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Edited Transcript of NP earnings conference call or presentation 11-May-20 3:00pm GMT

Q1 2020 Neenah Inc Earnings Call

Alpharetta Jun 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Neenah Inc earnings conference call or presentation Monday, May 11, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bonnie J. Cruickshank-Lind

Neenah, Inc. - CFO

* Julie A. Schertell

Neenah, Inc. - President, CEO & Director

* William B. McCarthy

Neenah, Inc. - VP of Financial Analysis & IR

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Conference Call Participants

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* Christopher Paul McGinnis

Sidoti & Company, LLC - Special Situations Equity Analyst

* Jonathan E. Tanwanteng

CJS Securities, Inc. - MD

* Steven Pierre Chercover

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Neenah First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

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

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William B. McCarthy, Neenah, Inc. - VP of Financial Analysis & IR [2]

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(technical difficulty)

First quarter earnings call. With me today are Julie Schertell, Chief Operating Officer; and Bonnie Lind, Chief Financial Officer. Julie and Bonnie will comment on business and financial results for the quarter as well as spend time discussing impacts from the coronavirus pandemic and actions we're taking to address this fluid situation. After our prepared remarks, we'll open up the call for questions.

Let me briefly cover a few headlines. First quarter sales of $234 million were down 3% from a year ago as strong volume growth in Technical Products was offset by declines in Fine Paper and Packaging. Earnings, however, increased significantly. Adjusted earnings per share rose more than 60% from $0.69 last year to $1.12, while GAAP earnings of $0.97 per share were up 40%. Adjusted earnings this year excluded unusual costs of $3.5 million or $0.15 per share, while there were no adjusting items last year. Bonnie will talk more about these items later in the call and as always, complete details along with a reconciliation to comparable GAAP figures can be found in our press release.

Finally, I'll note, our comments today will include forward-looking statements. Actual results could differ from these statements due to the risks outlined both on our website and in our SEC filings.

With that, I'll turn things over to Julie.

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Julie A. Schertell, Neenah, Inc. - President, CEO & Director [3]

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Thanks, Bill, and good morning, everyone. Let me start with a word of appreciation for all first responders and essential workers, our condolences for those affected by the coronavirus and our best wishes for everyone's health and safety. Obviously, the world has changed quite a bit since our February call. However, the strong performance we expected for the first quarter did not change.

Before discussing results, I also want to take a moment to recognize our employees for their commitment and agility in adapting to this dynamic environment, while at the same time remaining focused on delivering strong results. Our top priority is always the health and safety of our employees, and I'm especially grateful to our manufacturing team, who had to adjust rapidly to new ways of operating that included enhanced sanitation and cleaning practices, temperature checks, employee zoning, additional personal protective equipment and social distancing. While navigating through these challenges and changes, our teams never missed a beat.

Turning now to performance in the quarter, despite a weakening external environment, our teams delivered solid volume gains in our targeted growth categories of filtration, performance labels, digital transfer and premium packaging. This top line performance, along with improved manufacturing efficiencies and continued price discipline, helped drive significant year-on-year increases in profits and margins in both business segments. With higher profits and disciplined asset management, return on invested capital increased to double-digit levels.

Cash flows for the quarter increased more than $10 million versus last year, further bolstering our liquidity. We ended the quarter with liquidity of just under $200 million and are committed to taking appropriate actions to preserve our liquidity and strong financial position as we work through this year. While I'd like to spend more time talking about our great first quarter, what's more important now is sharing the actions underway to address expected negative impact from the COVID-19 pandemic. I've been extremely pleased with the global collaboration and rapid response of our teams during this challenging period.

As I noted earlier, our top priority is the safety and health of our employees. The new protocols we implemented to protect employees and contractors have been effective, and we've had no disruption to our operations. I'm also very pleased that our safety performance in the quarter improved, building on the trend started late last year. With changes in the external outlook, we quickly began assessing potential financial impacts and proactively began reducing costs. These actions included: significantly cutting spending in areas like maintenance, marketing and SG&A; reducing operating labor and machine schedules; reorganizing to enable salaried headcount reductions; deferring annual salary increases; freezing travel, new hiring and internship programs; and idling a fine paper machine, which I'll talk about shortly.

Further, to maximize cash flow, we implemented additional measures including reducing capital spending by 50% from our prior guidance, driving working capital efficiencies, reducing pension contributions and suspending share repurchases. While unable to fully offset the impacts from COVID-19, we believe these actions, valued at over $50 million, will enable us to maintain ample liquidity.

We also exited our planned acquisition of Vectorply. Between the time we tendered our offer until when the agreement was terminated, there was clearly a material change in conditions. This was a prudent decision for Neenah, allowing us to maintain our strong balance sheet going into an unexpected economic downturn and, more importantly, coming out of it.

Let me turn to our efforts with customers. As you might imagine, many customers are currently focused on their immediate needs versus longer-term projects or new opportunities. We're working with them to meet these needs, while at the same time never losing sight of being prepared with new capabilities and ways of doing business. One of the ways we're doing that is by continuing to invest in R&D capabilities. Our R&D work contributes to our long-term growth and has led to the launch of several new products this year. Many of these products, such as low-emission filtration media, fiber-based plastic alternatives and digital transfer media for natural textiles, have both cost-in-use and environmental benefits to customers.

In addition to customers, we also developed plans and worked closely with critical suppliers to safeguard our supply chain. While we've had no mandated or supply-driven disruptions to our businesses, as always, we manage operations in line with customer demand. With softening economies and markets, we began to see weaker demand in mid-March, especially in printing papers.

Consequently, we decided to idle one of our fine paper machines in Wisconsin beginning in early May. While these are never easy decisions, it allows us to more fully load our other machines and optimize our asset footprint, helping to ensure that we stay cost competitive. We expect this action to save over $1 million annually, starting in the second half of the year and will book a related onetime, mostly noncash charge of approximately $2 million in the second quarter. As you can see, we've reacted quickly and taken aggressive, prudent actions to protect our strong financial standing while staying fully engaged with our employees, customers and suppliers, and with a view towards short-term and long-term success.

I'll talk about our outlook later in the call but will now turn things over to Bonnie to cover financial results in more detail.

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Bonnie J. Cruickshank-Lind, Neenah, Inc. - CFO [4]

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Thanks, Julie. Good morning, everyone. I'd also like to add my appreciation for everyone who is fighting the fight during these challenging times and similarly, recognize the amazing job by our employees responding to these conditions.

We had a very good first quarter across all financial metrics. Top and bottom line performance was impressive. Margins improved significantly. Cash flow and liquidity were very good, and return on capital increased. Consolidated sales of $234 million were down 3%, but we delivered strong volume-driven increases in technical products and solid growth in premium packaging, though not enough to overcome declines in a very challenging paper market and headwinds from currency.

GAAP operating income was $24 million and was $27 million on an adjusted basis. This was up from $17 million a year ago. While there were no adjustments in 2019, there were $3.5 million of unusual costs this year. These adjusting items were: a onetime payment of about $1 million to our operations workers to compensate them for hardships related to COVID-19; corporate costs related to the terminated Vectorply acquisition, also around $1 million; and then finally, $1.4 million of costs for restructuring, following implementation of our new functional organization and for minor other items. As a reminder, details on adjusting items and a breakdown by segment is included in our earnings release.

The quarter would have been even more impressive, except for 2 things. Like most companies, we saw orders and shipments start to fall off significantly in the second half of March as the economic outlook worsened. This was especially true in our Fine Paper segment. We, therefore, made changes to increase reserves for uncollectible accounts receivable in both segments to reflect this worsening outlook.

I'll start with a review of business results and adjusted income before turning to corporate items, including liquidity and capital allocation priorities.

In Technical Products, quarterly sales of $142 million grew 2% and were 3% higher on a constant currency basis. The increase was driven by 7% of volume growth with increases in both filtration and performance materials. Filtration grew in the low to mid-single digits with gains in transportation and other filtration products and an improved mix and new business.

Performance materials growth was led by double-digit increases in backings as we gained share with the launch of new products in North America and grew volume in Asia and Latin America. Performance materials also increased in key categories like dye sublimation and labels. Partly offsetting the favorable volume were lower net prices, mostly in performance materials due to selling price adjusters for some customers and a lower value mix.

Adjusted operating income was $17 million, up almost $6 million, while operating margins were an impressive 12% compared to 8% last year. In addition to higher sales, income increased due to improved manufacturing costs, including fixed cost absorption benefits from higher production volumes, and lower input costs versus a year ago. These positive items were partly offset by $1.3 million of higher SG&A, which I'll talk about a little later.

Turning to Fine Paper and Packaging, quarterly sales of $91 million were down 8%. This was mostly due to a 6% decline in volume, primarily commercial print, where market demand fell by more than 10%. Commercial print is a short-lead-time category and reflected a more immediate impact from the COVID crisis. We also had lower sales related to the transition from a major distributor that we began last year.

Partly offsetting the commercial print decline was growth in premium packaging, led by a double-digit gain in labels and in our consumer channel, where sales of our ASTROBRIGHTS brand grew by double digits as at-home activities increased and online sales grew.

Adjusted operating income was $16 million, up almost $4 million, and operating margins remained in the upper teens. The increased (sic -- decreased) cost was due to lower input costs as well as cost improvements, which combined, offset the impact of lower volume.

Looking next at corporate items, consolidated SG&A was $26.6 million. This was up $1.3 million from last year as we incurred $1.7 million of increased costs due to our higher reserve for uncollectible accounts receivable and timing of leads, legal expenses. The majority of this increase was in Technical Products.

We expect consolidated SG&A to average a little over $23 million per quarter for the remainder of this year, which is down from our historical run rate of about $25 million per quarter.

Unallocated corporate costs on an adjusted basis were just over $6 million and up less than $300,000 from last year. Quarterly interest expense was $2.9 million, down from $3.2 million last year as a result of lower average debt. Our tax rate in the quarter was 21%. This was up from 17% last year when we benefited from a reduction to our reserve for uncertain tax positions following completion of an audit in Germany. We currently believe our full year rate will be no more than our previous guidance of 22%.

In late March, as a precaution, we drew down $65 million from our revolving credit facility, and so we ended the quarter with debt of $272 million and cash of $78 million. This net debt of just under $200 million resulted in a net debt-to-EBITDA ratio of 1.5x. Along with other quarterly financial data, EBITDA is reconciled to GAAP on schedules posted on our website if you are interested.

Most of our debt is comprised of a $175 million senior unsecured note due in May of 2021. While we had plans early in the year to refinance, debt markets tightened as economic projections worsened, and we've decided to delay. We continue to actively monitor debt markets and feel comfortable in our ability to refinance this later in the year with terms more favorable than what's available in the market today.

I'd also like to comment briefly on our global revolving credit facility, where we have long-standing relationships with the high-quality banks that comprise this facility. The revolver is asset-based and sized at a maximum of $225 million. As of March 31, availability was $117 million, and with cash on hand of $78 million, provided us with a strong liquidity position going into the crisis. Covenants are not expected to be an issue. Under the senior note, covenants generally come into play only if we incur new debt, while revolver covenants are triggered only if availability falls below $28 million.

Cash generated from operations was $14 million in the first quarter. This is up significantly from $3 million last year. First-quarter operating cash flow is typically lower as accounts receivable and inventories increase from year-end lows. For example, in 2020, our first-quarter cash flow included a $14 million negative impact from increases in working capital. Capital spending in the quarter was $5 million. That's similar to last year.

Next, I'll talk about our liquidity outlook and capital deployment priorities. As mentioned, we headed in the second quarter with a strong balance sheet and substantial available liquidity on existing credit lines. Expectations are for global economic activity to decline significantly in the second quarter, and we will work to flex our costs as much as possible to match demand. However, as a manufacturing company, we have a sizable amount of fixed costs, and shedding cost for a short-term decline is often not prudent or even possible. In general, I'd estimate our variable margin to be around 35%.

Julie listed actions we've taken to control costs and maximize cash flow. Let me provide some more detail about a few of those. Capital spending this year is expected to be around $15 million, well below our normal expected range. We've minimized maintenance projects and cut nonessential spending while still proceeding with projects that deliver a meaningful cost savings in the short run or are key to long-term growth objectives.

Our retirement plans have been well maintained, giving us the opportunity to reduce pension contributions. Total cash outlays for all retirement plans are projected to be $7 million this year. That's about $6 million less than we contributed in 2019.

In the U.S., we're utilizing government plans, such as the CARES Act, to defer payroll and other tax payments and estimate that we'll defer about $5 million of cash this year. Operations outside the U.S. will benefit from government subsidies as well, and that could be up to an additional $3 million. Finally, working capital can be a significant source of cash in a downturn. Just as it increased $14 million in the first quarter, it could quickly decrease by at least that amount. And as always, we continually work to minimize our working-capital needs.

Our culture of capital discipline has served us well in the past, and we've learned from the Great Recession in 2008 and '09. Our teams know what to do, and our short-term priorities are clear: preserving our capital and our flexibility so that we can move aggressively and opportunistically when things begin to turn.

On a personal note, you may have seen our announcement last week that I will be retiring from Neenah. Succession planning has been underway for some time, and my October 1 retirement date will help ensure an orderly transition of duties. At more than 60 earnings calls, I think I've set the company record and hopefully, no longer sound like a robot. It has been an honor and a privilege to be a part of the evolution of Neenah over the past 16 years, and I've enjoyed the opportunity to get to know many of our stock- and bondholders, many of you on this call. I'm looking forward to watching the team here continue to grow the company in the future.

With that, I'd like to turn it back to you, Julie.

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Julie A. Schertell, Neenah, Inc. - President, CEO & Director [5]

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Thank you, Bonnie. I'd like to start by talking a bit more about how we're managing through the current situation and then add some thoughts on near-term impacts and recovery. Obviously, it's a very fluid and uncertain period for everyone, making accurate forecasts challenging. By taking swift and smart actions to maximize liquidity, we expect to emerge in a position of strength that will allow us to take advantage of potential market opportunities.

Initial activities in a crisis are focused on containment, and our #1 priority was to protect the health and safety of employees. As I mentioned earlier, we quickly initiated robust safety protocols at all sites to protect our people.

Our second priority was to ensure business continuity. We implemented a war room structure, and our leadership team met each morning to resolve issues and provide guidance and directions to support global operations and safeguard our supply chain. We increased the frequency and transparency of communications internally with employees and externally with customers and supply partners.

Our third priority was liquidity. We entered the crisis with a strong financial position, and it was important that we developed and executed plans to maintain this. We ensured we had clear and timely visibility to daily dashboards with critical information to help us make informed, disciplined decisions. And we developed plans and actions focused on things we can control that would reinforce the resiliency of our business. As I said earlier, the steps we've implemented so far represent over $50 million of added cash flow versus our original plans.

On the revenue side, we've connected with customers in new ways. Our sales and marketing teams are having regular virtual meetings with customers, and we've implemented technology, enabling more streamlined automated ordering for portions of our business.

One example of how our efforts were successful was our ability to quickly develop and ramp up face-mask capabilities. While having only a modest financial impact, we expect to provide the media this year to support the production of roughly 100 million face masks. These efforts are not only the right thing to do to help fight the virus, but also provide new opportunities to partner with customers in innovative and collaborative ways that support longer-term growth.

Despite the many actions our teams are taking, it's clear the second quarter will be very challenging. In the Great Recession of 2008 and 2009, our sales initially declined by roughly 30% before recovering. Demand for many of our categories is correlated with GDP, and published forecasts show second-quarter GDP declines ranging from 30% to 40%. Our level of decline and pace of recovery will vary by business with Technical Products categories being more resilient than Fine Paper and Packaging. Filtration and labels are likely to hold up well, with transportation filtration rebounding as the economy recovers and miles driven begin to increase.

Our remaining Technical Products categories should also fully recover, though likely at a more measured pace. Commercial print papers will feel the most pressure, especially if the recession is lengthy, as companies spend less on marketing and advertising or find alternatives. Input costs are likely to remain subdued, though favorable year-on-year comparisons will diminish as we move through the year.

The major challenge this year is clearly demand. While short-term earnings pressure is inevitable, as a result of our actions we don't anticipate that same magnitude of impact on liquidity. We've modeled several scenarios to analyze a range of potential outcomes. And if the outlook were to worsen, we've identified additional levers that we could quickly pull to further reduce spending and improve cash flow. Consequently, I'm very confident that Neenah is taking the appropriate steps to support our liquidity position during this time.

Crisis often can bring opportunity, especially when operating from a position of strength, as I believe we are. During this time of uncertainty, we will continue to build on what's made Neenah successful: strong customer relationships, superior product quality, disciplined decision-making, a focus on capital-efficient growth and providing a return to our shareholders through a meaningful dividend.

Our strong financial position is valued by customers, and we benefit from a local footprint and supply chain in our primary markets. We're collaborating with customers and suppliers and continuing R&D efforts to support short- and long-term growth. We're significantly reducing discretionary spending, organic capital and have suspended share repurchases. We'll continue to identify acquisition opportunities that can add value, though during this current period of uncertainty we're clearly more cautious.

Last but not least, we remain committed to our dividend. And based on our modeling, we expect to have ample liquidity through the downturn. While this year will be challenging, I'm confident we're taking the right actions. And first-quarter results clearly demonstrated the strength of our underlying business fundamentals.

But ultimately, it's our people that drive our success, and Bonnie has definitely been one of those people. I look forward to working with Paul DeSantis, our incoming CFO, and would like to extend my deep appreciation to Bonnie for all that she has done for Neenah over the past 16 years.

Neenah has always had a talented and dedicated workforce. Their commitment to each other and to Neenah is inspiring and was demonstrated again by their ability to work safely and push all the way to the end to deliver a strong first quarter. I'm excited to be a part of this team and to grow our company together in the years ahead.

Thank you for your time today, and I'll now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Jonathan Tanwanteng of CJS Securities.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [2]

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First, I guess, congrats on the strong quarter and, Bonnie, also on your retirement. Looking forward to working with Paul, who've I've worked with before.

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Bonnie J. Cruickshank-Lind, Neenah, Inc. - CFO [3]

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Oh, great. Thank you.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [4]

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I guess my first question is, I was wondering about the strength in your filtration media and kind of the comments you've made on Q2. We've seen some other consumables going to autos that are related to miles driven falling quite dramatically, like 60% to 70%, entering Q2. And I'm just -- what's giving you the confidence in that business: one, not being down maybe that much; and two, that it will recover that quickly?

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Julie A. Schertell, Neenah, Inc. - President, CEO & Director [5]

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I think a couple of things, Jon. I think one thing is remember that about 50% of our business is in heavy-duty versus passenger cars, and that volume has continued for the most part. And then secondly, about 80% of our media goes into the aftermarket, not new car sales. So even though miles driven have fallen in the short term, we have a little bit of a lag effect, and we expect it to come back. So we're seeing data that says it's fallen about 40% in the U.S. and similar rates in Europe. But we expect that to come back in the near term as the shelter-in-place starts to exit.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [6]

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Got it. And then just wondering about your expectations for input prices. I think you mentioned modest declines and kind of losing that year-over-year benefit as you get into the second half. I'm just wondering why only decreasing that much as we've seen a lot of commodities and other inputs fall dramatically. Is there anything special in the -- in your inputs that we should be thinking about that would preclude that sort of a price move?

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Bonnie J. Cruickshank-Lind, Neenah, Inc. - CFO [7]

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Yes. Jon, I only have like 2 words for you, toilet paper. So virgin pulp is in tremendous demand right now. So even though you see other kinds of commodities falling because of lower demand, we're not seeing lower demand in that. And the other thing that we have, we use quite a lot of recycled office waste. And as we all know, who are not in an office, that there's not nearly as much of that. So pricing has gone on up for that. So having -- we do not expect prices to go up as much as what we expected in -- when we had this call in February, but we do expect a gradual change. Still favorable, though, versus prior year.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [8]

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Got it. Okay. Bonnie, just one more for you. I'm just wondering as to the timing of your retirement, which is well earned to start with. But I'm wondering, between you and John both retiring this year, I'm wondering about the timing of the planned succession and kind of how that was impacted by what was going on in the economy and -- or maybe it wasn't. Just any color on that would be helpful.

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Julie A. Schertell, Neenah, Inc. - President, CEO & Director [9]

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Sure. I'll take -- I can take that one, Jon. I think from a succession planning process, Neenah has a really robust succession planning process both internally, and we use outside agency work as well. So Bonnie has a fairly long succession. I mean, she'll be here until October 1. So we'll have her expertise and knowledge and guidance for quite a while.

And for John and I, we were part of a succession planning process for almost 2 years. So even though the -- this downturn happened right now, it definitely wasn't expected, but it was a 24-month type of succession planning process that we worked through together.

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Bonnie J. Cruickshank-Lind, Neenah, Inc. - CFO [10]

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Yes. Our succession wasn't what was unexpected. It was COVID.

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Julie A. Schertell, Neenah, Inc. - President, CEO & Director [11]

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Right. The only thing unexpected was the COVID pandemic.

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Operator [12]

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The next question comes from Steve Chercover of D.A. Davidson.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [13]

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So my first question is with respect to that idled paper machine. You didn't say if it was temporary or permanent. But can you talk about the capacity of the machine? And are all the capabilities of that specific machine duplicated elsewhere in your system?

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Julie A. Schertell, Neenah, Inc. - President, CEO & Director [14]

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Yes. That was one of our lower-capacity machines and lowest-capability machines. So all of the capabilities are duplicated elsewhere in our system, and it was in that 10% to 15% range of our total capacity in the system. So it has been idled without a current expectation of restarting it.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [15]

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Okay. And then since you're not integrated on the pulp side, does it have a material impact on the balance of the paper mill in general?

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Bonnie J. Cruickshank-Lind, Neenah, Inc. - CFO [16]

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Steve, what -- could you elaborate on that?

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Julie A. Schertell, Neenah, Inc. - President, CEO & Director [17]

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We really are just transferring the volume to our other assets. So it really improves our cost position and keeps us cost-competitive by better loading or more fully loading our other assets. It doesn't have an impact from a fiber standpoint.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [18]

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Yes. No, I understand that. I mean in an integrated mill, you take down a machine, now you're running too much pulp for your digesters or your boiler is out of whack. So this is kind of just direct costs or, I guess a lot of variable costs.

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Julie A. Schertell, Neenah, Inc. - President, CEO & Director [19]

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Right.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [20]

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Okay. And you told us it's $1 million a year savings with a $2 million Q2 hit.

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Julie A. Schertell, Neenah, Inc. - President, CEO & Director [21]

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Right.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [22]

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And then how big is that opportunity in face-mask media? I mean you said it's like 100 million units.

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Julie A. Schertell, Neenah, Inc. - President, CEO & Director [23]

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It's really moderate right now. I think the bigger opportunity for us -- so face mask is probably under $10 million in revenue this year, but the bigger opportunity for us is that's a great extension of our existing technologies in transportation filtration into air filtration, which is a growth platform for Neenah. And so it's just an acceleration of that growth platform with existing and new customers. And we have great capabilities and technologies as we grow into that type of platform. But face masks, I think, is fairly small, but it's a nice opportunity to support the cause and to grow and collaborate with different customers as well as existing customers.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [24]

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Sure. Okay. And then you kind of quantified the volume impact that you endured back in the Great Recession. And then on the paper side, some of your big commodity freesheet peers are looking at better than 1/3 of their capacity or demand going away in Q2. And this is basically office demand, and I'm concerned that might never come back. But I mean your papers, by and large, are not office papers. So your end markets, do you expect them to have a permanent hit the way office papers might have?

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Julie A. Schertell, Neenah, Inc. - President, CEO & Director [25]

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I think it's probably premature to speculate on if it's permanent demand destruction in fine paper at this point. We recognize it's a risk, and we're working to manage that business in a responsible manner, thus the paper machine that we shuttered in May. The longer that the economy is weak, the more detrimental it is for fine paper. Our end-use applications are -- they lean more towards advertising and marketing, and there is the opportunity for switching in the marketing need. I think the -- twice as important, though, and what I would tell you about fine paper is, it's still a really financially strong business for Neenah, has nice margins, as you could see in the first quarter, almost 18% margins in the first quarter, and it throws off a lot of cash. So I wouldn't want to discount the role of fine paper in our portfolio and -- but it is; it's different -- little bit different end markets. Some of it's used in the office. It's just kind of premature to determine if it's a permanent change in the dynamics of that market.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [26]

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Got it. And good luck in your new role. Bonnie, congratulations.

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Bonnie J. Cruickshank-Lind, Neenah, Inc. - CFO [27]

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Thank you.

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Operator [28]

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The next question comes from Chris McGinnis of Sidoti.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [29]

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Bonnie, congratulations.

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Bonnie J. Cruickshank-Lind, Neenah, Inc. - CFO [30]

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Thank you.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [31]

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So nice quarter. I was just wondering if there could be any potential kind of added costs with COVID coming in, whether it's external or internal due to the safety measures or maybe external, just with some of the suppliers.

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Bonnie J. Cruickshank-Lind, Neenah, Inc. - CFO [32]

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Well, we booked $1 million that we had experienced in the first quarter that were direct out-of-pocket types of costs. Going forward, we'll continue to isolate that for things that we might have to pay for like personal protection, stuff like that.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [33]

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Okay. But nothing that would, I guess, would remain going forward that you see today?

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Bonnie J. Cruickshank-Lind, Neenah, Inc. - CFO [34]

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No.

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Julie A. Schertell, Neenah, Inc. - President, CEO & Director [35]

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No. Nothing structurally different.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [36]

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Okay. If you can maybe just talk about the health of the customer base, a little bit of a write-down in the quarter, and just how you see it. And maybe how that plays out over the next couple of months given the pressure.

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Julie A. Schertell, Neenah, Inc. - President, CEO & Director [37]

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Yes. Are you suggesting like from a credit standpoint, health?

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [38]

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Yes, exactly. Exactly, yes.

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Julie A. Schertell, Neenah, Inc. - President, CEO & Director [39]

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We're managing it pretty tightly, as you would imagine. And our customers have been very healthy so far from what we can see, and we're working very closely with them. Our percent current hasn't really moved at all. But we're working with them very closely and providing a little bit of flexibility with strategic customers if we need to. But we're clearly not a bank, and we're not going to finance customers but working closely with them. But we're not seeing significant risk at this time. We did increase our reserve, I think as Bonnie mentioned in her portion of the prepared remarks, and ensuring that we're managing that tightly and being conservative in how we look at it.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [40]

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Great. And then just one last one. Just kind of given the disruption due to COVID, outside of the media for masks, are there any other opportunities you see kind of taking advantage of in the near term or that better positions Neenah longer term?

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Julie A. Schertell, Neenah, Inc. - President, CEO & Director [41]

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I think it's probably more learning from how quickly we move and then extending our face-mask media into the broader category of air filtration. And then from a macro trend standpoint, there's some macro trends that will shift that will inform our longer-term strategy. So things like -- as awareness of health increases, that likely lends itself to greater awareness of environmental stewardship, which a lot of Neenah products compete in areas where we're the environmentally preferred alternative, where we're competing with things like plastics. Or another area might be where a macro trend where consumers have shifted their buying preferences to more online sales and ensuring that we're well positioned with our retailers, like Amazon and Staples, where we have a strong presence and the right portfolio and basket mix for those shoppers. I think the team has done a nice job of getting more on the offense in that regard and looking forward, but more longer-term.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [42]

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Okay. Great. And then just around volume, I -- or buying trends you're probably seeing, just any noticeable change, not noticeable maybe, but at least maybe the bottoming after April, obviously, has been probably the most difficult, I would think. Are you seeing at least stabilization in trends at the current -- in May, I guess, early May?

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Julie A. Schertell, Neenah, Inc. - President, CEO & Director [43]

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I think it's still hard to call right now. Or I would love to tell you we're seeing stabilization, but I think it's still hard to call right now. We definitely see more stability or -- stability probably isn't the best word, but more resiliency in our Technical Products categories, not as much so in our Fine Paper category.

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Operator [44]

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

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William B. McCarthy, Neenah, Inc. - VP of Financial Analysis & IR [45]

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Okay. Thank you. Once again, thanks for your interest in Neenah today. And as always, please reach out to me, just not physically for now, if you have any questions. Thank you.

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Operator [46]

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