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Neenah, Inc. (NYSE:NP)
Q2 2020 Earnings Call
Aug 5, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Neenah Second Quarter 2020 Earnings Call. [Operator Instructions]

I would now like to hand the conference over to the speaker today, Bill McCarthy, Vice President, Investor Relations. Thank you. Please go ahead.

Bill McCarthy -- Vice President, Investor Relations

Great. Hello and thank you for joining Neenah's 2020 second quarter earnings call. With me today are Julie Schertell, Chief Executive Officer; and I have the pleasure of introducing for the first time Paul DeSantis, our Chief Financial Officer. Julie and Paul will cover business activities and financial results for the quarter in detail, including impacts from the Coronavirus pandemic and actions we've taken to respond. In addition, we'll share a few thoughts on our outlook for the rest of the year and following these prepared remarks, we'll open up the call for questions.

As usual, I'll start with the few headlines. Sales in the quarter were $161 million, down 36% versus prior year. This was in line with our communicated estimate then the drop in the U.S. economy. Operating income declined due to the lower sales as well as from the impact of reduced operating schedules to manage inventories. On an adjusted basis, operating income was $0.5 million in the quarter, down from $23 million last year. We booked $59 million of mostly non-cash adjusting items related to asset write-offs and impairments and other restructuring and non-routine costs. In the second quarter of last year, there were $3.5 million of non-routine charges. We will cover these items later in the call and complete details along with the reconciliation to comparable GAAP figures can be found in our press release.

GAAP EPS in the quarter was negative $2.98. Excluding these adjusting items, EPS was negative $0.08 when compared to $0.95 in 2019. Lastly, I'll note that our comments today include forward-looking statements and that actual results could differ from these statements due to the risks outlined in our website and in our SEC filings. With that, I'd like to turn things over to Julie.

Julie A. Schertell -- President and Chief Executive Officer

Thank you, Bill, and good morning, everyone. While we started out the year strong, there was no avoiding the significant impacts from the pandemic in the quarter. I'm very pleased with how our Neenah team has responded. In this time of great uncertainty, we responsibly managed operating schedules and inventories, aggressively reduced spending and delivered strong cash flows, all while continuing to support our customers with the highest level of quality and service. I am confident with the work we've done, we will emerge in a strong position. Last quarter, I shared our plans to address the pandemic covering five key areas, maintaining the health and safety of our employees, exceeding our customers' expectations and working with them on future needs, driving operational excellence in manufacturing and reducing costs in all areas, preserving our strong liquidity position and continuing to execute our long-term growth strategies. I'll update you on our progress in each of these areas.

Our top priority is always the health and safety of our employees. With enhanced protocols and practices, we've implemented numerous changes to the ways we operate. Our employees quickly adapted to these changes while remaining focused on delivering the high quality and service our customers expect from us. Most importantly, they have done all of this while working safely. In fact, we reduced injuries by almost 30% this year as we continue our progress to ensure that no one gets hurt while working at Neenah.

Second is serving the needs of our customers who have also been impacted to various degrees by this year's unpredictable environment. Neenah is known for our flexibility, speed, nimbleness and responsiveness in the marketplace. During these times of increased volatility, our customers value these characteristics more than ever and our global footprint has helped us effectively support customers with a local supply chain. At the same time, we continue to develop innovative new products for the long-term. I mentioned in May, our success in commercializing media for high performance face masks. Recently, we've also launched replacement filtration media for consumer-branded face masks. This business, while small today, continues to grow and we've accelerated efforts to increase throughput on our assets in Europe. In addition to face masks, we've grown our high efficiency HVAC applications and expanded our high performance industrial filtration media to address the needs for data storage. Growth in both of these markets continues to accelerate.

While we've introduced proprietary new environmentally friendly digital transfer products that expand our addressable market and provide increased customization and cost efficiencies for our customers. We're developing new tape backing applications to meet the increased demand for painting and other do-it-yourself home projects. And not to be outdone, our consumer fine paper team recently designed and launched new teacher tool products under our well-known ASTROBRIGHTS brand and began selling new Southworth brand planners and journals. These products are available at major retailers, both online and in stores and help extend our reach beyond the traditional paper category.

A third area of focus has been operational excellence and cost management. In the quarter, our team significantly reduced costs, both temporarily, in line with reduced operating schedules and also on an ongoing basis as a result of restructuring efforts. We reduced over $15 million of manufacturing cost in the quarter as we optimized capacity, restructured parts of our organization, improved asset yield and deferred spending in multiple areas. In addition, our procurement team did an excellent job negotiating lower prices in more favorable terms with many vendors. Our hard work extended beyond manufacturing and SG&A was more than $6 million less than last year, with reduced payroll cost, of course, lower travel expenses and spending decreases in virtually all other areas. These reductions included non-recurring savings of $1 million from furloughs.

Additional initiatives included optimizing certain brands and SKUs and as noted in May, idling a fine paper machine and reallocating its volume to other assets. While these efforts didn't overcome the significant impact of under-absorbed fixed cost in the quarter, the changes we've made clearly set us up for more efficient operations as volume returns and are expected to generate ongoing savings of around $7 million a year.

Next, we focused on preserving our strong liquidity. Cash generated from operations in the quarter was almost $30 million. In addition to cost reductions, we reduced working capital, non-essential capital spending and discretionary pension contributions. In May, I communicated a targeted cash flow improvement of $50 million versus our base plans to help mitigate impacts of lower volume. I'm pleased to note, we are on track to surpass this target. These efforts as well as the successful refinancing of our debt helped us end the quarter on sound financial footing.

Last but not least, we remained resolute in our efforts to create long-term value, to executing strategies, to invest efficiently in platforms that deliver attractive returns and enhance our growth rate. We have important foundational categories like fine paper and backings that generate meaningful cash flows that we can redeploy in four targeted growth areas, filtration, custom-engineered materials, premium packaging and design and specialty coatings. We're continuing to act on organic opportunities in these areas, while maintaining an active but cautious M&A process and recognized it's our ability to execute well while maintaining financial discipline that ultimately drives value.

Before wrapping up, I'd like to comment on the one-time charges in the quarter. While these included cost for actions we've taken to restructure and optimize our business for the future, the largest impact resulted from lower near-term demand due to the pandemic, which triggered a partial impairment of our U.S. filtration asset. As we've noted in the past, qualification on some grades has taken longer than anticipated and we've also made investments in Germany that have provided incremental capacity. Our objective is to optimize total cost to this business. These items now combined with an additional slowdown due to the pandemic has extended the U.S. ramp up curve.

We continue to see transportation filtration as a strategic and attractive market. Our expectations are to fill the U.S. asset over the next several years and deliver our historic above-market growth rate for this category. I can assure you our teams remain very focused on this and we view it as an important catalyst for growth at Neenah. I'm sure it was no surprise that the quarter was challenging. As you've heard, we've acted aggressively to protect employees, support our customers, manage our cost and improve our financial position. We remain well-positioned in our markets and have the organizational capabilities and financial strength to address short-term challenges and deliver on our long-term strategies.

I've been encouraged by the sequential improvement in demand in the past few months and will talk more about our outlook later. I will now turn things over to Paul to cover our financial results in detail.

Paul F. DeSantis -- Senior Vice President, Chief Financial Officer & Treasurer

Thanks, Julie, and good morning, everyone. I'd like to start off by saying how pleased I am to be here at Neenah. Although starting in the middle of an unprecedented pandemic is not ideal, I've been impressed with the can-do attitude of the team and how well Neenah has responded to the crisis. I'm confident we're on the right path.

As I go through each segment's results, I think you'll hear it's a pretty consistent story. Significantly reduced demand due to COVID coupled with our efforts to responsibly manage operating schedules and reduce inventories lowered results. And we partially offset this with a broad range of cost improvement and benefits from lower input costs. We also focused on initiatives to deliver our targeted $50 million of cash flow benefit by the end of the year. A very important element of this has been working capital management. Our efforts resulted in cash generation of almost $30 million from operations for the quarter and further contributed to our sound liquidity position.

As Julie mentioned, we recorded $59 million in impairments and other non-routine charges, almost all non-cash. This was primarily triggered by the COVID impact on demand, which extended our U.S. filtration ramp up curve. If you're not aware, in determining impairment, the accounting treatment is to measure cash flows over a fixed period weighted to near-term results. To be clear, it's a great business for us and our expectations continue to reflect filling this asset with profitable business. A list of adjusting items by segment is included in our earnings release. So I'd like to review segment results excluding these and then discuss a few overall items, including liquidity and our recent refinancing.

In Technical Products, net sales of $106 million were down 28% as the global pandemic reduced end use demand. There were several bright spots, however, with revenue growth in some key market, including industrial filtration products, face mask media and medical packaging. Net sales prices were down slightly, reflecting price adjusters for certain grades and a modestly lower price mix of products sold. Currency was also slightly unfavorable with the euro averaging $1.10 in the quarter. Adjusted operating income was $5 million compared with $13 million in 2019. While the decline in operating income was $8 million, the combined impact from lower sales volumes and manufacturing fixed cost absorption was over $17 million. So that gives you an idea of the impressive amount of cost savings and improvement that we delivered in the quarter.

Benefits from lower input costs, net of selling price changes accounted for about $3 million. In Fine Paper and Packaging, the year-on-year decline in revenues as expected was steeper. Net sales of $55 million were down from $107 million in 2019. The decline was virtually all due to lower volume. Sales in the second quarter of last year were the highest of the year. In addition, since supply chains in this business are shorter, the impact from customer inventory destocking occurs more quickly. A meaningful end market for commercial print is high-end advertising and marketing, which typically declines quickly in tough economic times. Sales for premium packaging and consumer performed relatively better and we continue to grow in labels, which are used primarily for wine and other spirits.

Turning to the bottom line. Adjusted operating profit was $0.5 million, down from $16 million last year. The combined impact of lower sales volume and unabsorbed fixed costs in the quarter was $19 million and this was partially offset with cost reduction and benefits from lower input costs net of selling prices.

Turning to corporate items. Consolidated SG&A was $21 million, down $6 million from an exceptionally high quarter last year. Like in manufacturing, we acted aggressively to take out costs in this area and did so through a number of actions, including headcount reductions, wage freezes, furloughs and pay cuts and reduced travel. We expect consolidated SG&A to average around $22 million per quarter for the remainder of the year. This is down from historical run rate of $25 million and also below our previous quarterly guidance of $23 million.

Unallocated corporate cost on an adjusted basis were $4.7 million, down from $5.5 million last year. These costs are expected to average around $4.5 million per quarter in the second half of the year. Quarterly net interest expense was $3 million in both 2020 and 2019. In June, we entered into a new $200 million Term Loan B Facility with an initial interest rate of 5%. Proceeds from this facility were used to pay down borrowings on our revolver and fully redeem the $175 million of outstanding 2021 senior notes on July 16th. As a result of the overlap of borrowings in July, third quarter interest expense is expected to be $3.7 million before dropping down to projected quarterly rate of $3.3 million. Our tax rate in the quarter was a benefit of 19%, which was reduced by $4 million increase in our valuation allowance against existing deferred tax assets, primarily due to the non-cash impairment charges. We continue to project our ongoing tax rate at approximately 22%. We ended the quarter with cash of $203 million and debt of $381 million. However, both of these numbers were inflated due to cash received from the new term loan at quarter end. Reducing both balances by $75 million -- $175 million to reflect the redemption, cash would have been $28 million and debt $206 million. I mentioned that cash generated from operations in the quarter was very strong. With careful attention to inventory levels, operating schedules and supplier terms, we generated over $20 million of cash from reduced working capital. I'm comfortable with the quality of our receivables and inventory, especially in this environment and know that our teams are continuing to focus on further efficiency improvement in these areas.

Capital spending was $3 million, down from $5 million last year. Year-to-date, we've spent $8 million and currently expect full-year spending of around $15 million. This is about half of what we consider our normal level as we've cut non-critical items while continuing to fund project that deliver meaningful cost savings or are key to long-term growth initiatives.

I'd like to wrap up with a few comments on our sound liquidity position. Neenah's credit facilities are in good shape, starting with the new Term Loan B facility that replaced our 2021 senior notes. We like the Term Loan B in this environment as it's highly flexible and we continue to maintain our $175 million global revolving credit facility, which today is undrawn. Both of our credit facilities are with high quality lenders and with terms we consider to be reasonable and covenant-light. Overall, I'm comfortable with our financial position. We ended the quarter with almost $30 million of cash on hand, $130 million of availability on our revolver and strong processes in place to control cash during this pandemic. Thanks to Bonnie, Neenah has an excellent finance team and a proven history of financial discipline while driving growth. I can assure you that will continue. I'm looking forward to being part of Neenah's future and to sharing our success with you.

With that, I'll turn it back to Julie.

Julie A. Schertell -- President and Chief Executive Officer

Thanks, Paul. I'll wrap up with a few comments on our outlook. As everyone knows, the global situation is still very fluid, however, there are some things that have more visibility and many areas under our control. So I'll start with those. First, as usual, we will take our annual maintenance down in the third and fourth quarters. While we continue to carefully manage spending, this work is required to ensure our assets continue to operate safely and efficiently. Maintenance expense in the third and fourth quarters will each be about $1.5 million more than the second quarter. As global economies recover, input costs are projected to rise modestly and favorable year-on-year comparisons will diminish. The euro has strengthened recently and this will benefit us from a translation standpoint with each $0.05 change, moving quarterly sales by $2.5 million and operating income by $0.5 million.

As a reminder, currency impacts are almost all in Technical Products due to our large European presence. Recent rates of around $1.18 compared to a rate of $1.10 in the second quarter. While those items are a bit easier to predict, the pace of demand recovery is more challenging, including impacts of seasonality and back-to-school demand, as noted earlier, have been encouraged by the steady improvement in both segments that we've seen over the past few months. Third quarter sales will still be below prior year, but the percentage decline should be much improved. Transportation filtration is improving in Europe as their economies recover and miles driven increases and other Technical Products categories are picking up as well.

Fine Paper and Packaging is also bouncing back from the steep decline in the second quarter, helped by the short supply chain. Looking beyond that, I expect the sequential improvement to continue. Technical Products is a growing and resilient segment and we expect sales to fully recover to pre-pandemic levels. Fine Paper and Packaging is likely to lag Technical Products in timing of recovery and while packaging should continue to grow, the rebound in commercial print will depend more on improving economies and as companies resume spending on marketing and other high-end print needs.

During this time of uncertainty, you've seen that we've addressed challenges head-on by aggressively managing cost, while continuing to build on what made Neenah successful. Deep customer relationships, superior product performance and disciplined decision making, these values won't change, nor will our commitment to providing a return to shareholders through a meaningful dividend. I'm very encouraged by how we are executing. We're collaborating with customers to develop and launch innovative new products, implementing a Neenah operating system to create long-term sustainable manufacturing improvements, leveraging the strength of our local footprint and supply chain and pursuing opportunities in targeted growth platforms. You'll hear more about this as we continue to execute our strategy to extend our technologies and capabilities in this growth platform through both organic and inorganic opportunities, that add value for our stakeholders and position us more strongly for the future.

None of this would be possible without our talented and dedicated employees, their ability to work safely through the recent challenges and changes while providing customers with the highest quality products and service and finding ways to significantly reduce cost has been remarkable. As I said in May, I'm excited to be part of this team and I look forward to growing our company together in the years ahead.

Thank you for your interest today and I'll now open up the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Jon Tanwanteng with CJS Securities. Your line is open.

Jonathan Tanwanteng -- CJS Securities -- Analyst

Hey, good morning. Thank you for taking my questions.

Julie A. Schertell -- President and Chief Executive Officer

Good morning.

Jonathan Tanwanteng -- CJS Securities -- Analyst

Maybe first off, I was wondering, if you could talk about the inventory situation of your customers. I know, you mentioned the supply chains in paper are short, but just overall, did you see restocking tailwinds heading out of Q2 or into Q3 and if so, how long that maybe sustainable for?

Julie A. Schertell -- President and Chief Executive Officer

Yeah, so it's a little bit different by segment. We -- I would say, customer inventories have right-sized for the most part, where we see probably some inventories that are still a little bit heavy at our customers would be in our backings category and performance materials. And so recovery there might lag just a little bit as we head into Q3. But for the most part, I think our customers have right-sized their inventory levels at this point.

Jonathan Tanwanteng -- CJS Securities -- Analyst

Got it. Thank you. And then just in terms of general trends, have you seen any places where demand is still sluggish? Maybe like you said backings inventories might still be high versus a general improvement that you've seen in many other places?

Julie A. Schertell -- President and Chief Executive Officer

Well, I think, the first place that I would talk to you about is probably commercial print. The nice part about Fine Paper and Packaging is we have nice diversity even within Fine Paper and Packaging. So we have a commercial print part of that business and it's driven by advertising and as you recognize, as soon as the economy start to be challenged, many companies reduce their advertising budget and we are feeling that. And so when economy start to open up and advertising budget start to open up, we expect that to rebound back. But in commercial -- or in Fine Paper and Packaging, we also have our consumer business, which goes to large retailers like Amazon and Target and office superstores and that's driven by school and crafting and teachers. And we have packaging, premium packaging, both of those have been more resilient. So commercial print is probably a little bit more challenged. The diversity gives us more opportunity to rebound, because of the end use market. And we have the leading position in the space, both in the B2B channel and the B2C channel, but that's probably where we're feeling the most pressure. And then backings, as I mentioned, just from a -- that's more from just what we talked about the customer stocking and from an inventory standpoint. And I think that's timing as much as anything.

Jonathan Tanwanteng -- CJS Securities -- Analyst

Got it. Thank you and that's a good set for my next question. In prior calls, I think, you discussed the possibility of demand destruction in the commercial print business depending on how long the pandemic last. Are you seeing any evidence of that so far as companies are relying more on a digital offering and -- or is it maybe too early to tell there?

Julie A. Schertell -- President and Chief Executive Officer

I think it's too early to speculate at this point. I think, the longer the duration and the deeper the decline, the greater the risk of just what you described, moving to different advertising modes and that would be mostly from a commercial print standpoint. Like I said, what I like about our business is the diversity within Fine Paper and Packaging that we have the consumer side that is healthier and rebounding a little bit quicker and in the packaging side, which is a nice growth platform for us. We're also aggressively supporting customers to help with new products and programs to drive demand. And I think, the other thing that's important to us is fine paper as a category has been under the pressure of secular decline since the mid-'90. So that's nothing new to us. We know how to manage this business and we know how to manage it well and it generates a lot of strong cash flows that we then --we invest into other growth platform. And we will continue to manage it in that way, so that it adds value for Neenah and for our shareholders.

Jonathan Tanwanteng -- CJS Securities -- Analyst

Got it. And nice job on the cash flow, that was impressive work. One last one from me. Just given the scale of cost reductions both on the SG&A and on the manufacturing, how should we think of your incremental margins here as price recover?

Paul F. DeSantis -- Senior Vice President, Chief Financial Officer & Treasurer

Yeah. Hi, Jon. I'll take that question. So a couple of things. One of the things we quoted was about $7 million of permanent cost savings that we expect to get on an annual run rate going forward. So I think, we actually quoted three sets of numbers. So we had $15 million worth of cost coming out of manufacturing and that was a combination of variable cost and some fixed cost that we really drilled out. So that variable cost will stay out while volume is down. We're going to continue to control the fixed cost where we can, but one of the reasons when you look at our overall margin in the second quarter of this year from last year is unabsorbed fixed cost. And so it's still a big number when volume is down as much as we are. So as we start to move up in volume, which we are expecting to do, we're going to see some margin improvement in that. So then talking about some of the things we've learned on a sustainable basis. One of the numbers we talked about was $7 million of benefit, of that we think about $4 million of that is permanent in SG&A and we think about the other $3 million is going to be permanent up in manufacturing above cost of goods sold. So we didn't experience a lot of that in the quarter, because a lot of that got implemented during the quarter. So we'll get some benefit from that as we roll forward, but the primary driver really seeing margin improvement when we're down as much as we are as improvements in volume.

Jonathan Tanwanteng -- CJS Securities -- Analyst

Got it. Appreciate the color. Thank you.

Operator

Your next question comes from Steve Chercover with D.A. Davidson. Your line is open.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Thanks. Good morning, everyone. So the decline in paper is obviously a source of concern and I've heard you say that demand for commercial print should recover, but is there anything you can do to accelerate the migration toward printing -- or sorry, toward packaging and other uses, labels or is that kind of pushing on a rope if you try and accelerate things?

Julie A. Schertell -- President and Chief Executive Officer

Well, no, not accelerating growth toward those end-use application isn't pushing on a rope. We are really focused on the end user, so as we think about, particularly in packaging, we're selling to the brand manager. So if you think about that Iconic, Tiffany's Blue brand that everyone knows or that Maker's Mark label, we're selling to that end -- brand user, because it's their image that matters and that pulls demand. And so our selling process, how we go to market, the supply chain we use, the capabilities we have for colors and textures and supporting their brand imagery that's what really matters for packaging. And just recently, within the last few years, we implemented a design center within Neenah that helps create prototype and design to help demonstrate for those brand users, specifically in packaging, how we can support their brand imagery, which is where they gained -- they gain equity and value. So there is definitely efforts that we can continue to drive from a packaging standpoint. I think, the pushing on the rope would be more if we try to pretend there wasn't secular decline in commercial print. And then there is also additional efforts as we focused on plastic replacement alternatives and I would tell you even more so during this time of COVID and where health is of major concern, that often times leads into environmental concerns very quickly for people and so plastic replacement alternatives, which Neenah is often the preferred alternative or our media is often the preferred alternative has been of an innovation focus area for us as well.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Well, I now look forward to Jihad against plastic. Good luck there. And then, can you tell us about the financial opportunity within European face mask filtration? Can you quantify the...

Julie A. Schertell -- President and Chief Executive Officer

Sure.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Size of the market.

Julie A. Schertell -- President and Chief Executive Officer

Sure. So for us, it's not a significant amount of revenue. It's probably up to $20-ish million annually and that's on our existing assets in Europe. We have not invested in new assets in Europe. I think, what that really did for us is it really demonstrated our technical capabilities and how quickly we were able to develop a product and qualify a highly technical, the N95 equivalent face mask product in Europe to meet the demand and then we've added throughput through organic projects to grow that. The nice thing about that business was two things. It's proportionately more profitable on the bottom line, even in the top line impact it has. And secondly, it just helps accelerate our growth into greater air purification, which is a growth platform and market for us that we've continued to evolve into. And it's very defensible. We have longer term contracts to make sure it stays with us for a while. So it's been a nice win for Neenah, but I don't see it as a significant big market for us in the future.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Okay. And then with respect to the North American automotive filtration, I assume you're talking about Appleton, well, I think I know you're talking about Appleton.

Julie A. Schertell -- President and Chief Executive Officer

Yes

Steven Chercover -- D.A. Davidson & Co. -- Analyst

We in the long run be able to achieve the original financial goals, I mean when you take a charge, does that mean it's no longer attainable or it's just a longer ramp?

Julie A. Schertell -- President and Chief Executive Officer

It's really driven by the longer ramp. So we manage our filtration business like we do any business, where we have redundant capabilities and we optimize the system versus optimizing a particular asset or facility. And so over the last few years, as we've unlocked latent capacity in our European facility. And we've worked on responsibly managing entry into the U.S. and qualification has extended. We've optimized the profitability in that system versus a particular asset by loading some on our lower cost assets in Germany.

Now, I would tell you then what happened was when COVID hit and the decline in the market became more significant and we did an accounting impairment test, it barely triggered the accounting impairment level and then from an accounting standpoint, once you trigger that, it changes the calculation to an NPV calculation and then the number became much larger. But putting that accounting part aside, the important part for us is, we're still bullish on the market, on the geography, on the asset, the footprint, our technologies, the customer support and engagement that we have. We had a timing challenge because of the ramp up that has extended and then COVID hit, but it's a strong business for Neenah and a catalyst for growth. And we expect to grow to the original sales of $70 million plus that we have and with attractive margins to support our overall Technical Products margins.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Okay. And the last two, I guess, we'll call them housekeeping, just because I'm a slow rider. Did you say maintenance in Q3 and Q4 is $1.5 million higher each quarter than it was in the...

Julie A. Schertell -- President and Chief Executive Officer

Yeah, that's correct.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

First half of the year?

Julie A. Schertell -- President and Chief Executive Officer

That's shutdown driven.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

And then the FX benefit. Sorry, just repeat what you said there, I guess.

Paul F. DeSantis -- Senior Vice President, Chief Financial Officer & Treasurer

Yeah, what we said was every $0.05 change, we would pick up $2.5 million of sales and $0.5 million of profitability in the quarter in which that occurs.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

And did you say that the euro delta was $0.08?

Paul F. DeSantis -- Senior Vice President, Chief Financial Officer & Treasurer

Yeah, so we closed the quarter at $1.10 and so right now, the euro is trading in the $1.18-ish range. So if that were to continue through the entire quarter then would be $0.08 over $0.05 and you can do the math, I guess.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Got it, OK. Thank you. Be safe.

Julie A. Schertell -- President and Chief Executive Officer

Sure. Thank you.

Paul F. DeSantis -- Senior Vice President, Chief Financial Officer & Treasurer

Thanks.

Operator

Our next question comes from Chris McGinnis with Sidoti & Company. Your line is open.

Christopher McGinnis -- Sidoti & Company, LLC -- Analyst

Good morning. Thanks for taking my questions.

Julie A. Schertell -- President and Chief Executive Officer

Good morning.

Christopher McGinnis -- Sidoti & Company, LLC -- Analyst

I was wondering, if there's -- morning. I was just wondering, if there was more opportunities that you're seeing just like you went into the face mask, are there opportunities that the pandemic is opening up for you that maybe we -- you haven't talked about or if you just maybe think about, I guess when you look at your product line, do you need to add more or is there opportunities to kind of grow to offset kind of what's happening in the marketplace.

Julie A. Schertell -- President and Chief Executive Officer

Yeah, I think there is a couple of things, a couple of opportunities that the pandemic has opened up and we're really focused on ensuring we don't face the crisis, both short term and long term. We talked about face mask and then more broadly, I think that category of air filtration, where our technologies lend themselves well to expanding into greater air purification efforts, whether that's HVAC or industrial air. I think, I mentioned a couple of those in my prepared remarks. Those are accelerating in demand. Those are for -- data storage is one of the end-use applications there and then the other one that I think is worth mentioning is, just what I've touched on earlier, it's the trend toward when health efforts and health concern become larger share of mind, it's quickly followed by environmental concern and Neenah is often the preferred alternative. And so we are working closely to ensure we have the right paper-based gift cards, styrene alternatives, packaging and label applications to meet that demand. And then lastly, there has been this acceleration of people wanting to customize whether that's for their in-home use, in apparel and furniture and things like that. And our digital transfer products and new innovative products that we've launched under natural fibers, which is a proprietary technology. That is an application that lends itself very well into those markets as well. So some of the macro trends have been accelerants that have been helpful and that will be helpful for Neenah in the longer term.

Christopher McGinnis -- Sidoti & Company, LLC -- Analyst

Appreciate that. And I guess, just with the expectation hopefully things start to normalize a little bit. I know, you took out some capacity or maybe some rationalization in Q1. Just kind of given the run rate, where would you need to do another step down or another round of rationalization through the network depending on where trends go on the fine paper side?

Julie A. Schertell -- President and Chief Executive Officer

Yeah, we're always evaluating our footprint and we -- I mentioned that we're in the middle of implementing a Neenah operating system and a big part of that is improved productivity and one of the larger mills that we're starting implementation in is one of our larger fine paper and packaging mill. So there's a lot of variables there, but what we've seen is that if we get to the point where we need to rationalize another asset as much as I hate to do that from an employee standpoint, it's been of value to Neenah from a bottom line standpoint, because it just means we're able to then switch volume to assets where we have redundant capacity and capability. So we'll continue to manage that closely and when I said earlier that we know how to manage business that's in secular decline, I think that's been a part of it. We've been responsible and when we needed to move assets into and out of the system and we've even started assets back up when it made sense to do so.

Christopher McGinnis -- Sidoti & Company, LLC -- Analyst

Okay, great. And I appreciate that. Thanks for taking the questions and good luck in Q3.

Julie A. Schertell -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Adam Silver with ArrowMark Partners. Your line is open.

Adam Silver -- ArrowMark Partners -- Analyst

Hey guys. Just a housekeeping item in terms of the revolver. I think, I don't know if I missed this during the call, but what was the balance at the end of the second quarter? How much of fees were drawn or what was the availability? And then, did I hear that right that it's been paid down in the sense?

Paul F. DeSantis -- Senior Vice President, Chief Financial Officer & Treasurer

Yeah, so the balance was around $10 million at the end of the quarter and it's been paid down through liquidity that we generated in the month of July. So the balance is zero now.

Adam Silver -- ArrowMark Partners -- Analyst

Okay. What was the LOCs at the end of the quarter?

Paul F. DeSantis -- Senior Vice President, Chief Financial Officer & Treasurer

The lines of credit at the end of the quarter, I'll have to look that up, I don't have that number handy right now.

Julie A. Schertell -- President and Chief Executive Officer

Very low.

Paul F. DeSantis -- Senior Vice President, Chief Financial Officer & Treasurer

Very low, I would think, Yeah.

Adam Silver -- ArrowMark Partners -- Analyst

Okay. Thank you.

Operator

There are no further questions at this time. I'll now turn the call back over to Bill McCarthy for closing remarks.

Bill McCarthy -- Vice President, Investor Relations

Okay. Well, once again, thank you for your time today. Please reach out to me if you have any questions and we hope to have the opportunity to talk to many of you at upcoming virtual conferences hosted by Jefferies, D.A. Davidson and Sidoti. Thank you again.

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Bill McCarthy -- Vice President, Investor Relations

Julie A. Schertell -- President and Chief Executive Officer

Paul F. DeSantis -- Senior Vice President, Chief Financial Officer & Treasurer

Jonathan Tanwanteng -- CJS Securities -- Analyst

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Christopher McGinnis -- Sidoti & Company, LLC -- Analyst

Adam Silver -- ArrowMark Partners -- Analyst

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