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Neenah, Inc. (NP)
Q3Â 2020 Earnings Call
Nov 4, 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 Third Quarter 2020 Earnings Conference Call. [Operator Instructions] After the speakers' presentation there'll be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to your speaker today Bill McCarthy, you may begin.
Bill McCarthy -- Vice President of Investor Relations
Thank you and welcome to Neenah's third quarter 2020 earnings call. With me today are Chief Executive Officer, Julie Schertell and Paul DeSantis, our Chief Financial Officer. Julie and Paul will cover activities and financial results for the third quarter in detail, provide a few comments on our outlook, and then Julie will wrap up with a discussion about key initiatives under way that will create substantial long-term value. Following, these prepared remarks, we'll open up the call for questions.
We released earnings yesterday afternoon, so I understand there was some other news last night. So in case you missed it, let me recap a few headlines. Sales in the third quarter were $191 million and up almost 20% from the second quarter, but below 2019, due to the continued impact of COVID on-demand. Operating income follow this pattern as well, with a significant rebound from second quarter, but not yet catching up to last year. Non-routine items of $2 million for restructuring and other costs, compared to $2.5 million last year.
On an adjusted basis, third quarter operating income of $16 million in 2020, compared to $21.5 million in 2019. GAAP EPS of $0.46, compared to $0.84 last year, excluding adjusting items, adjusted EPS was $0.55 this year, up from a small loss in quarter two, but below $0.95 in 2019. Complete details of non-GAAP items along with the reconciliation to comparable GAAP figures can be found in our press release.
Lastly, I will note that our comments typically include forward-looking statements and actual results could differ from these statements due to risks outlined on 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. Our third quarter performance was very encouraging, as we saw sequential monthly improvements in sales that led to significantly improve profits in both business segments. As expected, Technical Products recovered more quickly, led by strong filtration performance and operating income for this segment increased by more than 30% versus last year.
I'd also note both business segments returned to double-digit EBIT margins and we generated our highest ever third quarter free cash flow with disciplined management of working capital and capital spending. These results reflect the great job our teams have done, maintaining the health and safety of our employees, supporting our customers, reducing cost across all areas and preserving our strong liquidity position. I'll comment on each of these and then later in the call, we'll talk about progress on initiatives that will create value by accelerating our growth and increasing our margins.
As always, our top priority is the health and safety of our employees. To address COVID, we've implemented numerous changes to the way we operate this year. Our employees quickly adapted to these changes, while continuing to play safety above all. We have a number of manufacturing facilities in the Midwest and while this region has experienced a recent surge in cases, our teams have worked successfully to prioritize health and safety, while maintaining operating efficiencies and avoiding disruption to our customers. It's a real credit to our teams that despite these many changes and challenges, we've reduced injuries by over 25% this year, as we work toward our expectation of no one getting hurt, while working at Neenah.
Next, as I mentioned, we've worked very closely with customers to ensure their needs are met in this unusual year, it's during times like these that I believe we built deep long-term relationships with increased levels of collaboration and interdependency. We've launched innovative new products and customers have continued to grow share with us. Our global footprint, local supply chain and agile flexible asset base provide us an advantage to respond the changing needs and our financial strength is also valued, as customers want to know their supply chain is secure and that we are well-positioned to grow with them in the future.
Third, we have aggressively reduced costs across all of Neenah. In the third quarter, we removed almost $15 million of manufacturing cost and $4 million of SG&A through actions to optimize capacity, restructure parts of our organization and deferred or eliminated spending in multiple areas. As noted previously, these initiatives result in $7 million of permanent savings, split between SG&A and cost of manufacturing.
Finally, our actions have helped us maintain a very strong liquidity position. Liquidity increased in the third quarter, driven by our impressive cash generation and we remain well ahead of our initial plans. I'm very pleased with how our teams have continued to unlock and increase cash flow this year. With over $180 million of available liquidity, we have significant financial strength and flexibility as we exit 2020, and I think I can speak for all of us, when I say we can't exit soon enough.
To wrap up our teams have done an exceptional job working safely, during this most challenging of times; supporting customers in new ways and with new products; aggressively managing costs and maintaining our strong financial position. Their success driving results this year along with initiatives, I'll talk about later position us very well for the future.
But now I would like to turn things over to Paul to cover third quarter financial results in more detail.
Paul F. DeSantis -- Senior Vice President, Chief Financial Officer and Treasurer
Thank you and good morning everyone. As you heard from Julie, our business delivered meaningful improvements in sales, profit and cash generation in the quarter. While demand for some categories remains below pre-COVID levels, our teams have worked to mitigate this by pursuing topline growth opportunities and aggressively managing costs to improve margins and protect liquidity. As a result, we're continuing to make progress in both segments.
Let me start with Technical Products. Sales in the quarter of $124 million were up 16% versus last quarter, though down 6% from last year, because of reduced demand due to COVID. The year-on-year impact was seen most acutely in some of our industrial categories like labels and security. Products are tend to be more economically sensitive, digital transfer and backings fared better and filtration performed very well, growing 9% over last year. Transportation filtration volumes grew 7% overall, including double-digit growth in North America, and we also added sales from face mask media, launched earlier this year.
Net selling prices were slightly lower, primarily because of price adjusters, related to lower raw material costs. This was partly offset by favorable currency translation, due to a stronger Euro. Adjusted operating income was, up an impressive $8 million from last quarter and also up $3 million from the third quarter of 2019. This improved performance reflects the cost reduction efforts, a more profitable mix and a modest benefit from lower input costs, net of selling price changes, which offset impacts of lower sales volume.
In Fine Paper and Packaging, net sales of $67 million were up more than 20% versus the second quarter, but down from a strong third quarter last year, with the biggest impact in lower commercial print volume. Net selling prices were modestly lower in the quarter, mostly related to reduced raw material costs. We have implemented a number of initiatives in commercial print, consumer products and premium packaging that will help restore demand, as we work with customers to accelerate their COVID recovery.
Adjusted operating profit bounced back strongly from the second quarter, but still fell short of last year, primarily due to lower sales. These items were partially offset by spending reductions and modest benefits from lower input costs, net of selling prices. Our actions have positioned Fine Paper and Packaging to respond quickly to further improvements in end-market. Earlier this year, we curtailed production on one of our paper machines, restructured parts of the business and dramatically reduced inventory. While these actions disproportionately impacted fixed cost absorption, we're now at a more balanced inventory levels and capacity utilization, which should ultimately help accelerate our return to historical mid-teen operating margins.
Looking next at a few corporate items. Consolidated SG&A of $19 million was down $4 million from last year. Unallocated corporate costs on an adjusted basis were $3.4 million and in line with last year. We have acted aggressively to take out cost this year and the quarter was also helped by certain temporary benefits from credits under the CARES Act, further cuts in selling and marketing and other one-time items.
As our business continues to recover, we expect a variable cost and SG&A and unallocated corporate expense to begin to approach pre-pandemic levels, once we are able to start traveling and meeting with our customers again. We then expect to grow SG&A, at a rate lower than our ultimate sales growth, while investing disproportionately in areas that will drive growth and margin like innovation.
Quarterly net interest expense was $3.6 million in line with what we had communicated, but up from $2.8 million in 2019. Approximately $400,000 of the increase was due to an overlap in July, prior to the redemption of our bond. Going forward, quarterly interest expense should be around $3.3 million, primarily for our $200 million Term Loan B, which has an interest rate of approximately 5%.
Our tax rate for the quarter was 23%, in line with our projected ongoing rate of 22%, but higher than last year's 11% rate, while the third quarter rate in both 2020 and 2019 benefited from the reversal of reserves for tax audit, after statutes of limitations expired. In 2020, this benefit was offset by increased expense, due to a change in our projected mix of income by jurisdiction.
Turning to a few balance sheet and cash flow items. As Julie noted, our liquidity is in great shape, and we grew during the quarter to more than $180 million, this was comprised of over $40 million of cash and $140 million of unused, available borrowing capacity. We ended the quarter with debt of $196 million, primarily our Term Loan B and had no borrowings against our $175 million credit facility. Cash generated from operations with a very strong $36 million and included around $20 million from working capital management.
In the fourth quarter, there are initiatives we are pursuing that will have the temporary negative cash impact. For example, we accelerated $6 million of 2021 retirement plan cash contributions in order to generate a significant cash tax benefit. Working capital needs are also expected to increase. However, overall we'll deliver sizable cash flow in 2020, as a result of the many initiatives our team successfully completed.
We are also carefully managing capital spending. Third quarter spending was $4 million and year-to-date we spent $12 million, with full-year spending expected to be around $17 million. This is about half our normal level, as we've cut or deferred non-critical items. But continue to fund projects that deliver meaningful cost savings or our key to long-term growth. Next year, we expect capital spending to return to a more normal level of around $30 million to $35 million.
I'll wrap up with a few comments on our near-term outlook. In general demand should continue to recover with global economies and we've been encouraged by what we've seen so far in the quarter. However, as a reminder, the fourth quarter seasonally are slowest and consequently, while year-on-year percentage comparisons should continue to improve, overall sales may be similar to the third quarter. While we've seen limited impact at this point, the recent resurgence of COVID makes forecasting a challenge and hopefully we've all learned how to manage more effectively in this environment to minimize the impacts.
Fiber costs should remain fairly stable in the fourth quarter, while there have been some recent price increases, most of our contracts have a one quarter lag to market, providing this time to implement selling price changes, if warranted. Other input costs are projected to rise modestly in the fourth quarter, with increases in certain chemicals and energy. Fourth quarter results will also include $1.5 million to $2 million of incremental costs, our annual maintenance downs, primarily at our Filtration operation in Germany.
In summary, third quarter results were very encouraging. Revenues, profits and margins improved significantly in both segments, as markets recovered. Technical Products profit surpassed last year, led by impressive filtration performance. Our teams have been successfully managing working capital and cash flow and our financial position is strong, this gives existing customers reassurance that Neenah can grow with them and provides us flexibility to act on new opportunities that can drive our business to higher levels.
With that, I'll turn it back to Julie.
Julie A. Schertell -- President and Chief Executive Officer
Thanks, Paul. In addition to safety, which I spoke about earlier, I'd like to wrap up by sharing information on a few key initiatives focused on driving long-term value, by accelerating our growth trajectory and increasing our margins.
Let me start with the top line. I'm pleased with the recovery in each of our business segments and we're well positioned as we head into 2021. Technical Products is clearly on a path to pre-COVID levels, led by a faster recovery in our larger growth categories of filtration and digital transfer. While of course, there is continued uncertainty with the resurgence of COVID, assuming no significant change in market dynamics, we expect Technical Products to fully recover to pre-COVID levels early in 2021.
In Fine Paper and Packaging, revenue recovery is projected to take a bit longer and we expect to reach around 90% of our pre-COVID quarterly run rate of $90 million next year. Looking beyond the near-term, we're focused on expanding in four growth platforms that can accelerate our long-term growth rate and provide clear direction for our efforts and investments. These are filtration, specialty coatings, custom engineered materials and premium packaging. These are growing profitable and defensible markets, aligned with our manufacturing technologies and material science know-how. These platforms, more than double our addressable markets and allow us to unlock synergies, as we gain scale. I'll talk briefly about each.
The first growth platform is filtration, an attractive category in which we're very familiar. While today 70% of our filtration business supports transportation end-markets, we have started to expand our presence in industrial air and water, consumer beverage and recently accelerated entry into premium face mask media, a subset of air filtration. We have unique capabilities that unlock opportunities in these adjacent markets and a passed market through many of our existing customers. Our targeted filtration markets are large and growing and supported by accelerating macro-trends related to health and the environment.
Specialty coatings is our second growth platform, most of our Technical Products are coated or saturated, with unique chemistries developed at Neenha and we have opportunities to extend these capabilities and leverage our strength in digital and specialty coating in new markets. Recent examples, include expanding our dye sublimation portfolio to include natural fibers and launching a sustainable floor graphic media in Q3 to meet the safety needs of COVID and the environmental needs of our customers. Future opportunities include, extending our technologies into premium release liners, imaging performance labels and other markets requiring advanced coating technologies.
Our third platform is custom engineered materials. You may be familiar with composites, which are products made from two or more different materials, where the resulting combination is a higher performing product. We create products today by blending various fibers, be it, glass, cellulose or non-woven, to meet customer specific requirements. We see opportunities to leverage this material science expertise to solve other demanding and critical customer needs.
And our fourth growth platform is premium packaging, this is an attractive growing market and our team has done a nice job of building out capabilities and a robust pipeline of innovative products. Our flexible manufacturing and finishing capabilities coupled with our product in designed skills, are highly valued by premium brand managers. As consumers increasingly look for more sustainable alternatives, Neenha has environmentally friendly solutions for even the most discerning customers and brands.
Since these products utilize the same assets as our premium Paper business, we expect to offset the secular decline in printing papers, as we accelerate growth in premium packaging. We will grow in these platforms, both organically and through M&A. Organically, as a specialty materials company, we're reinvigorating our innovation process and gaining momentum as our pipeline of new products continues to expand. I've shared in past calls, some of the innovative products we've launched this year.
Going forward, we expect sales from our innovation pipeline, both to increase our growth rate and to be margin accretive and we made solid progress this year. Our M&A efforts remain active and our radar screen is robust. We are focused on acquisitions that are [Indecipherable] strategic fit and provide attractive financial return, while recognizing that we'll be cautious in the near-term due to market uncertainty. This is one of the reasons I'm so pleased with our financial position as we emerge from 2020. It provides us flexibility to invest and grow our business as we see opportunities.
Our four targeted platforms represent a potential significant increase in our addressable market and can boost our organic growth rate by 1% to 2%. While we've just began our journey, I'm excited about the opportunities these markets represent to accelerate our growth and to increase margins.
Let me talk a bit about other profitability initiatives. Clearly, our margins will benefit, as our volume recovers, and we more fully utilize our installed capacity. In addition, we've started work this year and what we call our Neenah operating system. This is a framework of principles, practices and tools that will standardize and harmonize the way we operate in our facilities and create a greater culture of operational discipline. We're implementing the system globally, and have started this year in two of our largest plants, with an initial focus on incorporating lean principles into these operations.
I started my career on manufacturing plant and recognize how much value we can gain with a disciplined manufacturing system. We're expecting the Neenah operating system to deliver over $20 million in annual efficiency and cost improvements, as we implement over the next five years.
So to wrap up, you've seen that we've addressed this year's challenges head on, and then we're emerging from 2020 in a position of strength, with a clear path to accelerate growth and catalyst increased margins. Initiatives are under way to create substantial value by expanding in our four targeted growth platforms that meaningfully increase our addressable market and accelerate our growth rate with innovative new products, supplemented with value-added acquisitions. And implementing a global operating system that will deliver substantial savings and improved profitability and grow EBIT margins in each of our business segments to mid-teen levels.
While there's a lot going on, we remain committed to the financial principles we've been known for, disciplined capital deployment, a relentless focus on return on capital, maintaining a prudent balance sheet and returning cash to shareholders through an attractive dividend. Success is not possible without a talented and dedicated group of employees and I appreciate all that our teams have done and continue to do. I'm excited about our future and appreciate your interest today.
I'd like to now open the call for questions.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of Steven Chercover from DA Davidson. Your line is open.
Steven Chercover -- D.A. Davidson -- Analyst
Thanks, good morning everyone. So you've answered many of my questions, partially in the global manufacturing we're now the Neenah...
Julie A. Schertell -- President and Chief Executive Officer
Neenah operating system, yes.
Steven Chercover -- D.A. Davidson -- Analyst
Neenah operating system, I'll write that down. So $20 million over five years. So what should we, kind of, be plugging in for 2021, we're assuming that you're just getting going now?
Julie A. Schertell -- President and Chief Executive Officer
Sure. We are launching now in our two largest facilities and as a reminder, the Neenah operating system it encompasses safety and cost and quality and delivery. We are really focused on safety, and cost and we're ramping up through the next year. And as you're probably aware the lean principles, create a high level of sustainability and execution, but they don't happen overnight. So while $20 million over that five year period of time and we'll see benefits next year, but there are some start-up costs and upfront cost in '21 from a personnel and training standpoint, that will offset some of the initial cost reductions in year one.
I wouldn't want to leave you with the impression though that we're managing costs and reducing costs every single day. As a manufacturing company, it has to be part of our DNA to be successful. So what the Neenah operating system does is -- it really accelerates, amplifies those efforts and makes them sustainable. And then at the end of curve, our expectation is clearly the $20 million annually that we should be seeing.
Steven Chercover -- D.A. Davidson -- Analyst
Okay. So it's going to be maybe a little bit back-end loaded or a couple of years before we start to see it. So a trust you will give us road map marks over the course of time?
Julie A. Schertell -- President and Chief Executive Officer
Yes, we'll give you as much road-map as possible and like I said, we'll see benefits next year there'll just be some upfront costs that may offset, some of those benefits next year. So I wouldn't call it completely back-end loaded, but it won't be a light switch for sure.
Steven Chercover -- D.A. Davidson -- Analyst
Yes. And, you know, I write down my question and then you answered before I ask, so...
Julie A. Schertell -- President and Chief Executive Officer
Perfect.
Steven Chercover -- D.A. Davidson -- Analyst
So -- paper well, that's good. So you're anticipating what we need, but in paper, I expect that at least talked with some of the commodity guys, there's going to be a permanent step function down. And I was going to say 10% and that if you're going to return to 90% of previous sales in paper, is that about right and then do you think that your end-markets will have the same kind of secular headwinds that the commodity guys have or basically will offset through the growth of packaging?
Julie A. Schertell -- President and Chief Executive Officer
So a couple of things. I think you got it exactly right, we're expecting to returned about 90% of our pre-COVID quarterly pace, which was about $90 million and we're expecting to do that in 2021. So a couple of things, I would tell you that's different. As we looked at the last recession and our performance in Fine Paper and Packaging, we saw a step down somewhat of a recovery, but not entirely like we expected this time, and then the market leveled off for a couple of years. So there was less secular pressure for a couple of years, that's what I would expect.
Now, obviously there is a lot of moving pieces and this is a different time with COVID. But the other thing, it's very different about Neenah from the last recession and different from the more commodity players is the diversity of our portfolio in the end-markets that we serve. About 50% of our portfolio in Fine Paper and Packaging is consumer products and premium packaging and where the greatest secular pressure and on going pressure is in that other 50% of commercial print. Our commercial print is really not driven by office usage as much, it is driven by advertising. So there is just different influencers in the end-market from our competitors and from our last recession, but we feel good about the pipeline, we've built particularly in consumer products and in packaging.
The other thing that I would just tell you that's not different is I think Neenah has done a really good job, managing this business over the long-term. We know how to run this business, it's been in secular pressure -- under secular pressure since the mid '90s, but our expectation is to return to mid-teen margins, continue to generate strong cash and then we invest that cash for growth in our growth platforms.
Steven Chercover -- D.A. Davidson -- Analyst
And do you think, you'll be back to that $90 million revenue rate by Q1 of '20, sorry 2021?
Julie A. Schertell -- President and Chief Executive Officer
Well, I think there's a lot of uncertainty right now with the resurgence. And so I -- forecasting is more challenging right now, then it's been in some time, but it will be a ramp up. But we're seeing nice sequential improvement in Fine Paper and Packaging across all of the categories in which we compete.
Steven Chercover -- D.A. Davidson -- Analyst
But it might be more from a modeling perspective to assume that's an exit rate as opposed to [Indecipherable] $360 million in sales next year?
Julie A. Schertell -- President and Chief Executive Officer
Yes, I would assume it ramped up over the year.
Steven Chercover -- D.A. Davidson -- Analyst
Okay, last question on paper, which has to do with the market pulp that you guys purchased. Can you tell us -- can you remind us how much pulp you buy and I wouldn't call it a competitor, but another company that buys market pulp is incorporating about a $50 ton increase. Is that about -- so what kind of magnitude increase are you thinking? What's the tonnage that you buy and will you be able to offset at your pricing?
Paul F. DeSantis -- Senior Vice President, Chief Financial Officer and Treasurer
Yes. So, this is Paul. So a couple of things on that pricing. So I think, as you know we -- as the market pricing tends to hit us, we have a bit of a lag, both in terms of when we get that pricing and then how that gets passed on. And so if you -- in our comments that we talked about now, we talked about our selling price came down a bit, but our raw material costs came down as well. So we were able to match that up. And so, as long as the movement isn't too dramatic. Our expectation is that we're going to recoup that change, one way or the other fairly soon in the process. And so we're not expecting dramatic increases, we're expecting pretty modest increases. And so from our point of view, we think that the bottom line impact will be minimal on those, assuming that our set of assumptions is correct.
Steven Chercover -- D.A. Davidson -- Analyst
Okay. And last question, I promise. I'm not very fast right and in fact I'm just not very quick. So the growth platforms before that you mentioned is it industrial air and water, face mask media and what were the other two? Is it...
Julie A. Schertell -- President and Chief Executive Officer
Well, let me go through, because I think you're on and one of them into the four growth platforms. The first one is filtration, and so industrial air and water fit into that particular growth platform as does the others, I think you mentioned. The second one is specialty coatings, so today Neenah -- at Neenah we coat and saturate, a lot of our products, particularly in Technical Products. And we have the ability to extent that into adjacent markets as well, it could be things like more performance and image labels, it could be things like silicone release labels that type of advanced coating technology, that's the second one.
The third one is custom engineered materials, so this -- that what is all about manipulating fibers to get a better or different end-use characteristic for our customers. So composites might be an example of that and we do that today, we manipulate and mix fibers, whether they are glass or non-woven or cellulose fibers.
And then the last one is premium packaging and that one that will continue to lean into an advanced and that runs on the same assets, as our paper business. And so it's a really nice utilization over time of that asset base to ensure that we remain competitive from a cost position as well.
Steven Chercover -- D.A. Davidson -- Analyst
Got it. Thanks for taking my questions.
Julie A. Schertell -- President and Chief Executive Officer
Sure. Thank you.
Operator
Jon Tanwanteng, CJS. Your line is open.
Jon Tanwanteng -- CJS Securities -- Analyst
Hi, good morning everybody. Thank you for taking my questions and a very nice quarter.
Julie A. Schertell -- President and Chief Executive Officer
Good morning.
Jon Tanwanteng -- CJS Securities -- Analyst
The first one, you gave us some color on the expected revenue heading into Q4 which was helpful. Thank you. But I think if I heard you correctly, you're going to see additional drags from inputs, maintenance down and maybe some expenses rolling-back in, and the CARES benefit, I guess expiring. Putting it together, is it fair to say you expect a pretty big sequential downtick in the margins there? Or are there offsets or savings that we should be thinking about?
Paul F. DeSantis -- Senior Vice President, Chief Financial Officer and Treasurer
Yes, I wouldn't say a pretty big downtick in margins, so what we wanted to highlight was that we have some items that we are expecting like the maintenance downs are going to be a little incremental. At the same time, we're driving our mix, we are still focused on cost control. And so even though we had some savings from the CARES Act and from the equivalent around the world showing up an SG&A and even though we have some permanent headcount reduction that we don't expect SG&A to bounce back up to historical levels next quarter, it might be a little bit higher on a run rate basis than it was this quarter. So I think, there will be pressure on margin in the fourth quarter from those items, but I wouldn't expect it to be a dramatic impact.
Jon Tanwanteng -- CJS Securities -- Analyst
Okay, thank you. That's help. And then Julie just to clarify, the $20 million expected savings over the next five years, that doesn't include the $7 million permanent savings you've already realized, right? And maybe as a follow on to that. Does savings need to -- great. And do those -- do you need to realize any certain volumes or revenue level to realizes maybe?
Julie A. Schertell -- President and Chief Executive Officer
The $20 million savings, those are really based on our current expectation of recovery. So as of course, as volume continues to recover that helps our margins and as we continue to accelerate our ramp up in North American filtration that helps our margins. So there's definitely other things that will drive margins in addition to the Neenah operating system, but it's incremental to the $7 million, it is not dependent on getting to a significantly larger volume numbers, based on our current short-term forecast, based on the businesses we're in today. And it's really focused in those areas that are very -- mostly variable in nature.
Jon Tanwanteng -- CJS Securities -- Analyst
Okay, great. And then the last one for me. Julie you've drawn a line in the sand, I guess for the paper revenue, I guess the $90 million run rate at some point next year. You've listed a lot of growth initiatives on top of that, whether it's fine packaging or on the other side in Technical, we wish to sound great. When do you see yourself, I guess with the rebound in the economy and these growth initiatives returning to 2019 revenue levels? And maybe what kind of long-term growth rates are you targeting for both these segments, inclusive of all these we seem to be get going on?
Julie A. Schertell -- President and Chief Executive Officer
Well, that was a couple of questions in there. So let me [Speech Overlap] I hit them all. First, I just want to make sure the $90 million run rate, what we're trying to message is, our expectation as we get to about 90% of our previous COVID -- pre-COVID run rate, which was $90 million. So that -- as you've asked about demand destruction in the past, that's the 10% we're expecting, just to clarify from a fine paper and packaging standpoint.
Your second question, I think was a lot around growth in 2019 and when we get back and what I would tell you is. And again I want to start with barring any significant impacts from the resurgence. Because we know that we're seeing some lockdown happened in Europe and other areas. But based on what we're seeing today, recovery in all categories is happening, it's deferred by pace, and there's some expected normal seasonality that will feel. It's led by filtration both transportation, filtration, our core business as well as the incremental business and face mask that we've penetrated this year. There is a stability in our large industrial categories things like backings. And then Fine Paper and Packaging is recovering as well and as expected, it's just at a little bit slower pace, which is what we expect.
We're working really closely with customers and we've seen opportunities to grow share during this time. We've launched innovative new products, that is driven incremental revenue. So we're really working to proactively manage the recovery, with some growth catalyst and with some margin catalyst in play.
Jon Tanwanteng -- CJS Securities -- Analyst
Got it. Thank you very much.
Julie A. Schertell -- President and Chief Executive Officer
Sure.
Operator
Chris McGinnis from Sidoti & Company. Your line is open.
Chris McGinnis -- Sidoti & Company -- Analyst
Good morning, thanks for taking my questions and nice quarter.
Julie A. Schertell -- President and Chief Executive Officer
Thank you.
Paul F. DeSantis -- Senior Vice President, Chief Financial Officer and Treasurer
Thank you.
Julie A. Schertell -- President and Chief Executive Officer
Good morning.
Chris McGinnis -- Sidoti & Company -- Analyst
I was wondering, just on the comments around the mid-teen margin profile in Fine Paper. Is that -- at that 90% run rate or is that a current levels in -- would that improve, just wondering about that comment you made early?
Julie A. Schertell -- President and Chief Executive Officer
Sure. Well the first step Chris was to get to double-digit EBIT margins, which we did in Q3 in both segments and as volume continues to recover, those will continue to ramp up. As our innovation pipeline continues to become more and more accretive, those will ramp up, as our Neenah operating system begins to get implemented those will ramp up. So I'm expecting continue with sequential improvement in our margins again barring any significant impact in resurgence.
And then of course we have normal shutdowns and some seasonality that impact those as well. But at a high level, I would expect continuous margin improvements and we saw that in Q3. We also saw pre-COVID really nice margins in Fine Paper and Packaging, as well as Technical Product improvements. I feel like our strategies were working in Q1 and as we exit start to emerge in Q3, from a recovery standpoint, we're seeing them work as well as, some nice margin recovery this quarter.
Chris McGinnis -- Sidoti & Company -- Analyst
Sure. Definitely evident number, so congrats on that.
Julie A. Schertell -- President and Chief Executive Officer
Thank you.
Chris McGinnis -- Sidoti & Company -- Analyst
And I guess, just around packaging was last year just a really strong quarter for packaging or just impacted, how was your growth actually in the period for the packaging products?
Julie A. Schertell -- President and Chief Executive Officer
Last -- you're asking, if there was a growth this year on Packaging...
Chris McGinnis -- Sidoti & Company -- Analyst
Yes, sorry. Yes, yes for this year, yes.
Julie A. Schertell -- President and Chief Executive Officer
This year, packaging currently it's been impacted by the virus as well. So from a year-over-year standpoint, we're not seeing packaging up versus last year yet, but it's recovering at a much faster pace than some other parts of our category like commercial print.
Chris McGinnis -- Sidoti & Company -- Analyst
Okay. Okay. I apologize. I thought last quarter it was up a little bit. So I was wondering, if that was a step down, or just a [Speech Overlap]
Julie A. Schertell -- President and Chief Executive Officer
So it's continuing to grow sequentially and I will tell you, I'm encouraged by the innovation pipeline that the team has developed around Packaging and some of the sustainable solutions that we're launching. I think right now, when health is still top of mind for everyone, and it quickly turns to the health of our environment as well. And the team has done a really nice job, developing some products like Floor Graphics that you see everywhere if you're out at all. And there -- the cellular space and recyclable and an alternative to some of the less environmentally friendly option, as well as styrene alternatives in some of those areas. So I'm encouraged by what we're seeing from a new product standpoint.
Chris McGinnis -- Sidoti & Company -- Analyst
Great. And that was going to be my next question, but my next question after that. Can you -- just talk about maybe your appetite for M&A in the current position, would you -- want to wafer a little bit more clarity on the economy to recover before you [Indecipherable] time for disbursement [Phonetic]?
Julie A. Schertell -- President and Chief Executive Officer
Well, I'm really pleased with our current cash position and liquidity position and that is an important part and our M&A remains an important part of our strategy. And we're seeing solid deal flow right now, we'll continue to be cautious because we're in uncertain times, we may take smaller bites. But having strong cash generation and liquidity, gives us the opportunity to capture that the targets that we see that are right strategic fit for Neenah and accretive. So we'll just be more cautious, but still participating from an M&A standpoint, which is our continuing path.
Chris McGinnis -- Sidoti & Company -- Analyst
Great, thanks for taking my questions and good luck in Q4.
Julie A. Schertell -- President and Chief Executive Officer
Thank you.
Operator
There are no further questions at this time, I will turn the call back over to Bill for closing remarks.
Bill McCarthy -- Vice President of Investor Relations
Okay, thank you. As you've heard, we've successfully addressing the challenges this year. Have a clear pathway to accelerate topline growth and catalyst to improve margins. Thank you for your time and interest today and as always, please feel free to reach out to me if you have questions. We hope to have the opportunity to talk to many of you at the upcoming virtual conferences hosted by Baird next Thursday, November 12th. Thank you.
Operator
[Operator Closing Remarks]
Duration: 32 minutes
Call participants:
Bill McCarthy -- Vice President of Investor Relations
Julie A. Schertell -- President and Chief Executive Officer
Paul F. DeSantis -- Senior Vice President, Chief Financial Officer and Treasurer
Steven Chercover -- D.A. Davidson -- Analyst
Jon Tanwanteng -- CJS Securities -- Analyst
Chris McGinnis -- Sidoti & Company -- Analyst
