Bill McCarthy – Vice President, Financial Analysis and Investor Relations John O’Donnell – Chief Executive Officer Bonnie Lind – Chief Financial Officer.

Jon Tanwanteng – CJS Securities Dan Jacome – Sidoti and Company Kurt Yinger – D. A. Davidson.

Good morning, and welcome to the Neenah Paper Second Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Bill McCarthy, Vice President, Financial Analysis and Investor Relations. Please go ahead..

Thank you and good morning. With me on the call today are John O’Donnell, our Chief Executive Officer; and Bonnie Lind, our Chief Financial Officer. I’ll begin with a few summary comments and then John and Bonnie will discuss business and financial results in detail. As usual following our prepared remarks, we will open up the call for questions.

We released earnings yesterday afternoon reporting record sales of $249 million driven by growth in both Technical Products and Fine Paper and Packaging.

As expected operating income included cost for the start up of our North American filtration operation as well as impacts from sharply higher input costs in the quarter that we ultimately expect to recover through selling price increases.

Consequently, operating income of $29 million, while up from the first quarter, declined compared with $34 million in the second quarter of last year. GAAP earnings per share of $1.46 increased from $1.24 a year ago and was driven by a lower tax expenses following a change in our repatriation plans for overseas earnings.

This tax benefit applied to both 2016 and 2017 and our adjusted EPS of $1.22 excluded a $0.24 per share benefit related to 2016. Last year adjusted EPS was $1.29 and excluding cost of $0.05 per share for integration and restructuring. A reconciliation of these GAAP and non-GAAP measures has shown in our press release.

I would also like to remind everyone that our comments today may includes forward-looking statements, and that actual results could differ from these statements due to uncertainties and risks that are noted in our SEC filings and on our website. With that, I’ll turn things over to our Chief Executive Officer, John O’Donnell..

Good morning, Bill, it continues to be a busy year at Neenah and I am pleased with the progress and the results we're seeing in a number of areas. As Bill noted each of our businesses delivered solid top-line growth resulting in record sales for the quarter.

In Technical Products, we grew in targeted markets of performance labels as well as backings and other non-transportation filtration products. While demand is strong for transportation filtration, availability remains tight in our European operations until our new capacity is qualified.

To date the team has done a nice job optimizing production and prioritizing sales of our higher value products. In Fine Paper and Packaging, sales of premium packaging were up 12%.

This double-digit growth reflects the team’s successful efforts to qualify our products for new product launches with key retail customers as well as growing demand for paper gift cards. These cards were replacing less environmentally friendly plastic cards for customers, who value a green positioning.

While still a small category for us, sale of these cards doubled in the quarter and then we expect this to be an important part of our future packaging growth. In commercial print, our results were equally impressive with sales up around 1.5% in a market that's declined 3% to 5% per year.

This outperformance reflected market enthusiasm for our recently refreshed CLASSIC brand as well as additional direct business that we've earned from a major customer over the past year. Without question, the largest initiative underway this year has been the start-up of our North American transportation filtration operation.

As I mentioned in the last call, we've now constructed what we believe to be the best and lowest cost assets in the world capable of making advanced transportation filtration media. As you'd expect, this complex manufacturing process comes with a commensurate start-up curve. During the second quarter, we continue to make good progress.

Production yields are increasing. We're running fewer trials, shipping more sample products to customers for final qualification and also starting to sell some fully qualified products. At this point, seven customers have been fully qualified and we've produced samples for nearly all of our targeted customers.

Customer enthusiasm for our project remains very high. As a reminder, these are very Technical Products solutions and initial qualification periods can be lengthy depending on the customer and the grade.

To maximize throughput, we're prioritizing qualifications that optimize our global capacity while matching the near-term needs of strategic customers. With a strong market demand, I’d love to have had this capacity six months earlier. However timing is right for this investment as it positions us very well for future success.

To summarize, top-line performance in the quarter is quite good. Our bottom line was impacted by the expected challenges that we communicated on our last call, specifically the filtration start-up and the lag between rapid input cost increases and market pricing activity.

In addition, in June, we experienced unforeseen headwinds in the form of some unplanned downtime in fine paper. These production interruptions were temporary in nature and not expected to repeat in the second half.

I’ll talk more about the remainder of the year later in the call, but at this point we’ll turn things over to Bonnie to go through second quarter financial results in more detail..

Thank you, John. Good morning everyone. As usual I’ll go through results in each of our segments and then discuss a few corporate items and let me begin today with Technical Products. Sales of $127 million were ahead of last year despite currencies translation headwinds and on a constant currency basis sales increased more than 2%.

Growth resulted from significantly higher shipments of labels and niche filtration products, continued good performance in backings as we gained share in abrasives in Asia and a higher value sales mix.

The improved mix reflected increased sales of our higher value products in transportation filtration, labels and backings, combined these items more than offsets lower transportation filtration volume as we work through short-term capacity constraints with reduced inventory levels.

Operating income of $16 million declined from $20 million last year largely due to $3 million of filtration start-up costs and $3 million of higher input costs. Partly offsetting these items were improved manufacturing efficiencies and benefits from the higher value sales mix.

Input costs have been a significant headwind this year and materials like latex and resins continued their suits rise in the quarter.

We remain confident in our ability to offset these increases over time and we expect to see additional benefits in the third quarter as a result of the efforts of our team and as contractual raw material price adjustors begin to take effect.

Turning next to Fine Paper and Packaging, revenues of $116 million were up 2% from last year and our leading brands continue to outperform the market. Results were boosted by double-digit growth in premium packaging.

Growth in other products like wide format and digital papers increased shipments to a major direct sales customer and higher export sales. Selling prices increases implemented early in the year also contributed to revenue growth although this was more than offset by lower price mix related to the growth in direct sales.

Operating income was $17.5 million compared to our strongest quarter in last year of $18.4 million. 2017 included benefits from increased volumes, higher selling prices and lower SG&A as well as the absence of $500,000 of 2016 integration costs.

These items were offset in the quarter by higher input cost of almost $1 million and cost for unplanned downtime in June at three of our plants due to weather and maintenance issues. Looking at corporate items, consolidated SG&A spending of $24.6 million was virtually unchanged from last year.

Second half spending is expected to average around the $24 million per quarter we previously communicated to you. Unallocated corporate costs of $4.4 million were similarly flat with the prior year, which included $300,000 for integration and restructuring costs.

Unallocated costs are expected to average $4.5 million to $5 million per quarter consistent with our past guidance. Net interest expense was $3 million down from $3.2 million in the first quarter, but up from $2.7 million in the second quarter of 2016.

While we pay down debt and reduced interest expense in the current quarter, the increase versus last year was primarily due to interest on the filtration project, which was previously capitalized. Debt of $221 million was down $5.5 million from March 31 and cash increased almost $4 million to $9 million at the end of June.

Debt at quarter end was comprised of $175 million of bonds at a fixed rate of 5.25% and short-term U.S. borrowings at variable rates ranging between 3% and 3.5%. Turning to taxes, like other U.S. companies we’re faced with added taxes when overseas earnings are repatriated.

For this and other reasons, we asserted our intent to no longer repatriate foreign earnings and recognize this change in the second quarter. This applied to foreign earnings in both 2016 and 2017 and reduced our effective tax rate this quarter to 5%.

As noted earlier, the benefit related to 2016 of about $4 million, or $0.24 a share, was excluded from adjusted earnings per share. On an ongoing basis, the change reduces our book tax rate from the mid-30s to an expected sustainable rate of 29%.

Our current cash tax rate of less than 15% reflects significant benefits as we consume prior period R&D credits and from accelerated tax appreciation on the U.S. filtration investment. Cash from operations in the quarter of $23 million was down from $41 million last year.

Well, record sales, the largest impact came from an increase in working capital and specifically accounts receivable. Our accounts receivables continue to remain in very good shape in terms of collectability and our present current. Post employment benefit plans and pension funding levels are also in excellent condition.

Cash outlays of $16 million are expected this year that's down from $23 million in 2016. Contributions are expected to be about $7 million more than expense and like last year the majority of these will occur in the back half of the year. Capital spending in the second quarter was $8 million down from $17 million last year.

Full-year spending in 2017 included payments for filtration work completed in 2016 and is projected to be approximately $45 million, which is within our targeted range of 3% to 5% of sales and still well below the $68 million that we spent last year. So to wrap up, Neenah continues to be in great financial shape.

Our businesses generate good cash flows and we’re disciplined in our capital deployment in order to maintain an attractive double-digit return on invested capital as we grow.

With debt to EBITDA of around 1.5 times and over $100 million of borrowing capacity readily available on existing credit facilities, our balance sheet is very strong and will allow us to have attractive opportunities going forward.

We also remain committed to returning a portion of our cash flows directly to shareholders through a growing dividend supplemented by opportunistic share buybacks. Today, our dividend yield is just under 2% with a payout ratio in the mid-30s. Our long term objective is to increase our yield while managing internally to a payout ratio of up to 45%.

Our consistent record of double-digit dividend increases over the past five years has clearly demonstrated this commitment. With that I'd like to turn it back to you, John..

Thank you, Bonnie. I’ll begin with some perspective on the remainder of the year and then open up the call for your questions. Starting from a macro level economies for our large geographies the U.S. and Europe are continuing demonstrate solid growth in export markets like Asia are growing even faster.

As a result, this generally translates into healthy market demand for our Technical Products. As I noted earlier, demand for transportation filtration media has been particularly strong. And combined with tight global capacity, our recent investment positions us very well to take advantage of these conditions for years to come.

In fine paper, our second quarter was strong as our teams find ways to mitigate the secular declines through growth in premium packaging and other potential revenue streams.

While currency translation was a headwind in the first half of this year, we believe it could change given the euros recent value of over 115 [ph] compared to around 110 in the second half of last year. We communicated in May that input costs are raising sharply and we experienced this in full bloom in the second quarter.

While it appears that prices for some materials could begin to moderate, pulp is projected to continue to rise. Input cost in the back half of the year forecasted to be over $2 million per quarter higher than in 2016.

For the full year, input cost could be up approximately $8 million with the impact split evenly between the first and the second half of the year. In our efforts to restore the margin impact from rising input costs, our Fine Paper and Packaging business increased prices on key brands early in the year.

In Technical Products, price realization in the first half was limited due to contractual commitments and adjusters, but we should begin to see additional price realization in the coming quarters from recent activities.

Ultimately each of our businesses has demonstrated the ability to overcome changes in input costs over time and we expect the same level of high performance to continue.

Historically, Technical Product experiences seasonality in sales were the first half comprising up to 52% of the full-year as customers takedowns in the summer and at year end to control inventories. Fine Paper and Packaging revenues tend to be more consistent throughout the year.

As usual third quarter costs will increase for scheduled maintenance down with one exception. This year, our German filtration outage has been moved from Q3 to Q4 to best support customer needs and bridge to higher North American filtration output.

We are anticipating further advances with our filtration start-up as we grow sales and continue our progress up to learning curve. Losses in the second half should improve versus the first half and for the full year still total around $8 million with revenue projections remaining between $10 million and $15 million for the year.

As a reminder, our capital deployment priorities of internal management practices that are focused on creating value remain firmly in place while there can be adverse short-term impacts from value adding CapEx. We know these investments will provide an attractive return and are a critical catalyst for future growth.

As I mentioned on past calls, M&A is also expected to be an important use of cash as we seek to increase our presence in growing categories. The market has been active and our pipeline is robust, but if you're waiting for me to announce a transaction on this call, I am going to have to disappoint you.

Rest assured, when we do announce a deal, you can be confident that it was subject to our disciplined internal scrutiny and will have a clear strategic fit and the ability to add value. So to wrap up, our teams are executing on a number of strategies and initiatives to make us an even stronger company.

This was reinforced by our record revenues in the quarter, which included double-digit growth and targeted product categories like labels and premium packaging. Most importantly, our competitive positions and performance in our core markets of transportation filtration, fine paper and backings remains very strong.

I’d like to thank you for your interest today and we’ll now open the call for your questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Jon Tanwanteng with CJS Securities. Please go ahead..

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

Good morning, Jon..

Good morning..

Can you talk about the decision not to repatriate cash? I assume most of that is in Europe.

Is it mostly a tax savings move or have you actually saw any most suitable use for the overseas whether that's organic or inorganic investments?.

Yeah, so, Jon, we currently do not have any cash built-up in Europe, but for your book rate, the GAAP requires that you put a tax hit and if you assume that you are going to repatriate cash. Now that we made this designation that we don't plan to repatriate cash and like I said right now we don't have any cash there. We remove that drag from our rate.

So that's the reason why we have to pick up. Going forward, we look at a number of factors. The resilient factors of course that go into tax planning, but based on all these factors, we're looking at – we would have better uses leading the cash in Europe than paying U.S. cash taxes to repatriate it..

Got to it, that’s very helpful. Thank you.

And Bonnie, you may have mentioned this, and I am sorry if I missed it, but either Bonnie or John, are there opportunities for pricing improvements in filtration given that you are capacity constrained in Germany at this point?.

Yeah, our pricing activities, I think we’ve talked about in the past that typically filtration is annual contracts, but they're not annual January 1. So our pricing conversations happen with our customers on a regular basis.

That being said, we also want to make sure that we treat this temporary position where we're short on capacity because we're about to qualify a full asset if you will and we're going to bring that product to market.

So we don't want to be too opportunistic when we're going to be looking to those same customers to support our utilization of this asset.

So we are having pricing discussions on a regular basis where it makes some meaningful sense at the same time we know this is a very long run and we're treating it like that both with our customers and for the utilization of this asset..

Okay, great.

And then just from a pricing perspective over the whole business, is the expected pricing rise in the second half through your contracts and increases expected to expand the margin over whatever you expect input prices to increase by?.

Yeah, I think, what we've talked about each of the businesses is mid-teen double-digit margins with the expectation from where we're at.

The primary uses for pricing is really to recover any of the input costs to protect our margins if you will and really want to be able to drive the overarching margins or improvement in our margins through greater penetration, better mix and through our R&D activities that we have underway, especially in our technical products side.

So it's more – pricing is more on a recovery than this opportunistic margin increases..

Great, I get the question.

Do you expect to recover more than views in the second half?.

Yeah, it won't be an exact view from that standpoint. So I expect to recover the impact of input costs that's where I would be.

Tech Products, as we look at the three – our operating segments and Technical Products, we've got three different pricing strategies, annual escalators and then more market and it's really going to be the waiting of the products that come across there. So….

All right..

Hope that covers it, Jon..

Got it.

But Bonnie, what was the impact from the downtime in fine paper?.

We think it's approximately $1 million..

Yeah….

On the other….

Yeah, that was blackout in lighting a complete blackout, but I guess appropriately they were focused on bringing the hospitals up first in that regard. So that’s way we don’t believe it to repeat..

Okay, got it.

And then just finally, can you just provide a bit more color on the increase in receivables, what's going on there and do you expect that to come back in anytime soon?.

Yeah, like I said, the increase in receivables, we are really pleased when we look at our present current there is going to save ever been. Our DSOs are good. So the health, the quality of the receivables is really good overall, but the terms are sensitive to the geographies in which we sell.

So what we saw in this quarter was high – a higher sales rate internationally, especially for filtration than what we had in the local market. So the term is basically extended out. So, yes, they will come back, but it's only just a matter of time..

Got it. Thank you very much..

And our next question comes from Dan Jacome with Sidoti and Company. Please go ahead..

Good morning.

How’s everybody?.

Good.

How are you?.

Thanks..

Good, thank you. So first on the Appleton, I think you mentioned you got seven customers qualified at the end of this quarter. Can you just remind us how many did you have at the end of the first quarter if you could detail that I am just curious.

And then following that would be able to tell us how many in total you're trying to qualify this year, so we have a better understanding of it? I think you're making great progress. I'm just trying to put some numbers on it..

No, that's fair. You're going to be able to have this math in your head, but we have zero at the end of the first quarter..

Okay..

So that's why we’re all excited about seven, Dan. That's about a quarter – the customers that that we will ultimately qualify. And if you remember on the past calls, I've talked about qualification taking six months to eighteen months. We're just at the six month period, so to have seven. I was very pleased with that..

Okay. It’s very encouraging. So it looks like you're still targeting utilization of this new asset.

30% in the back half of 2018, is that still reasonable?.

That is our expectation and I think what gives me even greater confirmation or comfort is the fact that we've got multiple grades. We've run samples if you will for over 90% of the grades that we plan to sell. So, we’re in good shape..

Okay, great.

And then I'm not an expert at all in resin or latex, but why are prices going up? Is there some global shortage of supply that I need to know about? Or what's happening there just so we have a better understanding?.

I would say one of the major drivers was a significant flooding in Thailand and some of our resins are tied to more rubber, if you will, 40% of the rubber produced in Thailand. So that's really – but it was kind of a weather issue if you will.

Our expectation that shot-up in the second quarter, which drove a lot of that, we start to see it mitigating in the back half as I mentioned in the call pulp will be taking its place and then [indiscernible] of input cost increases..

Great. Okay, okay, all right. I'm glad....

Yes….

Okay. And then housekeeping so for the tax effect of 29% you're guiding is when do that’s started next year or third quarter of this year, just I'm sorry if I missed it..

That’s going to start in the third quarter of this year..

Okay, okay, great. I think that's all I had. Nice job. Good luck for the rest of the year..

Thanks, Dan..

Thank you..

Yep..

Our next question comes from Kurt Yinger with D. A. Davidson. Please go ahead..

Yes, good morning John, Bonnie and Bill..

Good morning, Yinger..

Just starting off, you talked about the typical seasonality in Technical Products and as we move to the back half of the year it seems like the start-up costs will become less of the headwind and with some of the recovery of the input costs that should also be a tailwind.

So would you expect that seasonality maybe to be less pronounced this year than we would normally see it or….

Yeah, yeah, you're exactly right. We’ve referenced it because you can't change the history that's where the history of that business has been. But again as we love the learning curve on the A4 piece of it, the revenue aid from some of the pricing that's coming through there, this year might be a little unique.

I feel like I'm saying that about this year about every topic, but yeah that that could be a little more level probably than we’ve historically seen. Especially two with – when you think about the move in the outage that we had at [indiscernible] the fourth quarter. You may want to remove this year from your historical view..

All right, and then, I mean, I believe you’d said $15 million in incremental revenue from the Appleton facility this year.

Were there any sales in the second quarter?.

Yeah, there were minor sales in the second quarter. We talked about six months to qualify – six months to qualify the customer. So we were just getting those qualified. So, there were some minor sales. You're exactly right on the big number, the $15 million side. I said $10 million to $15 million.

So I'm giving myself lots of wiggle room because we're still in the start-up curve..

Okay.

And I mean I guess would the majority of that be in the fourth quarter? Or would you expect some I guess more meaningful build in the next quarter?.

Yeah, it's going to get bigger each quarter. So the last quarter of the year will be the biggest one of the year..

Okay.

And then obviously the Appleton asset will give you some much needed incremental capacity, but as you look out sort of to the mid to long-term time horizon, can you talk about maybe any other geographies where you see attractive opportunities at this point or any sort of forward thinking you guys are doing right now as far as more transportation filtration capacity?.

Europe, North America and Asia. Obviously, we have a European solution. We've just constructed a U.S. We believe it's going to give us the significant well above the market growth rate, which we've been tracking about 8%. We just think this market grows at 4%. This asset provides us with five solid years of that significant growth.

Obviously then that leaves just Asia as the last one. As we've discussed in the past that since we play at the very high end of transportation filtration, we want to make sure that the intellectual property is well protected. So we continue to ship into that market today both through – we will through the U.S. as well as through our German operations.

And we’ll be reviewing that as we get closer to consuming our U.S. capacity..

Okay.

And is that market much different than Europe and North America? It seems like they’re pretty consolidated at least in those regions? Is that different in some of those Asian countries?.

You're spot on it. It absolutely is. I think from a media provider, the predominance of the media is provided by three major players in both Europe and in the United States and in China whether it's the emissions requirements or market expectations, there were a lot of other smaller players that are in that market still.

So it's not nearly as consolidated as major – some manufacturers continue to bring their platforms – engine platforms into that market. We believe that our media is going to continue to ride with them and we should see more consolidation in the future..

Okay, thanks. That’s helpful.

Last question, just going back to the input cost inflation, is that mostly on the Technical Products side it sounds like or I mean how much headwinds have you had in papers as far as pulp prices?.

Sure, everybody is getting their turn in the barrel in this one. Now, first half is really was latex and then would impact disproportionately our Technical Products. The back half we’re feeling it's going to be a much larger impact as pulp is the primary input for the fine paper business.

So they're going to get probably a greater impact in the back half..

Okay. And then I mean just given the pricing action and the benefits that you saw in the first quarter in papers, I mean at least at this point there aren't really many levers you can pull to offset that at least this year.

I mean does that sounds correct?.

Yeah, the later comes in the year the harder it is to offset it in this year. And that's why. I think I only say that expectation is to offset the margin impacts over time. So if we see higher pulp in the fourth quarter, I wouldn't expect that the group to be able to offset it in the fourth quarter from that standpoint.

As I mentioned earlier we're going to see the Tech Products especially at performance material side starting to have some activity in pricing improvements in the third quarter because of this activity. Our expectation is –weather you offset it with price mix improvement or significant cost reductions, they're pulling all of those levers.

Who am I to doubt them in the sense that that I look back historically they've been able to not only protect their margins, but actually enhance themselves. I am confident they'll be able to recover that..

Okay, but I mean I guess just in papers, is there any ability maybe as you turn the corner into 2018 that if pulp prices continue to be at these elevated levels that we could see sort of like a similar to last quarter where you guys get a nice boost by pushing through some price..

Yeah, I think that the president of that business does a very good job, Julie Schertell, of ensuring that she understands the markets capabilities except pricing and she demonstrated that over time. I think if you look back at our historical, we've almost had an increase annually.

So that there's a high likelihood that that we'll be able to continue to recover it..

All right, great. Thank you very much..

Thanks, Kurt..

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

Okay, I'd like to thank everyone for your time today and we just note that John Bonnie and I will be in New York on Monday for the Jeffries conference. Please feel free to reach out to me if you have any follow up questions. Thanks again..

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