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Ladies and gentlemen, thank you for standing by and welcome to the Neenah First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. And please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Bill McCarthy, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you for joining us for Neenah's first quarter 2021 earnings call. We issued a press release covering financial results yesterday afternoon, and hopefully many of you who've had a chance to review that information. On the call with me today are; Julie Schertell, our Chief Executive Officer; and Paul DeSantis, our Chief Financial Officer.

Thanks, Bill. And good morning, everyone. Financial results for the first quarter outpaced our plan, demonstrating strong momentum and continued demand increases in both of our business segments. Technical Products sales increased 10% over the prior year, and our Filtration business delivered a quarterly record in both sales and profit. Fine Paper and Packaging revenues grew 8% versus the fourth quarter and have grown sequentially in each of the last three quarters, putting us right on track to achieve or exceed 2021 revenue target. Consolidated net sales of $227 million were up 10% from the fourth quarter, though still down slightly versus last year, due to the expected slower recovery of Fine Paper and Packaging. Adjusted operating income of $26 million was up significantly from $21 million in the fourth quarter, and we're just short of last year, while adjusted earnings per share topped $1 for only the second time in the past 11 quarters with improving volumes and disciplined cost management. Operating margins expanded in both segments to mid-teen levels.

Thank you, Julie, and good morning. Both business segments delivered another sequential quarter of improved sales, earnings and margins. Versus the fourth quarter of 2020, sales were up 10%, adjusted operating income grew 25% and margins reached the mid-teen mark. Our cash generation remains strong, and we ended the quarter with liquidity of just under $200 million. We also closed on ITASA in early April, and financed this acquisition with a more favorable Term Loan B. As you will see later today in our 10-Q we've modified the way we group our Technical Products category to better reflect our alignment with ITASA, Filtration, which remains our largest business will represent over 40% of segments sales. Our release liner and digital transfer business now including ITASA, will form the core of a new specialty coatings sub segment. Our third grouping is Industrial Solution comprised of tape and abrasive backings, along with a number of other categories. Specialty coatings and Industrial Solutions are each expected to represent about 30% of Technical Products sales. Turning to financial results in the first quarter, Technical Products sales of $145 million increased 10% from the first quarter of last year. The volume-driven growth was led by Filtration, which delivered record top and bottom-line performance. Filtration sales grew more than 20% with strength across all end markets. Revenues in the quarter also benefited from a stronger euro. So this was largely offset by lower selling prices in the quarter. Adjusted operating income of $20 million was up more than 20% from $16 million in '20. Driven by higher volume, continued spending discipline, good manufacturing performance and favorable foreign currency translation.

Thanks, Paul. I'll wrap up with some comments on our strategy and the actions we're taking to execute it. I've mentioned that we're focused on extending our presence in growing markets, both organically and through M&A. We've identified four target growth platform. Filtration, Specialty Coating, Engineered Materials and Premium Packaging. These platforms are made up of a large, growing, profitable and defensible market that align with our manufacturing technology, leverage our material science expertise and share common customers and pass to market. The recent acquisition of ITASA is just one example of how we're building out these growth platforms. ITASA is a leading manufacturer in the multibillion-dollar global release liner market, providing as a new large addressable market opportunity. Release liners are used in a diverse set of end-use categories, such as labels, hygiene, tape, industrial, medical and composite, making ITASA well positioned to capture growth in multiple avenues. ITASA is also well positioned geographically with a strong market presence and state-of-the-art technology. Historically, the release liner market has been resilient throughout economic cycles. Going forward, the market's anticipated growth is supported by several key macro trends, such as the growing demand for medical and hygiene supplies, increased labeling and shipping and lightweighting of products through the use of composites. ITASA has demonstrated a strong track record of growth and margin expansion, with historical growth of around 8% annually. Strategically, this acquisition provides a meaningful foundation in release liners from which we can build upon both organically and through future acquisitions with overlapping customers and end markets, as well as complementary technologies and supply chain, we're excited about how this new platform integrates with our core business. One of the most compelling aspects of this transaction is the talent and leadership team of ITASA. I'm very encouraged by our early integration effort and the potential value we'll create together as one team. Integration is well under way, and we anticipate about $4 million and the current synergies, coming both from commercial and cost opportunities. For Neenah as a whole, we're targeting to deliver average top line growth of around 5% annually, with a faster bottom line growth rate as our margins continue to expand. M&A will continue to be a key component of our strategy, combined with a number of catalysts in place to drive organic growth. Let me talk about some of these next. From a top line perspective, with investments and resources biased toward our core growth platform, we expect to accelerate our organic growth rate with an improving portfolio mix. In Filtration, we've seen strong results across all end markets. While transportation filtration remains very strong. Our air, water and industrial filtration business is growing in double-digits and represent a large market opportunity. We'll continue to invest to extend our technologies and expand our presence in these complementary filtration markets. I talked about the opportunities we have in Specialty Coatings with ITASA and with our digital transfer business. Our third platform, engineered materials utilizes some of our most specialized material technologies in a growing market. This business is growing double-digits top line and bottom line with future growth supported by recent investments that will increase our capacity. While our growth will come disproportionately from Technical Products, which is now 70% of Neenah. We're also successfully growing in Premium Packaging and Consumer Products. I mentioned earlier a few of these recent successes that are driving growth in these areas. Finally, I know that all four of our targeted growth platforms benefit from favorable macro trends, like the need for improved air and water quality, an aging population and a growing preference for sustainable products. Innovation is also a key catalyst that will add to our growth rate, always a part of our focus. I'm encouraged by the direction we're heading under our new Global Head of innovation. We've aligned our R&D teams to leverage their knowledge and skills across Neenah, and are tapping into employees and customers for input, insights and ideas. This will allow us to identify and act more quickly on opportunities to unlock even greater value with existing and new customers and end market. And I expect our pace of development to continue to increase over time. Turning next to margins. We expect both segments ultimately to achieve sustainable mid-teen EBIT margins. Margins will benefit from an improving and diversified mix as our faster growing and more advanced products tend to be the most profitable as our performance this quarter demonstrates. And our innovation efforts will also be pointed to these higher margin products in markets. The Neenah operating system is another way we'll continue to drive meaningful and sustainable margin improvement. As a reminder, this global manufacturing initiative is based on lean principles. And we've recently begun implementation at two of our largest facilities. Thus far, results have exceeded our expectations. And ultimately, we expect to unlock $20 million of value annually and support our employees and customers with improved safety, quality, delivery and cost. As I said in our last call, none of this would be possible without the right people. I'm pleased with our talent and with a culture that makes safety the top priority if result oriented with a strong bias to speed, and it's collaborative and inclusive. We started off the year strong with our growth and margin engines delivering ahead of expectations. In the near-term, we are facing inflationary headwinds, and we're taking actions to overcome these just as we have historically, we have a strategy with clear catalysts and initiatives under way that will create long-term value and continued Neenah's transformation into a faster growing more profitable specialty materials company. Before we open the line for questions, I'd like to thank Bill McCarthy, who has been our Investor Relations leader from the start, and with over 66 quarters of earnings call experience with Neenah. In addition to IR, Bill has been involved in multiple areas in Neenah and we have valued and benefited from his expertise, guidance and life, internally and externally. On our next call, we'll introduce Kyle Anderson, who'll be taking over the IR function, and his contact information is on our website. Kyle has deep and broad experience with Neenah. And I'm confident he will also be highly effective in this role. I'd now like to open the call for questions.

Hi, this is Julie and Paul. I don't know if we have a bad connection. But if you can hear us ask questions, we're here and available to answer.

Yeah, hi. Can you hear me?

Yeah.

I can.

Very sorry, I don't know I never get that of what happened here. It's Pete Lukas of CJS for Jon.

Okay.

Hey, Pete.

Hi, Pete.

How are you? Congrats on the quarter. You answered a lot of the questions and appreciate that. Just wondered if you could talk a little bit how demand is trending in April and May? And if you've seen any surprises, either positive or negative on the demand side.

You know I would say we're continuing, it's a little bit different by segments. We don't give formal guidance, obviously. But we continue to see recovery in Fine Paper and Packaging just as we expected more so in the Consumer Products side and Packaging, and still a little bit lagging on Commercial Print. And then Tech Products has really recovered from any impact from COVID and is continuing strong demand just as we saw in the first quarter.

Great. And in terms of Filtration, usually you negotiate those prices at year end, do you think you'll be able to pull that forward given the current environment?

That is the question of the day. You know, the team in both segments have announced and implemented pricing. And you're exactly right, the ones that have a little bit more of a lag for us typically are in Filtration, because we have annual agreements, we're in a pretty unprecedented environment. And so we're working closely with customers during this time to see what different approaches that we may use. But the pricing we've announced we've pulled through, it's been a fact, it's delivering value, just as we expected. And you know, over time, there might be some timing differences here we have a history of recovering input costs, we're expecting the same thing with these input costs escalation. The other thing I would tell you, because it's so condensed and so fast in this year, we're really focused on how we close that gap, not just with pricing, but with incremental volume, with an improved mix in the growth platforms we've talked about with cost reduction efforts, with our Neenah operating system efforts as well as pricing.

Great. And then I guess, last one for me sticking with Filtration, given that you're having a record quarter, are you starting to fill up the Appleton capacity now?

No. Our Filtration business is strong across all of the categories in which we compete, Transportation Filtration, Water, Air Filtration, Evaporative Cooling, Industrial Air. So really strong demand signals that we're getting. And we've talked about in the past, we don't manage, you know, buy asset as much as we do with the system. So we do make trade off really excited to thrill with the margins and demand in that business. But I would tell you, as far as our North American Filtration, Transportation Filtration business, it is not yet delivering and where we expect and it is still a drag on our financials. So a record performance, but it's not really being driven out of our North American Transportation Filtration.

Very helpful. Thank you very much.

Sure. Hi, Chris. We can see your name on the screen, but I don't know if you can hear us.

Hi. Can you hear me?

I can.

Now, we can.

Sorry, this is a long day. But I didn't get prompted. So I apologize.

No problem -

Congratulations on a strong start to the year. Bill, thanks for all the help and good luck in retirement. I'm going to miss you. I guess just to start with the demand, I get around Filtration that Julie was talking about, you know, how much of that is maybe pent-up demand? Or versus maybe, you know, change in the market and can you just - has COVID changed the market to a higher growth rate in some of those end markets that you're working with you know Filtration, ? Thanks.

Well, I think there's, you know, there's some great macro trends, particularly in areas like Water Filtration and Air Filtration, Indoor Air Pollution Control, Indoor Air Quality. So those macro trends are, I think, maybe escalated coming out of COVID just because there's a heightened awareness in all the populations, as far as Transportation Filtration, we're not seeing a significant amount that's pent-up inventory or pent-up demand at this point, it continues to recover and has recovered nicely. There's also a small amount of facemask in there that we didn't have last year, we're doing about $4 million a quarter, a facemask and so it's small in total. What it does, though, is really provide another avenue and entry into Indoor Air Quality, Air Pollution Control, Industrial Air and cemented Neenah as a strong provider technically in that market.

And I guess just to follow-up on that. You know you talked about the expansion of market. Are you already started into that or that you know I guess can you just I know that you just bought those online last year? So can you just explain the higher power, higher process? Thanks.

Sure. So the easiest, you know, penetrating the market is never easy, but the easiest place to do it is where you have customer overlap. So that's where we started where we have customer overlap and path to market overlap. And so where we provide Transportation Filtration, historically, many of those same customers are also buying Indoor Air Quality Filtration Media or Air Pollution Controller, Industrial Air type of media. So that's where we started, we've continued to see nice demand, and we're continuing to our resources and investment into more of those focal areas.

Right. And I probably should have started with this. I missed some of the calls. I have a number of earnings today. So I apologize if there's any overlap with my question. But I guess just thinking about maybe last quarter what you said about sequential improvement, do you still expect that for the businesses the remainder of the year, or is the issues around raw materials, possibly impact that any demand trends, already worried about that with the escalating raw material prices?

So you're asking about demand sequential improvements or bottom line -

Yeah, yeah, no top line, but I guess just because of the rising input prices, have you seen any changes with the demand environment, because of those price increases?

The short answer is, there's no, we're not seeing that impact demand. You know, what I would tell you is Tech Product has pretty much recovered, you could see that in Q4 and Q1 from a demand standpoint, we expected to return to come some of our normal seasonality, which typically starts more front-end loaded and get a little bit softer, particularly in Europe in the summertime. I would expect that in Tech Products demand. And Fine Paper and Packaging, which is where we had intended to message continued sequential improvement, we're continuing to see that business come back. It's just that a more lag timeline because this is really driven by some things like advertising that comes back a little bit slower. But we're really seeing that comeback continuing throughout the year and a nice improvement and 50% of that segment, which is now Consumer Products and Packaging, and not solely dependent on Commercial Print, which is more lagging in the recovery.

Is that - was just on the packing side. Is that - are you benefiting from the e-commerce posts? And I guess how are you growing with new customers and actually this expand, you know, just talk a little bit about that growth?

Sure. Both in the Packaging and in Consumer Products, which are really where we have stronger market dynamics. We've had some really nice recent wins. Some of it is related to e-commerce, a lot of that is related to sustainability, environmental sustainability and our customers bias towards that and that's continuing to accelerate. So both in Consumer Products, we've been awarded new business that will start shipping significant new business or I wouldn't mention it, that'll start shipping in the latter half of this year. And then we've been awarded nice new business in our packaging area as well, primarily in the technology, beauty and spirit verticals. And that is driven by - some of that is driven by dotcom, particularly everybody on Amazon.

And then just around ITASA. You know can you just talk a little bit about, I know, you've just closed behind, but you know, the integration there. And I guess, how does it strengthen your go-to-market strategy? Can you discuss a little bit more of the benefits from the acquisition? Thanks.

Sure. So ITASA, we are in the process of early integration, it's going really well, as we talk about our growth platforms, one of those growth platforms a specialty coating, we do a lot of coating and saturation at Neenah. So the technology overlap, chemistry overlap, how we go-to-market is similar our supply chain, we have customer overlap. So some of the benefits as we work through integration, we're expecting about $4 million of synergies that will ramp in starting in the latter part of this year and be at that run rate by the back half of next year. It's really split between cost benefits in areas like transportation and warehousing and procurement, as well as revenue overlap, where we have a significant amount of opportunities in North America in particular, that Neenah does a lot of business if you think about our industrial segment, tape and abrasive, that's where we see a lot of common customers between tape and abrasive and release liners.

Great. And I appreciate that. I wouldn't get you on Appleton, but somebody already asked that question. But thanks for taking the question -

Yeah, it's been in the q center, yeah. Fair enough.

Thanks for taking the questions. And best of luck in Q2.

Thank you.

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

Okay. Thank you for your time today. It's been my pleasure to get to know many of you through the years. And I know I leave you in good hands with Kyle and Paul.