Good morning, and welcome to the Neenah Paper First 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.

Okay. Thank you and good morning everyone. With me today are John O’Donnell, our Chief Executive Officer; and Bonnie Lind, our Chief Financial Officer. As usual, I’ll start up with a few a brief comments, and then John and Bonnie will discuss progress on key initiatives, financial results and detail. Following these prepared remarks, we will open up the call for questions. We released earnings and filed our 10-Q yesterday afternoon. Revenues of $242 million were equal to prior year, as modest growth in Technical Products and Fine Paper & Packaging was offset by negative currency impacts and lower sales in our Other segment. On a constant currency basis, consolidated sales increased 1%. Operating income of $27 million declined from $31 million last year, but included approximately $5 million of costs in Technical Products related to the start-up of our North American filtration capacity and downtime at our German filtration plant. There were no non-GAAP adjustments to income this year, while in 2016 operating income was adjusted to exclude $1.1 million or $0.04 per share for non-recurring integration and restructuring costs. Earnings per share of $1.03 compared to the $1.11 a year-ago. The decline in earnings per share reflected a lower operating income that was partly offset by a reduced tax rate for the quarter. Lastly, I’ll remind everyone that our comments today may include forward-looking statements, and that actual results could differ from these statements due to uncertainties and risks noted in our SEC filings and on our website. With that, I’ll turn things over to Neenah’s Chief Executive Officer, John O’Donnell. John O’Donnell: Good morning. It’s been a busy year so far at Neenah. Certainly a major activity has been the start-up of our North American transportation filtration asset with the newly repurpose paper machine in adjacent solving…

Thanks, John. Good morning, let me begin with Technical Products. Sales of a $122 million were slightly ahead of last year in U.S. dollars and up over 2% on a constant currency basis. Higher volumes accounted for around 1% of the increase, led by strong growth in labels, continued good performance in backings and modestly higher transportation filtration where we had to draw some inventory peak demand due to the tight capacity. In addition to increased volume, a higher value mix also contributed to sales growth. Operating income of $12.5 million declined from $19.2 million last year, largely due to $3 million of filtration startup costs and $2 million of higher costs from Germany, mostly for production downtime taken to improve the safety and reliability of our saturation process. In addition, profit was negatively impacted by almost $2 million due to a combination of higher input prices currencies, and other cost increases. Input costs reflected a double-digit rise in the price of latex, one of our most significant raw materials used in Technical Products. As noted in the past, a portion of our customer contracts have raw materials price adjustors that typically lag by a quarter or two, so there was limited price realization in the first quarter. Finally, there were no integration or restructuring costs in 2017; these costs totaled $300,000 last year and were reported as an adjusting item. Turning next to Fine Paper & Packaging. We began the year with a very strong start as we refreshed our CLASSIC brand, raised selling prices and continued to expand our retail presence. Net sales passed $114 million and were slightly ahead of last year. Volumes increased 5%, mostly due to increased sales of non-branded grades sold directly to certain leading customers and strong growth in the retail channel. These…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Dan Jacome with Sidoti & Company. Please go ahead.

So, just a couple of questions here, first on Appleton, good to hear that you are still targeting this $90 million, once you climb up capacity cost over. But what sort of utilization rate on that capacity does that assume, is that like 80% or is that closer to a 100%? I was just curious. John O’Donnell: Yes. I mean, we tend to view these assets, if you’re in 80s, you’re in full capacity, from that standpoint. So, given the number of grades and products associated with it, that’s we believe is full.

Okay. And then, if I heard you correctly, I think you said profitable by the second quarter of 2018, was that correct? John O’Donnell: No, it wasn’t; you’re very attentive, and my whole group gasped. I meant to say second half of the year, but I did say that Dan. You’re tracking on my every word…

No, I do have my day today, the rare day -- today I wouldn’t want to [indiscernible] looking at the transfer transcript and you said second half 2018. So, I got very excited. I am still excited, don’t get me wrong. I just wanted to see if there was a different. Okay, that’s fine. So, labels here, obviously double-digit growth, very encouraging. I think in the last call, you gave us an idea that you are going to be introducing new product in 2017. So, just wondering for the double-digit growth, how much of that was maybe core run rate growth versus the new product, what drove this outsized performance? John O’Donnell: Yes, I did give honorable mention last time to labels, new products, but this was predominantly products that were commercialized earlier, one of a big, like our harsh environment product, which is a lot of the growth has been driven by regulation, changes, which introduce new colors. Once they did that, they introduced digital print and that brought it to our products as a solvent solution. So, we are still enjoying growth from that. The pipeline is still good on the labels. And I hope to talk on the future earnings calls about some of the successes.

And then on the production outage in Germany, can you just give us a little flavor of like what exactly you are doing? I think the press release cited your boost in saturation capabilities, which I understand. Just kind of give us a better understanding of what the long-term goal there is, like improve the quality, better cost curve or both? John O’Donnell: We are very happy with the quality from our facility. But, it really was a safety and reliability of the process. So, this is going to be at a very high level. But, we saturate with methanol, which is a liquid, but our raisins can come in either in a liquid or in a dry form. So, when you combine the two together, you’ve got fumes from one and potentially a combustional material on another. So, when we built our Appleton facility, everything is state of the art and the latest. And we had a solution built in, in Appleton that from a safety standpoint, realize, we need to make sure that we implement that in our legacy business in the barrier. So, as much as I did want to take a week of down time out, I never want to look back and say, wish I did.

Okay. John O’Donnell: So, it’s a really safety and reliability. The team was awesome and in the fact that they were able to reduce inventories, but it’s going to be a while before we can replenish our inventories, getting Appleton qualified.

And then last couple here on a Fine Paper; it still seems great numbers, just on the retail. Just given -- I know it’s a public call here but what’s your secret sauce on the retail channel; why are you guys continue to be seeing as a supplier of choice, if I can call you that? John O’Donnell: Yes. I’d tell you, I am very, very pleased that -- you are exactly right. First of all, first quarter disproportionately has retail sets. So, if there is going to be change, it’s going to happen typically in the first quarter. The team was able to grow their business by 9% in the first quarter, it’s going to be -- that’s not a run rate you should expect all the year, but they did have a lot of success. And a lot of it’s because it’s consolidating category that has significant brand recognition. I mean, we really are the brand leaders and nothing is more important at retail than your brand presence. So, team’s done a great job at that growing well in the first quarter, and retailers can be relentless. If your products don’t perform, you’re not going to sit on that shelf.

Okay. And then, the last one is on the M&A pipeline, looks still healthy but any color there in terms of what’s coming to your cable; is r it more on premium packaging or maybe technical products or just rather not get on talk about that on the call? John O’Donnell: I will tell you, I always talk about that piece. But, I believe that our packaging team has a lot of the capabilities required to activate their strategy. Some other minor things but really we are focused on the technical product side either in additions to our filtration business which would be ideally or into our performance material. So, we’ll likely be focusing on the technical side of the business in the near term.

The next question comes from Jon Tanwanteng from CJS Securities. Please go ahead.

Really nice performance in the Fine Paper segment with 18% operating margins. I think you mentioned that advertising was light in the quarter and it’s going to normalize for the rest of the year. Can you just give us a magnitude of what the swing is going to look like in sequential quarters and was that $2 million [ph] in difference that you noted from year-over-year? John O’Donnell: I think what we meant to characterize if we said that, what we meant to characterize that you are going to see a much more quarter-to-quarter spending level this year. Last year, if you go back to the first quarter, we had some pretty high costs early in the year and it’s going to be really going to be flat quarter-to-quarter. So, I would look at our spending in Q1 as being more representative of how we anticipate our quarter spends to be.

Got it. And the follow-on question would obviously -- do you think those 18% operating margins are sustainable there? John O’Donnell: I would be disappointed if you didn’t ask me that Jon. I think what I’ve publicly said is mid-teen margins, 14% to 16% is a good expectation for the business. What those 18% really highlight is the fact that even though this business was not impacted by the fiber increases that are coming over the next two quarters yet, they’ve already acted in the marketplace and been able to move their pricing already. So, I think what we’re seeing is price increases being able to be pulled through yet the year or early parts of fiber impact. I would expect it to move back down a bit.

And then just a little bit more color on the downtime in Germany; it’s nice to see that you are putting out process improvement. Was that actually planned beforehand or something that you just realized as you implemented Appleton and you realized you have something better? John O’Donnell: I think when we -- I think we’ve known the current process; we had the same process in Germany for quite some time. So, we’ve known that process. I think it really became I think more of a sense of urgency when we realized the differences between the two processes and we needed to implement in this first quarter. And what’s consideration at the end of last year, we were talking about but understanding just how different the two process in the handling was; clearly, the safety component of this, what made it a very easy driver that rather than wait and put it in our forecast, we really wanted to get that in and implement it.

And then, just finally, Bonnie, on the interest expenses at the run rate we should be using going forward, given the way you’re changing how it happened last year?

Yes, I think that’s a reasonable assumption.

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

So, first off, sticking with Fine Papers, given some of the maybe incremental input costs and then the lag of the price increases, is there any way to sort of talk to how maybe the CLASSIC branding re-launch would maybe help offset those things as the year went on? John O’Donnell: Sure, yes, those are separate things. So, let me back up just little bit. The Fine Paper business was able to early activate their overall pricing. So, they’ve been able to move. I was talking more in general; I am probably leading more towards a customer by customer view on the technical products. So, she’s enjoyed, I say she, Julie Schertell runs our business there. They have implemented mix really what’s given that 80 margin in the overall quarter. The CLASSIC relaunch does create some strong market interest and excitement. But, just as a remainder, even as good as our marketing is, this is still a business of secular decline. So, it will help offset some of the pressures that they feel as customers bring new solutions to the marketplace. So, both of those are value adding. But, I would fully expect the second quarter, third quarter really feel a lot more input pressure on from wood fiber.

Okay. So, it’s fair to say that the record earnings in the first quarter aren’t obviously good run rate and probably are the best of the year? John O’Donnell: Yes. So, sometimes when -- don’t multiply that times four, I think what she -- what really -- what not to do. And by definition, from a record standpoint, the moves have to come in alignment. I don’t want to take anything away from them. What we saw was real successful progress in the retail business capturing new shelf sets, the courage to announce pricing early, the market awareness to relaunch the CLASSIC businesses overall, and then the consistent commitment to packaging and packaging growth, we invest in the overall business. So, yes, there’s a lots of great things going on; and there are all those things come together and deliver a record quarter. But, there is a lot excitement in that business.

And then, just one more higher level. Looking at the secular decline that you mentioned, struggles in the commodity market, can you talk about any sort of increased competition you have seen from people trying to move up the value chain or sort of what gives you comfort with your competitive positioning? John O’Donnell: Predominantly, we are talking about Fine Paper, because on the technical side, we really do create end-use solutions that pricing is usually the only way to get knocked out on that. There are inherent product solutions. So, on the Fine Paper side of it, I talked about the brand equity. So, those brands have been built already from that standpoint. Second, there is a significant technological barrier, whether it’s in the amount of great changes that our assets can do, the post paper machine processes converting and ability to do small runs. Those are going to be our real clear barriers for anyone stepping in. It doesn’t mean that the highest end of somebody’s white papers couldn’t be challenged some of the lowest end of ours. But what we are finding is also that when people are looking for direct mail solutions or greeting cards, they are looking for a little higher technical quality level. I mentioned in the call, we had a significant increase in what we consider to be non-branded greeting card, which we would say from a product portfolio, it’s at the bottom of the list. Good news is that when people are deciding to print are going to print with the best.

All right. And then, moving to Technical Products. Could you provide a bit more color on some of the support from your customers, as far as the ramp from Appleton? Is there any way to sort of quantify spoken for volumes or should we just sort of take away that 30% breakeven capacity figure you used and then say, well, it’s in the second half of 2018, you are going to be profitable, maybe you’re at like a $30 million revenue run rate; is that sort of a good way to look at it? John O’Donnell: Yes. I think that’s appropriate. As you can imagine with customers, our products are very small cost component in the overall engine. So, making sure that what they -- when they transition or move to a different asset that they are very, very comfortable with that. The efficacy of the product replicates what we do in Germany. So, we knew going into this process that it’s going to be a longer approval time. But customers will decide how quickly they get to their comfort level. We’ve already qualified a number of grades into this commercial and we’ll start to see some of that revenue into the second quarter. And we’ve made the majority of the samples that we do on our paper machines and continue to move that through our saturating processes. So, the customers will decide the speed in which we go. I want to make sure that you are having awareness of our expectation. And I think it’s a conservative expectation that by the back half of next year, we should have about 30% of that asset utilized which is where we draw that breakeven line.

Okay. And then, sort of the incremental $7 million to $8 million versus the $4 million you had talked about before. That was speed that was you deciding to ramp up quicker or maybe just… John O’Donnell: Yes. There is a variety of things. And I would say the first is we did a lot more trials than we had anticipated or planned. So that’s a very positive thing, if you assume more trials means potentially more qualification, so. But unfortunately, if you are running trials, you got a very, very low yields and that was one of the poor assumptions I think met from the beginning. Second piece is the labor. With more trials, I better be able to go not just one shift to two shifts and I better have prepared and trained labor, so we hold labor cost up from that standpoint and that’s impacting us early. But, I would hate to get a qualified product and then not be able to optimize the speed on this asset. So, those are a couple. We probably were more conservative than we should have been. What we are ensuring is that our customers know that we’ve got incremental capacity to support their growth and we need to make sure that we’re prepared to do it at the speed that they are willing to do it, so adding a little more cost upfront for us.

Okay. John O’Donnell: I’m not concerned on the project.

Okay. And then, finally, forgive me if I missed this. But can you -- could you tell us where you sort of be comfortable taking the debt on your balance sheet? I think it’s maybe 1.5 times EBITDA now or where -- would you be comfortable as far as like a sizeable acquisition or taking it up 2 or where you would like to just sort of run consistently? John O’Donnell: What we’ve communicated is our ideal leverage target would be 2 to 3 times. You are right, we are below that 2-time period. And even we’ve been below that 2-time for the last four years -- five years, even though we’ve made four acquisitions, our expectation would be that if we find the right opportunity for Neenah, we would be willing to lever up to 4 times but then our priorities for debt reduction -- it would be in prepayable debt and our priorities would change and bring ourselves back down to that comfort level. We grew up a lot of cash but getting the right acquisition is by far the most important thing. The leverage metrics are more of a byproduct of the decision than the driver of the decision.

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

Okay. Just very briefly, thanks everyone for your time today. Feel free to contact me if you have any follow-up questions, and we’ll look forward to updating you on our progress later this year.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.