Welcome to the SWM Second Quarter 2016 Earnings Conference Call. Hosting the call today from SWM is Frederic Villoutreix, Chairman and Chief Executive Officer. He is joined by Allison Aden, Chief Financial Officer, and Mark Chekanow, Director of Investor Relations. Today's call is being recorded and will be available for replay later this afternoon. The dial-in number is 800-585-8367. At this time all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Mr. Chekanow. Sir, you may begin.

Thank you, Ranya. Good morning. I am Mark Chekanow, Director of Investor Relations at SWM. Thank you for joining us to discuss our second quarter 2016 earnings results. Before we begin, I would like to remind you that the comments included in today's conference call include forward-looking statements. Actual results may differ materially from the results suggested by these comments for a number of reasons which are discussed in more detail in our Securities and Exchange Commission filings, including our quarterly reports on Form 10-Q and our annual report on Form 10-K. Some financial measures discussed during this call are non-GAAP financial measures. Reconciliations of these measures to the closest GAAP measures are included in the appendix of this presentation and our earnings release. This presentation and the earnings release are available on the Investor Relations section of our Web site, www.swmintl.com. I will now turn the call over to Frederic.

Thank you, Mark, and good morning, everyone. At Mauduit, we are generally pleased with our overall performance and we consider our earnings performance for the second quarter and year-to-date in line with our expectations. Second quarter adjusted EPS of $0.93 puts us at $1.73 for the first half of the year which annualizes well above our adjusted EPS guidance of $3.15 which we issued at the outset of the year. Similarly, our GAAP EPS performance is delivering as expected. As anticipated, the recent customer driven LIP inventory build started to reverse in the second quarter. RTL volumes declined and Argotec performed well. In addition, DelStar's organic sales stabilized in the second quarter, an encouraging sign after several quarters of pronounced top line challenges. Other elements reflected in our second quarter GAAP and adjusted EPS included the timing of prior non-operating gains on water rights sales, and newly evolving challenges in the Chinese tobacco industry which we will elaborate on shortly. Currency translation impact on GAAP and adjusted EPS was neutral for the second quarter which is better than we had expected. Execution was generally strong across our businesses and we continue to progress on our 2016 key strategic priorities. Non-tobacco sales again represented 40% of our total net sales in the second quarter. As anticipated, trailing 12 month free cash flow will likely trend lower for the second half of the year reflecting the expected second half softening in our earnings. Our engineered papers segment delivered a strong quarter despite the start of the anticipated LIP volume reversal and the RTL weakness. In total, our cigarette paper volumes including our Chinese joint venture, CTM, were up 5% in the first quarter as strong growth in other cigarette paper products such as conventional cigarette paper and roll-your-own, offset a moderate decline…

Thank you, Frederic. I will now review some financial highlights from the second quarter. Net sales grew 19.5% or 18.3% on a constant currency basis compared to the second quarter of 2015. The quarter benefited from strong cigarette paper and non-tobacco volumes as Frederic detailed, the addition of Argotec, and some modest currency benefits offset by lower recon volumes. Second-quarter 2016 EP segment net sales were up 2.8% versus second quarter of 2015 and increased 0.9% on a constant currency basis. Recall that with the consolidation of the former engineered paper and recon segments in the fourth quarter of 2015, engineered papers now consists of all cigarette papers, non-tobacco papers and all of our reconstituted tobacco products. Within the AMS segment, net sales were up significantly in the second quarter versus 2015. However, excluding the effect of the Argotec acquisition, sales declined about 1% due to unfavorable currency movements, an improvement from recent results. Consistent with strong recent trends in EP profitability, we saw good EP segment margin performance in the second quarter despite the decline in RTL as strong volumes in other papers, certain operational improvements and cost controls continue to bolster segment margins. Currency also provided a benefit as well. The adjusted EP segment margin was up 250 basis points. EP segment GAAP operating profit margin benefited from the operational positive adjustments as well as lower restructuring costs. The AMS segment adjusted operating profit margin improved by 140 basis points and benefited from the Argotec acquisition. In addition, operational improvements within DelStar helped offset moderately higher resin prices. Shifting to consolidated earnings. Second quarter 2016 GAAP EPS was $0.85, up from $0.80 in the prior year, driven in part by lower restructuring costs which are excluded from our adjusted EPS. Adjusted EPS was $0.93, down from $0.97 in…

Thank you, Allison. Overall, we are performing consistently with our expectations thus far in 2016 and we continue driving both short-term and long-term initiatives to transform SWM from a tobacco driven paper company towards a more growth oriented, diversified, value added industrial manufacturer. Our advanced materials and structural segment is well positioned in several key growth areas, specifically water filtration and surface protection to deliver solid long-term topline growth and propel that transition. However, where we believe our management actions can make the most impact is an intense focus on AMS margins. We have already taken several steps to rationalize product lines and improve product quality and consistency. These activities are key to delivering meaningful multi-year margin expansion, and when combined with benefits of increased scale and synergies across the more integrated operation, should drive total AMS profits higher and result in a more balanced split of our profit pool between our tobacco and non-tobacco businesses. We appreciate your continued interest and support. That concludes our remarks. Ranya, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Dan Jacome from Sidoti. Your line is now open.

It looks like you had a lot of strength on the non-tobacco paper side. Sorry, if I missed it, can you just give us a little bit more color of what you are seeing there and how you are looking at the trajectory for that in the next few quarters?

Sure. So the growth that you see, and again this is only a quarter-to-quarter comparison obviously, strong growth on non-tobacco paper this quarter. The growth came from, I would say capacity filling activity, the printing and writing business and some packaging products made out of Brazil. And we took advantage of a combination of pricing actions and product mix improvements to actually take a product that is low margin into a more profitable situation.

Okay, great. And then turning to the balance sheet. If I'm not mistaken, it looks like you paid down a nice amount of debt. How are you thinking about further debt reduction activity?

Yes, Dan. So we continue to be optimistic about our ability to continue to pay down our debt throughout the course of the year. It will most likely not be at the same high level that you have seen year-to-date.

Okay. And is the plan to kind of delever to a reasonable level and then kind of build more dry powder for another acquisition. Are you guys still thinking about this year as kind of reset and integrate everything you have already acquired in the last three years?

That's correct. I think the focus is integration of Argotec, developing synergy scale. We remain active as it relates to building a strong pipeline of potential acquisitions down the road but the focus is on integration and efficiencies.

[Operator Instructions] And our next question comes from the line of Julie Li from Drexel Hamilton. Your line is now open.

My first question is on AMS. I saw the segment revenue was up 77%. Of course, majority of that increase is from Argotec. But there is also improvement in DelStar. Can you share more color on that, since when did you see improvement during the quarter?

Sure, Julie. So as we mentioned in the prepared remarks, we continue to see solid growth coming from our water filtration business and we have also seen a stabilization of our business with customers that are aligned with oil, gas and mining activities. And we have been pleased with some good growth coming from our Asia operations across a variety of filtration applications. The point that I want to emphasize is that we continue to prune our mix of industrial sales. As I mentioned, our focus this year is really to reposition DelStar on higher value applications and expand the profit margins as we are posting year to date.

And I saw there is a comment on AMS that says declines in industrial product. Can you share more color on that? What kind of decline is that? And I also noticed that yesterday one of your industrial filtration competitor mentioned in their earnings call that they had some headwinds from large power generation customers. Did you see the same kind of headwinds during the quarter?

So on the industrial products question, I think the reason we are pointing to some decline is again our focus on profitability and the fact we benefit from growth on higher margin filtration businesses around the world, is kind of helping us to improve the mix and expand margins that way. As it relates to the exposure to the power segment, industry, our focus is really today on wind turbine blade manufacturers. There is some, I would say timing of order issues that this industry presents and it's fairly concentrated. However for us, we are seeing steady activity there. And obviously, we believe strongly that there is solid growth on selling those customers mid-term.

And my next question is on recon volume. How big impact was the Chinese JV volume decline? And do you see that as a long-term decline or rather short-term and could be recovered second half of this year?

So we had a very tough comparison as it relates to CTS, the Chinese joint venture. Last year's second quarter was the strongest quarter of the year and so when we report the profits and decline in volume versus prior period in the second quarter, CTS was the largest driver of that volume decline even though the French operation were also down year-on-year. And as it relates to CTS, there is typically is some timing of orders, continued lumpiness in one quarter to another. And as a reflection of the weakness, in 2016 in cigarettes being sold by our customers to the market and probably result of some reduction in inventory of finished products within the wholesale and retail, [excepting] [ph] the Chinese market, we expect growth from the quarter but certainly not at the level that we had built in the guidance, which was double-digit income benefit if you want from the joint venture versus last year.

Thank you very much. And my last question is on gross margin and operating margin. I saw some improvement in the gross margin, 66 basis points better than the second quarter 2015. I am wondering what is the cause behind that? Did you have better supply chain or was it mostly due to lower raw material cost?

So it's a combination of several factors. I would emphasize the strong performance of our engineered paper segments and the drivers being a combination of strong volumes, strong efficiencies within execution of our plants, within our operations. We caution that we are excited to see the in-build effect of our LIP product offering and we believe that will continue in the second half of the year, but I am very pleased with the execution of the segment, engineered papers overall. As it relates to AMS, strong execution of Argotec to topline and bottom line and improved margins from DelStar are contributing to the gain in profit margins and that is expected to continue.

And we have a follow up from Dan Jacome from Sidoti. Your line is now open.

So, yes, I'm just trying to get my hands around the no change to guidance. I know there is a lot of puts and takes. It looks like Europe might be a tailwind now with attrition not as bad as you probably thought back in February. China JV near-term headwind. Is it really coming down to your optics into LIP and you feel you have a pretty good grasp around that and then kind of the wildcard is just currency? Do I have that correct?

Yes, I think you summarized it well. Obviously currency is out of our control. I think right now we are seeing a very strong first half as it relates to the volumes. On the engineered papers side, as we have said with the in-build on the LIP question. It's really, almost, we believe we continue to gain incremental share. The question is how much of that incremental share gain equates at the end of the year, which is I would have [indiscernible] to what you say, the tailwind in our business. And in terms of the challenge right now compared to our plan, is essentially the weakness on the Chinese joint venture side which obviously we will continue to report on every quarter.

And I do show a follow up from Julie Li from Drexel Hamilton. Your line is now open.

Thank you very much. I had one follow-up question about the Chinese JV RTL volume. Was that, was there anything to do with regulation side or more serious competition from local competitors or potential another new competitor entering this landscape? Can you share more color on that? Thank you.

So just to address the last point. This is not due to, I would say increased competition on the recon side in China. There is a reversal -- China was the only country of size where there was continued growth in smoking in China and that stopped last year with a small decline. We believe this decline continues and that's driven by anti-smoking regulations and excise tax increases that the government has put on cigarettes. However, this is smaller compared to the challenge that we are referencing with the volume decline. And part of that, of cigarettes sales, part of that relates to excess inventory in the supply chain through retail of finished goods, finished cigarettes. And for CTS particularly we also are dealing with another line of excess lead supply which actually is probably more pronounced than what we see worldwide. And a lot of that has to do with the fact that the industry was growing strongly and then it started to have an inflection point downward and under maybe the current state regulated system, the adjustments in terms of production outputs for cigarettes and also crops, [indiscernible] have been slow to be made. And I think that the challenge we are seeing this year is a reflection of that. I hope this addressed your question.

And I'm not showing any further questions at this time. I would now like to turn the call back to Mr. Frederic Villoutreix for any further remarks.

Thank you, Ranya, and thank you all for attending the call. We certainly appreciate your interest in SWM. Allison, Mark and I will be in our offices today and if you have any further questions, please give us a call. We certainly look forward to updating you on our progress and results again in November. Have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a wonderful day.