Bill McCarthy - IR John O’Donnell - CEO Bonnie Lind - CFO.

Steve Chercover - D.A. Davidson & Co. Dan Ducome - Sidoti & Company Jack O'Brien - CJS Securities.

Good morning, my name is Leah and I will be your conference operator today. At this time, I would like to welcome everyone to the Neenah Paper Third Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question-and-answer period.

(Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today November 5, 2014. Thank you. I will now turn the call over to Mr. Bill McCarthy, Vice President, Financial Analysis and Investor Relations. Please go ahead, Mr. McCarthy..

Okay. Thank you. Good morning everyone and welcome to Neenah’s 2014 third quarter earnings call. We released earnings yesterday afternoon and also posted backup data in an updated presentation in the Investor Relations section of our website.

Today after I recap a few headlines, John O’Donnell our Chief Executive Officer and Bonnie Lynd our Chief Financial Officer will discuss activities and financial results for the quarter in detail. As usual following these prepared remarks, we’ll open up the call for questions. Consolidated net sales were a record $231 million, up 8% from a year ago.

While this included sales from the Crane filtration business, which we acquired on July 1, it also reflected continued strong performance in each of our heritage businesses. Operating income was up an even more impressive 35%, reflecting benefits of both topline growth and cost improvements.

GAAP earnings per share increased 18% from $0.68 to $0.80 per share, while adjusted earnings grew 36% from $0.61 to $0.83. In 2014, adjusted earnings excluded $900,000 or $0.03 a share for integration and restructuring costs, mostly related to the recent acquisition.

In 2013, adjusted earnings of $0.61 per share excluded net benefits of $0.07, primarily for a one-time state tax credit. Adjusted earnings are provided to aid in comparability between periods, but our non-GAAP measure and are reconciled to corresponding GAAP figures in our press release.

Finally I’ll note that our call today contains forward-looking statements. Risks and uncertainties that could cause actual results to differ materially from these statements are outlined both in our SEC filings and in the Safe Harbor disclaimer on our website. With that, I'll turn things over to John..

Thanks Bill. Our teams again delivered very good results for the quarter. Revenues were up 8%, including the Crane acquisition and a solid 2% excluding this. The increased sales result of the volume growth increased selling prices and a growing mix of higher value products.

This topline performance was complimented by strong operating results, especially at refined paper mills. In addition, as we said on our last call, our large filtration outage was moved into the fourth quarter and that timing change also benefitted third quarter comparative results.

As usual, I'll start with an update on progress against our strategic priorities, which include the recent acquisition before turning things over to Bonnie to review the numbers. First, we'll continue to expand our meaningful positions in product categories core to Neenah.

Our largest core categories are filtration, technical backings and premium fine papers. While we relentlessly pursue improvements in our competitive positions at each of these areas, this morning I would like to focus on filtration and more specifically, transportation filtration, which has been our largest end used market.

Our transportation filtration business has been growing at an annual rate of more than 8% over the past 10 years. This impressive performance reflects the deep relationships that we have with our customers as well as the unique technical abilities and willingness to innovate to meet customer needs that our Gessner brand is so well known for.

A couple of examples of our customer focus technology can be seen in the strong growth of our methylone combination products, which are some of the most technically advanced and highest performing grades and the recent capital investment to upgrade our largest filtration machine in Germany.

Here we not only enhance the quality of our existing products, but also increase throughput and enable the production of a wider range of product specifications to meet future needs.

As you’ve heard in the past and I'll reinforce today, we are committed to the support of our global customers and growth of our filtration sharing capacity internationally. Our business today is predominantly in Europe, where we enjoy a market-leading position.

North America and Asia represent large target markets with exciting growth opportunities for our customers and for Neenah. As I've said before, with such a strong position in Europe, our near term bias has been to expand our filtration presence here in the United States, where we've been growing at a double-digit pace, but still have a small share.

We're continually evaluating the most efficient and value adding lease to meet future growth needs and I would expect to share more about these plans with you in the future as they take shape. So to summarize, we're well positioned to continue to grow in filtration.

As engine platforms become more demanding, we're prepared with state-of-the-art technology and also have the opportunity and support of our global customers to expand our presence in growing markets outside of Europe. Our second priority is to increase our presence and scale in growth segments of poor markets that value our capabilities.

We've spoken about some of these targeted categories, specialized filtration media, premium packaging and performance oriented technical products. These are markets that are defensible, profitable and growing. The filtration business that we purchased from Crane is one example of how we're expanding in these categories.

This acquisition was a strong strategic fit and allowed us to broaden our end markets and acquire new technologies and product development capabilities. Our last call in August, we were very early in the integration, but even by that time, there were numerous interactions between our filtration research and business teams at Crane and in Germany.

Now that we are a bit further down the road, I can tell you, we're even more excited. We've seen the potential this business has not only to grow in this core markets, but also to develop new products and solutions for markets where we are already well established and potentially for markets new to Neenah.

To accelerate growth and to ensure clear coordination and focus of resources, the former Crane business including R&D now reports to our managing director responsible for global filtration. The structure and share we leverage are our combined technology and knowhow enact on growth opportunities.

Returning to our strategic priorities, last but not least, we intended to lever attractive return to shareholders with a meaningful cash component. Good return should follow good results, especially if they are delivered consistently and with no surprises.

Our teams are continuing to deliver and we're pleased that this has been evidenced in our financial results and recognized by the market. Our shareholders are also benefitting from increasing cash returns to rising dividends. In fact our dividend has more than doubled since early 2013 when we first announced our commitment to an increasing rate.

So to provide a quick recap, our businesses performed well in the quarter, both top and bottom line and we'll continue to make progress in targeted strategic growth areas. The recent acquisition has added new filtration categories and capabilities and it's a clear example of our commitment to the global growth of this business.

We're also excited about opportunities to grow another technical products categories as well as premium papers and packaging. Our strong cash flow generation and balance sheet continue to allow us to act on high returning organic investments and acquisitions as well as increase our dividend.

At the risk of sounding redundant, we remain energized about the opportunities ahead. With that, I'll turn things over to Bonnie to review financial results for the quarter..

Thank you, John. I'll begin with technical products Sales of $122 million were up 16% compared with $104 million last year. This includes the Crane acquisition, which is delivering top and bottom line results in line with our expectations. Excluding the acquisition, sales increased 5% and were our highest ever third quarter.

Volume growth accounted for about half of the increase with remainder due to a higher value product mix and increased selling prices. Excluding the acquisition, filtration sales were 9% in the quarter, while specialties increased 7% and backings were flat.

Revenue growth this year has resulted from improved global economic conditions in the first half of the year especially as well as share gains as we expand our geographic presence and capture new business. Excluding restructuring and integration cost, operating income of $11.1 million was up by more than $4 million versus last year.

As we had indicated, about a $1 million was a result of the delayed filtration maintenance down. The remainder of the improvement reflected a more profitable sales mix with strong growth in the high value filter products and labels, as well as higher volumes and selling prices.

Third quarter results included cost of $1.1 million for restructuring and integration and we expect an additional 100,000 in the fourth quarter, combined with capital spending of million related to IT systems and infrastructure to support Crane, this brings second half cost to just over $2 million.

This is below our original estimate of $2 million to $3 million as our teams have found ways to more quickly and efficiently integrate this business. Turning to fine papers, sales in the quarter were $101 million, down 1% compared with last year. This reflected 2% lower volumes partly offset by a higher value mix and increased selling prices.

While overall volumes were down, much of the decline was in non-branded grades that tend to be for special orders where our timing varies. Volumes for our most profitable premium brands were up an impressive 10%, while other specialty and packaging grades also continued to grow.

Operating income in fine paper was $15.2 million, up from $13.3 million last year. Third quarter results were particularly strong despite higher cost for annual maintenance down.

This reflected excellent operational performance as our fine paper mill set records for our productivity and throughput that resulted in year-on-year savings of over $1.5 million in the quarter. Our operational performance along with the more profitable mix in increased prices, combined to offset modestly higher input cost.

Unallocated corporate costs were $3.2 million, compared with $3.9 million last year. Differences resulted primarily from the timing of expenses. Unallocated corporate cost historically average around $4 million per quarter. Consolidated SG&A, which includes corporate expense was $19.8 million.

This was flat versus last year as added direct cost for the Crane business were largely offset by timing of other expenses. Ongoing we expect quarterly SG&A to average somewhere around the $21 million to $22 million per quarter.

We will continue to manage and leverage these costs as we grow, resulting in improved efficiencies and in the third quarter SG&A as a percent of sales was well under 9%. Moving to corporate P&L items, net interest expense of $2.9 million was in line with last year.

Interest costs were primarily for our $175 million of long term notes and these notes are non-callable through 2017. Our effective tax rate in the third quarter was 30%, compared to 17% last year. Last year's low rate included benefits of a one-time state tax credit.

We continue to work to find other available state and federal credits and the 30% rate this quarter included modest benefits from certain new federal tax credits. Ongoing, we expect our rate to continue to be in the mid 30s. In 2014, we have continued to use federal net operating losses to offset U.S. cash taxes. These NOLs will be consumed in 2015.

However, higher U.S. tax payments next year are not expected to significantly affect total cash flow as pension contributions in 2015 will be reduced as a result of actions we've taken this year to fund de-risk the plan. Through September, we contributed approximately $15 million to the plan.

This is slightly ahead of our run rate for the past few years. In the third quarter, cash from ops was $21 million, down from $34 million last year. In 2013, we had an unusually large reduction and working capital following the Southworth brand acquisition. This year, while we again reduced working capital, this has been from a more normal level.

Capital spending was $6 million versus $11 million last year. Spending was shifted to the fourth quarter with our filtration down. Total spending in 2014 is still projected to be $30 million. We're actively deploying our cash to generate more value and returns to shareholders.

With modest sustaining capital needs, the large majority of our capital spending is for investments that generate attractive returns including almost $10 million of high return in cost savings projects this year.

We've also paid down debt and used cash on hand to acquire the filtration business that is a leader in profitable defensible fast growing market. And finally our cash dividends continue to increase meaningfully. Our current quarterly dividend of $0.27 per share is up 35% versus where we were in December 2013.

Following all of these activities, our balance sheet remains very strong with debt to EBITDA of 1.4 times below our targeted range of two to three. That leaves us well positioned to take advantage of future opportunities that can generate value.

John?.

Thank you, Bonnie. Let me share a few comments on the current environment and future outlook as we ramp up. Seasonally the fourth quarter tends to be our slowest and this year while the U.S. economy has continued to improve, economic indicators in Europe have more recently been weakening.

This is marked contrast to last year, when the environment in Europe was improving in the fourth quarter and contributed to unusually strong demand. With softening conditions the Euro has fallen versus the dollar from around $1.35 to less than $1.25.

From a translation standpoint, a $0.10 changes were approximately $5 million a quarter at the topline and one-tenth of that or $0.5 million on the bottom line.

As usual our customers manage their yearend inventory stocking levels based on their perceptions of the environment and this could induce further uncertainty in the fourth quarter; however, this is a short term and our customers remain optimistic about their long-term success and our market positions with them remain strong.

In addition to date the impacts from topline variability earnings in the fourth quarter will reflect higher cost due to the timing and length of our filtration down. In our August call, we did mention this impact as up to $200 million. The down was extended to complete a capital investment on our largest filtration asset.

With the rate of return in the mid 20s, this project delivers attractive financial returns and provides additional capacity to support our growth initiatives and improved manufacturing efficiencies. I am pleased to note that the machine started up successfully in mid October on budget and without any negative impact to sales or to customer service.

This is a good example of how we like to invest capital organically, in projects that support our strategies for profitable growth, enhance capabilities and an ever-improving cost position.

While we always provide guidance on projected annual capital spending, I would like to comment briefly on the broader approach we follow to manage organic capital. In a growing company like ours, we expect capital spending to increase with the size of our business as it has in each of the past four years and range between 3% and 5% of sales.

In the last four years, with our major capital needs, we've been at the low end of that range averaging just over 3%. We believe the spending ranges responsibly sized will support a good free cash flow return, minimizes volatility and is consistent with other growing specialty manufactures.

We have a disciplined process to ensure projects are vetted against each other and prioritized, so that the best returning investments are first in line and as Bonnie said earlier our maintaining capital needs are low. So any spending above that will be for projects that provide meaningful financial returns.

Turning briefly to input costs, as you heard from us before, since our businesses are in specialty markets, we expect and have demonstrated that we will offset changes in input cost to increase selling prices or cost efficiencies.

For those of you who like to keep track of the moving pieces, we do not expect any major change due to input costs in the fourth quarter versus the third quarter.

Softwood pulp prices and synthetic fiber costs have remained relatively stable and while hardwood pulp prices have dropped modestly, we're entering the winter season and energy prices are expected to rise and likely moderate any benefit.

Finally stepping back to take a longer term view, I am very pleased with what our teams have accomplished this year and how we are positioned heading into 2015. Our transportation filtration business continues to grow as we increase our presence outside of Europe and we meet customer needs for ever more demanding products.

The recent acquisition expanded our presence in growing specialty filtration markets and has added new technologies that will help spur future growth.

Our other Technical Products businesses are also doing well with year-to-date mid to upper single digit growth in specialties and backings we're introducing new products with key customers and continue to grow and gain share in these markets. In Fine Paper our team has shown that they can grow organically despite market challenges.

We're encouraged about their success in targeted premium packaging niches, which represented attractive opportunity for future growth. At the same time our strong brands and operational excellence helps this business deliver impressive margins, cash flows and return on capital each and every quarter.

We believe the choices we make in allocating capital and resources have the largest impact on value. While meeting quarterly expectation is one gauge of the effectiveness of those choices we're more focused on how we manage and allocate our capital for the long run.

In this year alone we've invested in high returning organic projects and value adding acquisitions while at the same time significantly increased our direct cash returns to shareholders.

It's not lost on us that the commitment of our teams and their ability to execute successfully is what delivers the consistently good results that Bonnie and I are privileged to report to you each quarter, I'd like to extend our congratulations to each and every one of our main employees as we celebrate our 10th year as a public company later this month.

We've come a long way together. And as usual, thanks for those on the call, especially our long term shareholder for your interest and support. At this point, I'll be happy to open up the call up to questions..

(Operator Instructions) Your first question comes from the line of Steve Chercover of D.A. Davidson & Co..

Hi Steve..

Thank you, good morning. Just a couple quick questions actually.

Highlight of the automotive market and is that rolling over? And could you remind us if your automotive filtration is more focused on OEMs or replacement parts?.

Yeah, great. We'll we're seeing some fairly decent growth in the automotive business, more for us and I think as you see if you look at our historical results is that 30% of our business is actually going to OEMs and 70% is going to the aftermarket.

And I think it is that mix that has enabled consistency as we've rolled through virtually every recession if you will in Europe with the exception of the grade 1 without any major impacts and continue to still see 8% compound annual growth rate.

So that's the one business as a reminder too, 70% of our business is in Europe and it still continues to perform. And with the pressure that we've seen on the Euro that I mentioned in the prepared remarks continue to see our growth outside of Europe even more attractive..

So I think we'd be delighted to see Europe strengthen but to the extent that the economy remains weak is it fair to say that people who weren’t buying new cars have got to keep servicing their existing vehicles?.

Yeah, absolutely. I think the best way to think about this business is by miles not by new car and after, but as long as people are driving they have to take - caring for their vehicles whether they are buying new cars or the aftermarket and that's what drives our business. Now I don’t want to over generalize, we have other businesses also in Europe.

Our wall cover business and some of our packing businesses and they are right more with the global GDP from that standpoint, but our transportation filtration business the best way to think about it is in miles and that's why it is so steady..

Got you. Okay and it seems like the early results from Crane are quite encouraging.

Is it fair to say that your acquisition team still remains active and looking for opportunities?.

Yeah, absolutely, yes. Again M&A is one of the uses of cash that we look at. Organic capital is our first use from that piece. Finding the right fit for our business is key and that takes a lot of work. We've made three acquisitions in the last three years.

They've all been very value-adding and very fitting into our system in the back group and those resources are clearly focused on what opportunity might be next. And we're in good shape from the balance sheet standpoint to act on it..

Yeah I have the impression that you could do a $200 million $300 million acquisition without much difficulty.

But if you were to look at something that was significantly better than that would you consider using your stock as a currency for acquisitions?.

You know I think we look at all options from that standpoint that's not our preference from that piece, so we'll look at all options. And if in fact we do consider that it will be selective for the marketplace as to why that was a very good thing for us to do..

Great, and final question from me, you know Neenah Paper is definitely not the company it was 10 years ago when you're hatched.

If you could look out five years can you see any other significant transformations even new businesses?.

Well, I'll tell you that's, I don’t know what I'm going to eat next week, so I mean that's a hard question from that standpoint. But what I do know what won't change is the commitment of Neenah Paper to continue to evolve in areas where we can drive meaningful value and the principle.

It is not as really as much about getting big as it is providing value that customers will pay for. So I imagine we if all today because you're asking me I'm limited with my current information, I'm clearly biased towards filtration.

We've demonstrated it has a lot of value for us and then on the Fine Paper side, I'm giddy on their performance around luxury packing. So I would love to see us as a much more significant player in both of those in the in the future..

Very good, thank you very much..

Your next question comes from the line of Dan Ducome of Sidoti & Company.

Hi Dan..

Hi Dan..

Good morning everybody.

How are you?.

Good..

Great..

Good, nice job by the way, I guess first on the Technical Products segment I think you said filtration sales were up 9%, is that correct?.

Yes..

Okay, did you comment on the volumes? I'm just trying to get a sense of sort of like what level of pricing are you able to get there?.

On the volumes….

Just filtration volumes..

Okay.

Yeah would you?.

Separately, but yeah we had our filtration has been in combination of volume, price and improvement, and everything is working..

Yeah I would think from that piece of it it's predominantly volume growth but we did have pricing activity as we do across all of our businesses. The lion's share of that though will be actual consumption and volume growth. Sorry I didn’t understand..

So most of it was volume you said..

Yes..

Okay..

I try to characterize it as 2/3rds volume and 1/3 price..

Yeah and Dan when you look in the Q you're going to find the entire improvement hat we get from Crane volumes as filtration volumes..

Yeah it's characterized that way..

Great, now I mean even backing off the Crane it was still pretty good number I think you know this the seasonally softer part of the year.

And then I also was going you ask you also how would the seasonality of the Crane versus your legacy filtration business can you talk to that?.

Sure, I'm sure happy to. First off let me lead back up a little bit more. Our Fine Paper business is typically first half to second half it is pretty even although our third quarter is usually better than fourth quarter. In our technical businesses it is the easy one to remember.

The first quarters are the best quarter and the fourth quarter is typically the worst quarter from that standpoint, because most of our technical businesses are in processes in to some other value adding product. So customers have a tendency to manage their inventories based on how they see the opportunity for future demand.

So the Crane business is no different really than our filtration business or other Technical Products business in that sense. Customers continue to look at their inventories and manage them to year end in a similar fashion. So expect fourth quarter to be their weakest quarter.

We've said I think, I characterized in the previous call Technical Products being 52% first half 48% in the second half. So….

Great. Okay and then I guess, I appreciate that, I guess similar question the other segment on Fine paper I guess, revenue flat to down 1%.

You said volumes were down 2% and I know it was another tough quarter for uncoated, but just wondering can you talk to that, I think you mentioned it was kind of dragged down by the lower grade papers?.

Yeah, I would like to talk about that because I don’t want to hook you to the uncoated market, although it's been back the paper market has been pressured. If the year ended today, this business will have demonstrated growth seven years in a row.

So, while the quarter, while we tend to see, we have private label products or other products that tend to move in special make and tend to move in lumpier for the lack of an eloquent word. But our core products that truly drives the real profitability did very well.

So when we look under the hood, we’re also very pleased with the quality of the quarter and I think you see that on the bottom line as well from that standpoint. So I am not at all concerned in that businesses ability to continue to deliver great returns and thrown off strong cash flows..

Okay, great and then a last one and I’ll jump back in line.

I was just thinking about the premium, you know the luxury label, premium packaging market, I guess who are you really competing with there? I don’t know if you could disclose that, just curios I know obviously Mohawk's a big player on Fine Paper, but I am just trying to you know trying to chew down on that who would you be competing with?.

Yeah, and that is a very, very fragmented business and I think many people are doing it as a hobby. We’ve tried to focus our luxury packaging efforts to be around retail, alcohol, cosmetics and electronics from that standpoint. So it's not very meaningful to a lot of players. We want to make it very meaningful to us from that standpoint.

So we are likely not going to go out and make an acquisition that puts you immediately into that business.

We’re going to do as we have done over these past few years is continue to look for capabilities externally that that compliment ours and then change our Fine Paper organization towards more packaging oriented and continue to support their growth organically..

Okay, so it sounds like it’s not any big publicly traded company, it is smaller independents?.

Absolutely.

With less scale..

Yeah, there are public companies that have a little piece, but there’s no clarity there in this marketplace..

Okay, I’ll jump back in line, thank you..

The next question comes from the line of Jon Tanwanteng of CJS Securities..

Jack O'Brien - CJS Securities:.

:.

Okay, but that this will still be eloquent Jack..

Alright, first of all congratulations on the nice quarter.

You briefly addressed trends going into Q4 in your prepared remarks, but I was wondering if the more profitable product mix in those segments is going to sustainable going forward?.

Yeah, I think we talked about the Fine Paper side of it and in reality while their volumes are typically a little more compressed in the fourth quarter, because it’s such a branded business that branded business stays fairly stable so decent mix. Well around the technical side from that piece of it, oh again we should still expect to see strong mix.

The mix doesn’t come from a one quarter order pattern it comes from our emphasis of the organization of continuing to drive it. On the tech side where I talked about transportation filtration and combination products, those are developed over a significant amount of time, so those will still be there, those mix will still be there.

But I would expect a lot of the other volumes to potentially dip..

Okay, great and then as a response as a follow up to the previous questions asked, you addressed on premium Fine Paper brands and luxury packaging are highly fragmented and you guys have experienced really good growth there.

Do you find yourselves taking share given you’ve been so concentrated on it?.

Well knowing that we are growing over 20% year-to-date I don’t believe the luxury packaging business is growing at that, so I would mathematically I am going to say we are taking share in that regards..

Okay, great thank you very much..

There are no further questions at this time. I will now turn the conference over to John O’Donnell for final remarks..

Very good, once again thank you for your interest in Neenah and we look forward to updating you again on our next call in February. Thank you..

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