Good morning. My name is LaShanta, and I will be your conference operator today. At this time, I would like to welcome everyone to the Neenah Paper Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, August 8, 2013. 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.

Great. Good morning, and thank you for joining Neenah's 2013 Second Quarter Earnings Call. With me today are John O'Donnell, our Chief Executive Officer; and Bonnie Lind, our Chief Financial Officer. I'll start with a few brief comments and then turn things over to John and Bonnie to review business activities and financial results in detail. As noted in our press release yesterday afternoon, adjusted earnings per share were $0.80 in the second quarter. Earnings were adjusted by $0.03, primarily for a noncash write-off related to refinancing our senior notes. Last year, adjusted earnings were $0.85 per share and excluded cost of $0.08 for integration of acquired Fine Paper brands. Earnings on a GAAP basis were $0.77 per share in both periods, and a reconciliation of adjusted earnings to corresponding GAAP figures is included in our press release. Finally, as a reminder, this call will contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from these statements. These risks and uncertainties are described in detail in our SEC filings and in the Safe Harbor disclaimer contained on our website. And with that, I'll turn things over to John O'Donnell, our Chief Executive Officer.

Good morning. As Bill mentioned, adjusted earnings in the second quarter were $0.80 per share. That's not only exceeded our expectations but was our second highest income level ever, only bettered by the second quarter of last year. Technical Products operating income increased significantly versus the first quarter and was equal to last year's very strong results, despite a somewhat weaker but improving business environment in Europe. And our Fine Paper business continues to deliver mid-teen operating margins, supported by market-leading brands and a more efficient operating platform. Coupled with working capital improvements in the quarter, earnings translated into cash from operations of almost $28 million. Results also reflect the continuing progress against 3 strategic priorities. As I've shared before, at first, to build businesses in profitable specialty niche markets where we have a meaningful share position and right to win through improving the performance or the image of a product; second, to increase our growth rate and portfolio diversification as we invest and expand with high-value products in growing markets; and third, to operate in a disciplined financial manner that will deliver consistent and attractive returns for our shareholders. Let me update you briefly on our progress in each of these areas. We're continuing to build upon our meaningful positions in profitable niche markets. Some of these more sizable markets include transportation filtration, premium labels, specialized backings and branded fine papers. Transportation filtration is our largest Technical Products business, and the majority of this business is in Europe, where we hold a leading share. While economic conditions in Europe remains soft, our filtration business has continued to perform well, and volumes grew 5% this quarter. With 70% of filters going through the aftermarket, this provides a solid foundation in consistency and demand. Growth is being supplemented by an increasing…

Thanks, John. As usual, I'll cover our business segments first, starting with Technical Products. Sales of $106 million were in line with last year despite the challenging global conditions in Europe and slowdowns in Asia. We were able to do this with growth in filtration, labels and tape that helped to counter declines in the more economically sensitive industrial and other product groups. Our mix improved in the quarter with growth in higher-value products, and we also benefited from translation gains due to a slightly stronger euro. Operating income of just under $12 million was similar to last year's pretty strong level and up significantly from $10 million in the first quarter. While operational performance is improving, it continues to be below last year, and plans are in place for further improvements in the second half. In the second quarter, the impact of higher manufacturing costs was largely offset by a more profitable mix and decreased selling, administrative and other expenses. Moving on to Fine Paper. Quarterly sales topped $100 million and were up 4% versus last year. Increased revenues reflected growth from acquired brands and increases in luxury packaging, retail and international market. Net prices were also higher, reflecting price increases and an improved mix of higher-value branded products like our business papers, envelopes and other specialty grades. Operating income was $15.5 million compared to $13.3 million last year. After excluding integration costs in both years, adjusted income grew from $15.2 million to $15.6 million. Increased income resulted from higher average net prizes and improved manufacturing efficiencies, partly offset by almost $2 million of higher input costs and added selling, marketing and distribution costs associated with the increased sales. Advertising expenditures were also higher in the quarter due to timing of launches and promotions, and this should decline in…

Thank you, Bonnie. Let me start with a few comments related to our employees as success doesn't happen without their commitment, engagement and accountability. We recently finalized new 5-year labor agreements at all of our U.S. facilities and entered into new multiyear labor contracts in Germany. Relationships with our unions are productive, and with their support and ownership of results, we continue to work together on our common objective of safely providing the products and quality our customers value while never losing sight of the importance of continually managing our costs. Safety is a top priority, and our performance remains substantially better than the industry average. Our teams throughout the company are focused on this area, and our goal remains that no one be hurt in the workplace. I'd like to recognize employees at our plant in Munising, Michigan, who've reduced their rate of injuries by 2/3 this year, and also at our Bruckmühl facility in Germany, which has now operated injury-free for the majority of 2013. Next, let me briefly talk about expectations for the second half of the year. As a reminder, demand in the second half reflects normal seasonality with some holidays in Europe and year-end holiday downtime at many of our large customers. In the third quarter, we take annual maintenance downs at most of our plants. Higher spending and other costs related to downs are typically $3 million to $4 million, and our teams are focused on managing those costs and working safely through the down periods. With lags in our pulp contracts, we're expecting book costs in the third quarter to increase by about $1 million from the second quarter levels. Most of this will be related to hardwood prices used in fine paper. For the full year, the largest increases have been in…

[Operator Instructions] And your first question comes from Jon Tanwanteng from CJS Securities.

My questions. Gross margins were pretty nice despite what was a pretty tough macro headwind. I'm just wondering how sustainable you expect them to be?

Well, as you look across our business, I think we've demonstrated on the Fine Paper side, even through notable acquisitions, that they've got the -- both the market position and the brand positioning to maintain their margins. So feel very comfortable with the strength of our fine paper business. As we've talked in the past that our ability, not only from the economic position but the input cost changes, we play in the very high end of each of the categories in the niche, so our products continue to deliver differentiated capabilities and values. And that's been able to enable us to protect those margins. So I feel very comfortable about where we are from a margin standpoint.

Okay. And then just a clarification on your outlook as it pertains to revenue. Did you expect Q3 to be a sequentially lower quarter as per your historical norms? It seems that there haven't been major improvements in markets like back-to-school, Europe or anything like that?

Yes. The seasonality of our Technical Products business in the third quarter probably is not going to overcome any -- of any improvements with our back-to-school and some of the other areas. So I would expect no unnatural acts here that we're be going to be more in the traditional seasonal, with the front half representing typically 52% of our annual sales in the back half, 48% kind of a rough, and Technical Products having a much more seasonal business than our Fine Paper.

Okay. And then just on the Cordenons partnership that you announced, can you talk about the P&L impact of that at all?

Well, I will suggest this -- and again, that will be rolling out in the third quarter, we'll be talking about that a lot more as we move forward. But I would tell you that the revenue from the Gruppo Cordenons association isn't as significant as the partnership is to the strategy of growing luxury packaging in the Fine Paper business. You might liken it back if you follow -- we, a number of years ago, brought on the CRANE brand and was able to double our revenues in that. Our expectation is that with our distribution capabilities in our commercial markets and our focus on growing the very high end, this will be a very complementary piece of business for us. But I will also highlight, Fine Paper business has been -- and as you know, better than I than anybody that secular declines since 1997. And they have a headwind of about 3% a year of decline. This is a great example of some of the creative things that the Fine Paper business is doing to continue to offset. So the last 3 years, we've demonstrated growth in this business. Here's one more addition of the brand management as well as the envelopes and some of the other things we're doing to try to offset that. So, but we'll talk about it more in future calls as we bring that in and really get the market reception from our customers.

Okay, great. And one final one, you obviously increased your dividends substantially over the last 6 months. You have a very attractive target range over the next couple of years. I'm just wondering, does that mean you guys have seen less opportunity in M&A, which is your first option for cash deployment? Or is it you're just that much more confident in your cash flows?

Yes, I would -- first of all, we've said that growth and diversifying our portfolio is an important part of our future, and growth through M&A is an important part of our future. And if -- I think if you look at the robustness of our cash flows, especially when we step-change with some of the Wausau and some of the others, you'll see that even with the expectations that we've outlined to the market, it's not an onerous amount of cash being utilized for the dividend. And our -- by all means, acquisitions will continue to be a part of our view of how we can diversify and then -- and bring greater value. So we don't view them as mutually exclusive or one or the other. We really view that one as demand [ph].

Your next question comes from Mark Weintraub with Buckingham.

First, I just want to -- you just had mentioned kind of diversifying the portfolio being a priority. And wanting to understand, when you say that -- I know that in particular, filtration has been an area of potential. Are you -- which I guess, I wouldn't have thought of as being a diversification? Or would that be included in the notion of diversification if you're expanding geographies or going into adjacencies? What exactly -- can you just help me out a little bit, what do you mean by diversifying portfolio?

Sure. Some of -- and in fact, some of our Technical Products categories aren't -- they don't accompany significant growth opportunities. So what we're really after, either they can be finding new growth categories, they may be filtration-oriented and take advantage of technologies we have, they might be other performance-oriented products. So when I say diversify, really, some of the categories we're in don't have strong growth characteristics with them. I'm thinking of [indiscernible] to least -- for the least liner in the past. So when I'm talking about diversification, I'm really saying looking for performance-oriented growth markets. And that can be geographically. It can be a product category.

Okay. And can you give us perhaps a little bit of an update on what's happening in, for instance, the industrial, that some of the tape markets, which I know have been a bit more difficult competitively and hopefully, though, they'll be -- that the competitive dynamics might improve? What are you seeing in those markets?

Yes, we definitely enjoyed that. We even mentioned in the transcript that we've recaptured some of our share. But I'm as excited about the specialty products that we've rolled out and to recapture a big portion of that growth. So yes, we have seen that pick up. It's up significantly, I think 15% for our tape business. And as people have moved in and out of that business or as capacity has changed, continues to have our customers think hard about continuity and consistency and supply, and then who they want to line up with for their long-term growth and we've had great success both out of our Bruckmühl, Germany facility as well as out of our Munising, Michigan.

Okay, great. And just one -- real quick one. Bonnie mentioned targeted dividend yield. Could you just remind us again what is the -- how do you think of the targeted dividend yield?

Mark, we -- as you know, we benchmark ourselves against the Russell 2000 value. And when we say an attractive dividend yield, we say attractive relative to other players in the Russell 2000. And as we said in the transcript for it, we want to have a dividend that's attractive relative to the better performers of the Russell.

Your next question comes from Larry Stavitski with Sidoti & Company.

I'm just -- if you can kind of detail the environment, I guess, you spoke of Europe and Asia. And I mean, I guess the economically sensitive industrials kind of took a little bit of a hit. Can you kind of, I guess, elaborate on what you need to see for the industrials to start picking up to where you would like to see them?

Sure. And the way we'd like to see them always is up and to the right. As we've said in the past that a large portion of our Technical Products business, 2/3, resides in Europe. So from that standpoint, just the economic position of Europe is critically important for some of those products. We've actually enjoyed when we talk about the 5% growth in transportation filtration because our customers continue to find growth as they export outside of Europe. So our view of -- as China picks up, as Europe picks up, where we've seen some strengthening here in the U.S., those are going to help those products and the recovery of those products, which I think we felt a little heavier in the first half of this year.

Yes, we had the timing impacts on some of our durable papers.

Okay. You mentioned that the 5% growth rate in the transportation filtration segment, and you said it's, I guess, ahead of the greater market. Where do you see, I guess, long-term growth rates for that market and for you guys, specifically?

Yes, we're -- especially on -- when we talk about the 5%, we're oftentimes comparing it to the other product categories where we participate. I -- the shorthand for us is 2x global GDP as where we see the -- our filtration performance, where we've historically been and where we think we've been. The history doesn't always anticipate nor predict the future, but we've had an 8% CAGR over the last 8 or 9 years. And we believe that given the focus and investments on the high-end technology side and the innovative role that we play with many of our customers, we -- that's the level of growth expectation we have for our transportation filtration business.

Okay, got you. And I'm sorry, Bonnie, can you just go over the debt on the NOLs again? I kind of missed. Is it $30 million by the end of '14? Is that what you said?

No, we have $39 million as of the end of June.

$39 million, okay. And you'll expect to utilize those by the end of '14?

By the end of 2014.

Correct.

Okay, great. And I don't know, finally, if you could, just on the Cordenons licensing thing...

Sure.

I don't know if you can elaborate. But is -- are those distribution capabilities only in Italy or will that be throughout Europe?

No, and that's a great question. Thank you for having me elaborate. We said production is in Italy. The unique characteristics, whether it's in incredibly thick products for packaging or a plastic feel, plastic-like product that's paper or a soft-touch type of a product, they're produced in Italy. But we'll represent those products with our market-leading distribution in the United States and Canada. So that's what we're talking about when we're talking about that association. Obviously, success with that continues to look for ways of more international growth. But they are producing the products. Those types of capabilities aren't worth investing in our system, and our system, as a reminder, is loaded with high-end products for our domestic business. So this will be an additional revenue associated with that. North America is really what we should be thinking about as the geographic portion.

Your next question comes from Stuart Benway with S&P Capital IQ.

Yes. In Technical Products, it would seem to me that if volume fell in your lower-margin categories and rose in your higher-margin businesses, that your overall margins would rise but they fell a little bit instead. Can you tell me why?

Yes. I think some of the product categories that we have -- and I don't want to give you the answer of mix, but I'm going to talk you down the answer of mix a bit here, which is, I did reference abrasives as we talked about it from an overall product category. And it's a fairly decent-sized category portion, and it was down significantly for some of the things that we've talked about here. I also referenced, may have been this transcript, but our manufacturing performance in the first half of the year and our Technical Product business has been more challenged. I know I sung the praises of our Fine Paper business as they continue to set records. But in our -- on our Technical Products business, we've been more challenged from a manufacturing standpoint. I expect -- and we saw some progress as quarter-to-quarter -- expect that to improve as we go into the back half of the year. So it's not all product mix-related as much as it is the combination of the above. I know it sounded convoluted, but that's the best answer I can provide you.

Okay. And in the -- what you call industrial businesses, I guess you talked about it to some extent just recently there. But I mean, do you think there's any secular decline going on in that business or share loss? I mean, like your people not using wallpaper either commercially or residentially?

Yes, I think there's a variety of things in that industrial group. We have a variety of products in there. Some of them are, in fact, experiencing decline, some of the pre-masked tapes and some of the other products. From a wall covering standpoint, we participate in a unique segment of the wall covering. So not in all segments of overall wall covering. There are a lot of individuals who are moving into wall covering. You see a lot more competitive environment, and then the biggest part of the growth of that is Asia and Russia. And both of those markets have fed the pressures. So some of it, I would say, are economic conditions that are more temporary. There are some products inside of there that are faced with secular decline, and I talked earlier on the call about diversifying the portfolio. It's really finding performance products that have the growth elements to it, and there's many in that industrial ones that while they're very profitable, have -- they'll demonstrate a lot of top line growth overall.

Yes, one last one. With the Gruppo Cordenons, do you see any possibility of going the other way? I mean, can you sell some of your products through them?

Yes. I wouldn't rule out anything. As I mentioned before, from a creative stand, I think the first one is demonstrate the level of success that we can have here in the United States. And I'm very comfortable that our group's going to be able to demonstrate that. And then like any unique and creative decision, it opens up a lot of different alternatives, and I think that's what's critically important. It's so hard to reinvent a business that's been in decline, but the focus on the luxury packaging for this group and the focus on premium labels, we're seeing a lot of traction, and I'm excited about that. Yes, so we may be talking about other future revenue streams that we hadn't maybe talked about in the past.

I'll now like to turn the call over to John O'Donnell for closing remarks.

Okay. Once again, thank you, all, for your participation today. We look forward to the opportunity to talk to you again in November. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.