Welcome to the SWM’s Third Quarter 2017 Earnings Conference Call. Hosting the call today from SWM is Dr. Jeff Kramer, 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. At this time, all participants have been placed in a listen-only mode and the floor will be opened or 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, Katherine. Good morning. Thank you for joining us to discuss SWM’s third quarter 2017 earnings results.] Before we begin, I’d 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 the earnings release. Unless otherwise stated, financial and operational metric comparisons are to the prior year period and relates to continuing operations. This presentation and the earnings release are available on the Investor Relations section of our website, www.swmintl.com. I’ll now turn the call over to Jeff.

Thank you, Mark, and good morning, everyone. Yesterday, we reported strong third quarter results with adjusted earnings of $1 per share and sales growth in both of our segments. The businesses performed generally as expected with a continuation of momentum in AMS and the key drivers for EP playing out as we had anticipated. In short, AMS delivered solid organic sales growth with specialty films leading the portfolio again, and EP was fairly stable with LIP growth helping to offset the expected decline in RTL. It is important to note that the third quarter included an $0.11 per share non-operating gain from an asset sale that did not impact the sales of margins of our two segments. We have generated more than $60 million of free cash flow year-to-date essentially flat with the year ago period. Recall that free cash flow had been relatively light to start 2017, but that we had anticipated a substantial ramp up in the second-half consistent with our historical pattern. This materialized in the third quarter and we still expect to finish the year close to the nearly $100 million of free cash flow we generated in 2016. We were also pleased to announce another dividend increase, building our track record for steady annual dividend growth and continuing our balanced capital allocation strategy of returning cash to shareholders, as we make investments to transform and grow the business. Turning now to AMS. Excluding the Conwed acquisition, organic sales growth for AMS was 4% in the third quarter and 6% year-to-date. As anticipated, this metric slowed from the 10% we reported in the second quarter of 2017, when we had a rapid acceleration in surface protection sales from expanding our Asian distribution channels. Double-digit growth in those products continued albeit at a reduced pace, with solid…

Thank you, Jeff. I’ll now review our financial results starting with segment performance. In the third quarter, AMS net sales increased 60% to $116 million. Organic sales grew 4%, and the Conwed acquisition drove the remainder of the growth. GAAP operating profit was $15.4 million, or 13.3% of sales. Adjusted operating profit was $22 million, or 18.9% of sales, up 280 basis points. The margin expansion resulted from organic sales growth and favorable mix, both driven by specialty film products. The Conwed acquisition and associated synergies also contributed to margin expansion, while resin costs remained a headwind. The Engineered Papers segment net sales were up 4%, despite a 3% volume decline. Strong LIP volumes drove significant mix benefits, largely neutralizing the overall volume decline, pricing decreases and reduced royalties, leaving favorable currency movements to account for the sales increase. The adjusted operating margin was 23.1%, down a 120 basis points, due primarily to lower RTL volumes and LIP royalties. Additionally, our pulp costs were slightly unfavorable compared to last year. Adjusted corporate unallocated expenses decreased by 6%, due primarily to the timing of certain third-party consultant fees, such as tax and legal. As a percentage of total SWM sales, unallocated expenses declined approximately 110 basis points to 3.6%. On a consolidated basis, net sales increased 23%, but were up 4%, excluding Conwed, and flat excluding both Conwed and currency benefits. Adjusted operating profit was $45.4 million, up $10.3 million from the year ago. The adjusted operating margin was 17.6%, up 80 basis points. Regarding items excluded from adjusted operating profit, AMS segment non-cash purchase accounting expenses increased to $5.4 million, due to the added intangible asset amortization related to the Conwed acquisition and the restructuring expenses of $1.2 million related to a planned facility closure. For the EP segment, restructuring…

Thank you, Allison. To wrap up, the main takeaway from the quarter is that, we are continuing to execute according to plan across the operating segments. While there are still many moving pieces in our increasingly diversified products and markets, the most critical underlying themes remain executing on the Conwed synergy plan, efficiently managing EP and investing in attractive growth areas. We obviously remain focused on closing out the year and working towards our guidance. But we are also diligently working on strategic projects that lay the groundwork for sustainable long-term growth. Our new film line in Europe, our modified specialty paper line for filtration and an enhanced enterprise-wide software system for AMS are some of the more high-profile initiatives to improve our growth prospects. We look forward to sharing our progress on these and many other projects as they materialize. We appreciate your continued interest and support, and that concludes our remarks. Katherine, please open the line for questions.

Thank you. [Operator Instructions] Our first question comes from Dan Jacome with Sidoti & Company. Your line is open.

Good morning. How are you?

Good, Dan. How are you doing?

Pretty good. Thank you for the time. A couple of questions here. The security glass lamination, can you talk a little bit about the strength you saw there? I know, you guys talked about that end market when you first made the acquisition. But if I recall correctly, this is the first time I hear you guys really digging into it on a conference call. Just want to hear about what’s going on there? That was my first question overall.

Yes. I think it’s just continued to show the solid growth that we had expectations of when we started initially. We’re continuing to see that market expand. The reason we’re talking about is, because I think it really plays into the whole category that we’re talking around with surface protection and the key capabilities we can bring to the marketplace around thermoplastic polyurethane systems. And I think, it’s important for our investors to understand that, we’re not really just a one product pony here.

Right. And you’re definitely getting more diversified as time goes by. I will look more into that product, but where would I find that other than, I guess, conference rooms and things of that nature? Is that pretty much it for the glass lamination?

The security glass?

Yes.

Oh, no. It goes across a wide range of applications from military to safety glasses and bulletproof facilities, you name it. There’s a wide variety of end use markets for that.

Okay, great. And then specialty films still very strong. The – I think the weakness – just a sequential pullback, you kind of telegraphed that on the last call. But a longer-term, what’s a pretty normalized growth rate for that kind of 3% to 4%, I’m imagining?

Yes, we are still seeing it as a GDP plus type of business. I think, there is a lot of penetration to come in this marketplace, I think, it’s early on in the life cycle of it. We’re getting a little bit more of a kick from the internationalization, which we had talked about the last time. So I think, this right now in the near future would be one of our high growth – higher growth rate segments overall.

Okay, great. And then lastly, how much – 2018 is probably going to be a digestion period for you guys as far as acquisitions, but you never really know. Just maybe some very high-level thoughts on maybe your M&A pipeline, or remind us again maybe the two or three most important kind of check boxes criteria you guys are looking at internally for future acquisitions?

Yes. A couple of things. One, Dan, I think you are absolutely right. I mean, we need to make sure that we’re executing on what we promised with the Conwed acquisition. And so we have a number of activities that we need to complete in 2018. Now with that said, we are always looking for long-term growth opportunities. We are going to continue to focus on demonstrating we have the organic growth of our base portfolio. And in that matter though, we’re going to then look on for either some bolt-on acquisitions, or whatever else can come along. But we’re pretty disciplined in our criteria. So it’s got to match on a number of cases. One, it’s got to match strategically, so it’s not going to be something that’s really something out of the blue that doesn’t match the things that we already have. It has to tie into some of our growth themes around either technical capabilities, geographic expansion, product line extensions. And then, of course, there have to be a strict financial criteria around that. And we’re expecting now with a critical mass that we should be able to deliver synergies that will help offset some of the higher prices that we would expect for some of the attractive end markets that we’re looking at. So there’s no one single criteria. But you can see, it’s a pretty balanced portfolio look before we do anything around acquisitions.

Thank you. And our next question comes from Kurt Yinger with D.A. Davidson. Your line is open.

Yes. Good morning, everyone. As we sit here and sort of hone in on 2018, it looks like RTL should have some fairly easy comps and then with some momentum in some areas there. I mean, if we look at LIP specifically, I mean, is there anything to think about there above and beyond, maybe smoking attrition and some price erosion?

No. I mean, we’re seeing it to be fairly typical of what you see. There’s always continuing price pressure. There’s continuing attrition in the marketplace, which will impact volumes, and again, that will depend on which area of the world that the attrition rates hit. But we haven’t seen anything that material that we would change things from what we’ve seen over the last several quarters or so.

Okay. And then on the specialty film production, how is the transition of the Smith & Nephew facility going? And is that up and running, or is that more of a 2018-type event?

Yes. That’s more of a 2018. So the Smith & Nephew facility is running well. Remember, we had bought that from Smith & Nephew in the past, and so that has medical sales and that is running fine. What we’re taking advantage of is the trained workforce and the capabilities there to put a surface protection-focused line in Gilberdyke location. That project is in the early phases. We’ve had all the planning. We’re doing the engineering and the installation will be a mostly a 2018 activity.

Okay. So that facility is running as normal and then you’re just adding a line and sort of taking advantage of some extra space, I guess?

Yes. I mean, that’s really one of the synergies when you start talking about critical mass. I mean, that’s what we like now. As I think, we now have more of these opportunities to look at, leveraging sites that perhaps had been a little bit more focused on a single product line and others. This is one of the reasons we are able to actually do the Austin consolidation. Now we have enough locations that we can move materials to different sites and that’s how we’re really going to start delivering some operational synergies.

Okay, great. And then you touched on the filtration weakness. Could you maybe talk about what gives you confidence in some of those replacement-type opportunities as you go into 2018? It just seems like sort of the push out has been longer than expected. I’m wondering from your customers what sort of indications you get that, that type of market is going to improve?

Yes. So, we talk about filtration as a large category and it’s got several sub-segments. So we have reverse osmosis, process filtration, auto filtration and air filtration, they are all different segments. I think, the one you’re referencing is our reverse osmosis, which is a very important segment for us. Yes, we’re starting to see sequential improvement on it. It’s still a little bit slower. So we’re starting to see some of the indications of what our customers have indicated. It just still hasn’t hit full stride. Every time we talk to our customers and these are the major players around the world who build these units. They are telling us. They are starting to see increased interest and replacement life cycles are starting to come and hit. So again, we don’t want to get out over our skis. But the cards are showing very positives there and we’re hoping that that returns to a more traditional growth rate, which has been 5%-plus over a period of history.

Okay. And then as you bring sort of everything in AMS under the SWM banner, I mean, could you maybe talk about any sort of initial revenue synergy-type opportunities you’re seeing, or anything along the rebranding of AMS that’s exciting at this point?

Yes. I mean, we are seeing synergies. I mean, we talk a little bit about our filtration synergy between our paper unit and our filtration units of AMS. We are seeing sales synergy, particularly in regions like Asia, where we now have critical mass in our sales force and you are starting to see the advantages of that come on. The team probably has, I would say, four or five different activities around key customers. We’ve reorganized our commercial staff to now have it completely global and market focused. And so we’ve broken down those roles. We had, for instance, we had some sales staff that was focused on filtration in Conwed and other activities of legacy SWM. We’ve now combined those into single units. So we’re early in this transition, but the initial indications are positive for us.

Okay, that’s helpful. And then final one, resin prices have been up pretty significantly recently. And as we look at pricing in AMS sort of as a whole, can you talk about maybe sort of the mechanisms you guys used in the contracts? I mean, is there a lot of cost pass-through, or maybe your expectation for offsetting that inflation over time?

Yes. So there’s a couple of different things you can look at. So some of our contracts certainly have some pass-through applications, but most of the time we are a value sell. So we’re not as exposed to the movements of price. I mean, we never like it when price goes up in the short-term like it did because of the flooding. But most of our activities are value-based. So we try to take a long look at, is this a temporary increase, or is this a long-term trend? If it’s a long-term trend, we raise the prices as appropriate and we’re doing that in some locations. We think this pricing is a little bit shorter-term and it’s really going to go back to more of the norm, and a lot of it is because of the disruption of the flooding that happened in Houston. It didn’t cause us any shortages, but it really caused a scramble and I think that has raised prices for the short-term.

All right. Thanks a lot, Jeff.

Sure.

Thank you. [Operator Instructions] And we now have a follow-up from Dan Jacome with Sidoti & Company. Your line is open.

All right. Thanks, again. Sorry if I missed it. Did you discuss what percent of your EP business was Heat-not-Burn? I think you said 5% last quarter. Just looking for some incremental thoughts on that. Given your capacity, it seems like you wouldn’t need a major step up in Heat-not-Burn to offset some of the RTL weakness, going forward assuming that RTL is not a 3% decline into the future?

Yes. I think you are referencing last quarter when we tried to give you a little bit of an indication around the size of where it is currently. And we said it was about 5% of our RTL business overall, not EP as a whole.

Okay.

It is increasing. So again, this is still early on, but again, that would offset. If we could keep it at that or increase it, that would offset the typical attrition that we’ve traditionally seen in RTL. Of course, we had some headwinds last year that were a little bit more pronounced. And that’s what we’re using to give us some confidence that we’re working into a more stable environment for the EP business overall.

Okay. Great, Jeff. So it sounds like it was higher than 5%. It was – without getting too specific, it was above 5% this quarter?

Yes. I would say, that’s probably a good characterization.

Okay. What sort of push back do you get for the companies that are not using SWM technology? Is it just that they are already in-sourcing and doing everything themselves, because they were kind of maybe first on the learning curve or something?

Yes. I mean, it’s an interesting. It’s kind of a – it’s an interesting dynamic right now. And what you are starting to see is, there was a first-mover advantage, and so you’ve seen some too big first movers. But look at their company presentations, they’ve seen some real good success rate in Japan. They are now introducing it around the world. And I think that’s starting to get others moving. And so we have a number of conversations that are underway. But I think the marketplace is just so early on and it’s moving so fast that it’s hard to say for sure.

Okay, appreciate that. And then last one, just following-up on Kurt’s comments on filtration. How long – what are the replacement cycles for those products look like? How often do they need to be replaced? I think, you may have mentioned it a year or so ago, but I forgot.

Yes. I think, typically, they are two to three years.

Okay.

But again, depending on energy prices, they can trade it off to five years. When you get past five years, you’re now starting to get into a balance where you are forced to do and I think that’s where we feel we’re getting to.

Okay, great. And you go out again.

Sure.

Thank you. [Operator Instructions] And I’m showing no questions in the queue. I would like to turn the call back to Dr. Jeff Kramer for any closing remarks.

No, that’s about it. Thank you very much for everybody participating, and we look forward to the next call or meeting with you in the future.

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