards world class operational performance.

So you can see we're continuing to make meaningful progress as we emerge from a period, where our results have been pressured on multiple fronts.

With the addition of our filtration capacity the.

The recovery of unprecedented input cost increases.

And we have the financial strength and flexibility to act on investment opportunities. We will continue to explore ways that can both add value and allow us to maintain responsible financial position, especially given today's ever changing external environment.

As I said on our last call never lose sight of the fact that our shareholders expect and deserve value from their investments in neenah.

Our teams are focused unrelentingly on managing costs, strengthening our market positions and providing our customers with winning products and outstanding service or.

Our strategies are sound and are being executed with a disciplined internal decision, making process to drive capital efficient growth and restore our double digit return on invested capital.

Thank you we will now begin the question and answer session again to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star and then two at this time, we will pause momentarily.

To assemble our roster.

And the first question comes from Steve <unk> from D. A Davidson. Please go ahead Sir.

Thanks, and good morning, everyone.

Hey, good morning, Steve.

So could you please give us more details on the pending idling of the paper machine.

Is that happening and what's the capacity.

Yes so.

Maybe I could even take a step back from that a little bit as you know fine paper's been that business has been declining.

1997, overall and capacity comes out in chunks.

While the market and the business as a slower decline.

Overtime, so way, we manage our asset base is that we fill up available.

Available capacity with marginal products until we can actually make a rational change in pulling an asset out that'll happen in the third quarter or everything should be completed in the third quarter in regards to that transitioning happening.

Yes.

Expectation is that they don't have a $1 million of annual impact for us and that will begin in the fourth quarter.

The overall capacity of of an asset 20000 tons is a good gauge.

From that standpoint.

Again, our processes to fill it with marginal until it doesn't make it doesn't justify running an entire asset a marginal business.

You Shouldnt see more.

Asset rationalization from buying paper for quite some time.

Okay sure.

I was writing did you say.

Quarterly benefit.

No.

Got you I'm glad you clarified it for me, but what I did say as an annual impact of about $1 million beginning in the fourth quarter, yes. Okay.

Okay, so $1 million annually.

So the positive yes.

Yes.

Okay. That's what I wrote approach monitors were seemingly.

And then.

So is that just from.

Are there any more charges with it.

What were your operating rates be thereafter, and does it have an impact on head count.

Yes, we will be we will be fully.

Utilized so as you can imagine.

By moving all of that on the other assets will be what I would consider chockablock in the fine paper side of the business, yes, when when do we do idle a machine and take it out it will have an impact in Appleton.

So part of what part of the value as we're moving to lower cost assets and part of the values, we are reducing the overall operating costs.

So Steve included in the onetime costs were they were mostly cost for accelerated depreciation. So that's why we said non cash there is some severance costs and some write downs.

<unk> inventory.

But mostly noncash and then what we expect is another $2 million in the third quarter, because we're accelerating the depreciation over the remaining useful life of the asset to that $2 million in the third quarter will be all noncash.

Two more.

More to come at US and then sticking with paper did you get any benefit from the commodity freesheet price hike and is there any risk as the price hike fades.

Yes.

We haven't announced any incremental increases since the <unk>.

Small one that we had in the first quarter I think was the last one.

We don't announce as often as the free sheet market does but when we do announce it's usually in cadence with that that's just for the ease of our distribution customers and implementing price changes.

Our expectation also level like I said, we're not like the commodity in that way as.

Input costs continue to decline.

A 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.

Yes, and I was going to ask you can you remind us how many tons of market pulp you purchase annually.

A quarter of a million dollars a.

Quarter over $1 million, and mostly split kind of evenly between softwood and hardwood.

Dean.

Okay. Thanks, and my last question is what's the operating rate of the Appleton filtration machine.

While we're on plan when we talked earlier in the year about our ramp up plan were on plan for 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, which have seen some more slowing there, but we're on we're on our plan for Appleton.

Okay, Thanks, and one more.

<unk> question sorry.

Now good nice interesting choices.

Craig I think you said used the word nationalism.

Yes.

Yeah.

Yes.

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 Boeing economies, yes.

Yes, probably more keeping.

And I will even single it out a little bit more.

A significant portion of our banking businesses in Asia, and a significant portion of our Asian business is China, and that's where we clearly see a disproportionate amount of the impact. So local purchases is what I'm really talking about there.

We don't know whether there is a devaluation of the currency or even significant local rebates to keep it local.

Those are those are the challenges that we're facing I just wrapped it all up and that nationalism word felt good.

Okay. Thank you.

Thanks, Steve.

Our next question comes from John Kim Lincoln from CJS Securities. Please go ahead.

Good morning, guys nice job on the margins and cash flow given all that's going on in the world. Thank you for taking my question.

Thanks Joan.

Bonnie what went into the increased SG&A and how do you see that flush.

Floating out going forward, given or assuming that that was just the timing.

Johnny couldn't quite solid I know it was SG&A, but what was the first part of that question.

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 had $52 million year to date in SG&A, we had $52 million in SG&A year to date 2018, so the timing for the quarter with just it just happened to be higher medical costs, we still look at $25 million a quarter going forward and thats the expectation is where movements.

Yes. Thank you and then the $3 million to $5 million in maintenance down costs is that any different from last year.

No.

Just a reminder, so sometimes I am insightful and sometimes I'll just remind.

As 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 periods.

But it is an event and just wanted to remind you of that that's all okay understood 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 a 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 here 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 continue to.

Keep our.

Working capital around that 15% range.

Okay, Great and then just on the idled machine I believe you said that was in the Appleton facility are you keeping that in case things pick back up kind of be converted like you did with the filtration line or.

You may even be sold assuming that it's actually mobile.

I don't have there is no plans for it to be sold.

Obviously anytime you can take something to put into greater better use we'd love to do that I don't there is no existing plants I'd hate for you to believe that today, what I would say is our fine paper business had seven assets in the last quarter of paper machines, making the revenue they needed today. They can do it on six that's where we sit today.

Today overall.

Okay Fair enough and then just.

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 I think you've seen us diligently pruning.

And making sure that if there are assets that are out that aren't driving the value. We are and I don't see major changes in regards to that today that mentoring. 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 flex flexibility.

That's the internal part that I can control what I cant control is valuation still remain fairly high.

We.

Have an absolute commitment for real clarity as to why owning another company is going to make sense for us but we.

We are out.

We are engaged when we've got radar of companies that we continue to work with many of them as we've 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 about more likely.

Parts of other companies or other companies that we deem to be more strategic.

It's a little longer run, but a much more resilient.

Process, if you will so it is still.

Our highest use of cash is for organic growth and we talked about a number of catalysts on the call.

But second is M&A and we're in great shape.

Find the best fit for US we're in great shape to act on it.

Great. Thanks, a lot.

Thank you Joe.

Our next question comes from Dan Jacome from Sidoti and company. Please go ahead.

Yes, hi, good morning, two quick questions.

Thanks for taking our 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 qualified with the customers that capacity is up a 100% fully running is that still reasonable for you guys just thinking forward.

Yes, the capacity total capacity uses still still there yes.

Okay, perfect and then.

Didn't hear too much on the packaging line can you just give us like two or three sentences in your overall assessment.

Packaging portfolio, where youre seeing the most benefits I know theres, some box wrap and folding carton.

Maybe some color there and then if it's even further do you think there are some areas maybe.

Where you can where you can do slightly better.

Okay happy.

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 in the revenue. So that's some of the pressures that you might see especially when we talked about China, a little while ago.

Just talking about the premium packaging I'm sorry.

I know that and I am talking about the premium packages as well then.

And I'll get to yours I just wanted to get my little commercial is got it alright, okay, but gift card and folding carton are two areas that we are seeing a great deal of success gift cards are much smaller category, but our real strength is in the ability to create a laminate that.

<unk> flattened does a nice job of replacing plastic and a lot of applications and that's an area that we're seeing good market.

Enthusiasm regarding that and probably one we'll talk about more as we go forward folding carton.

Okay.

For the accordion was the new portfolio add on from the fiber market acquisition, a couple years ago, If I got that so you guys generally.

Still I'm satisfied with the ROI, you're getting off those off those assets I know it hasnt been too long, but just curious on that.

Sure they are two different things.

You are exactly right fiber Mark did help us build some capability it was more box wrap that.

I think as an addition from the fiber market side of that so we had folding carton before but.

Yes, we are happy with the assets that that we have in our portfolio and their ability to deliver the volume and the returns that we.

We expect from them yes.

Okay, great. Thank you.

Thank you Dan.

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.

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