Magnera Corp (MAGN) 2004 Q3 法說會逐字稿

Good afternoon, and welcome to the Glatfelter third quarter earnings release conference call.

At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation.

It is now my pleasure to introduce your host for today's call, Mr. Glenn Davies.

Sir, you may begin.

Thank you, Stephanie, and good afternoon.

Glenn Davies from Glatfelter's Corporate Finance Group, and I'd like to welcome you to our conference call to review our earnings release for the third quarter.

On the call this afternoon from Glatfelter is George Glatfelter, our Chairman and Chief Executive Officer, John Van Roden, our Senior Vice President and Chief Financial Officer and Dante Parrini, our Senior Vice President and General Manager.

Also in attendance is John Jacunski, our Vice President and Corporate Controller.

Before we begin our discussion, I would like to remind you that any statements that may be made today with regards to our future expectations, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Please refer to our 2003 annual report filed with the SEC for important factors, which among others, could cause our actual results to differ from any results which might be projected, forecasted or estimated in any such forward-looking statements.

And with that, I'll turn the call over to George.

Thank you, Glenn.

Good afternoon, everyone, and welcome to our 2004 third quarter conference call.

I hope you've had an opportunity to review our earnings release that was issued earlier this morning -- earlier today.

After my introductory remarks, John Van Roden will provide an overview of our financial performance during the third quarter, followed by comments from Dante on the operational side of the business.

I will then conclude with a few remarks before opening the call for your questions.

As many of you know, during the third quarter we completed a secondary offering of our common stock.

This offering was very well received in the marketplace, and I would like to take this opportunity to welcome those of you on the call that may be new to Glatfelter.

We'll look forward to your questions.

The third quarter of 2004 was an active and a very productive period for the company, as we continued to pursue our vision of becoming the global supplier of choice in specialty papers and engineered products.

Our third quarter results compared to a year ago demonstrate the strengthening of many of our specialty businesses, as well as the improving economic conditions in our marketplace.

Continuing trends we have seen throughout the past few quarters, demand for our higher value products increased, and we enjoyed strengthening pricing conditions this quarter when compared to earlier quarters in the year.

In addition, we're beginning to realize early benefits from our North American restructuring program.

This, as you may recall, is a pretty extensive initiative designed to reposition our product mix and reduce our cost structure.

Also during the quarter, we reached a significant milestone in achieving the program's intended financial benefits when we successfully renegotiated the labor contract at our Spring Grove, Pennsylvania mill.

This agreement was overwhelmingly ratified by the Union Workforce, and positions us to implement significant workforce efficiencies at this facility.

Later in the call this afternoon, I'll provide further insight into these issues, as well as our business for the quarter, but first, I'd like to ask John Van Roden to provide a review of our third quarter financial results.

John?

Thank you, George, and good afternoon.

Earlier today, we reported income from continuing operations of $2.2 million or 5 cents per diluted share, compared to a loss of $6.7 million, or 15 cents per share in the same quarter a year ago.

After adjusting our reported results for several non-recurring items in each quarter, which are outlined in today's release, our adjusted earnings were $5.6 million, or 13 cents per share in the third quarter of 2004, compared with $3.7 million and 8 cents per share in the third quarter of 2003.

The improved operating results are primarily due to increased volumes in our engineered products and long fiber and overlay business units.

Higher unit volumes in these segments, net of lower volumes in printing and converting papers, contributed approximately 5 cents per share when compared to a year ago.

Overall, selling prices had little effect on the quarter-over-quarter comparison.

However, on a sequential quarter comparison, selling prices continued to increase in each of the last two quarters.

Our gross margin widened to 18.6% in the current quarter compared to 14.8% in the third quarter of 2003.

The improvement largely reflects our efforts to shift our product mix to higher margin businesses, as well as early benefits from changes in our supply chain management processes.

Last quarter, we announced that our workforce reduction in our Spring Grove facility would result in a special charge mainly associated with an early retirement program.

During the quarter, we recorded a $16.5 million charge associated with this action.

Substantially all of the charge relates to enhanced pension benefits and other post-employment obligations to the effected employees.

As you know, we are committed to maintaining a solid balance sheet.

We ended the quarter with net debt to total capital of 33.6% compared to 39.1% at the end of 2003.

Also, as we have throughout the past two years, we continue to pursue additional opportunities to extract value from higher, better use timberlands.

During the current quarter, we completed a sale of 138 acres for $2.4 million, and signed an agreement to sell an additional 1,980 acres for approximately $18.3 million in cash.

This transaction is expected to close before the end of the year.

This concludes my comments, and I thank you, and I turn it back to you, George.

Thank you, John.

I'd now like to ask Dante to provide an overview of the operational side of our business.

Dante?

Thank you, George, and good afternoon.

I'll provide some comments on the performance of our three business units, new product development, and mill operations for the third quarter of 2004.

Let's start with our business units.

We'll begin with long fiber and overlay.

As you might recall, this business unit is the world leader in the manufacturer of high quality filter papers for the food and beverage markets, overlay papers for the composite laminate industry, metallized label papers in several niche technical specialties.

The third quarter 2004 net sales were approximately 30% ahead of the same quarter a year ago, which was largely due to strong performances from the food and beverage and composite laminate segments, and to the translation effect of foreign currency.

Volumes increased approximately 19% in the quarter-to-quarter comparison.

The investment in PM Number 9 in Gernsbach, Germany has enabled us to allocate more capacity to our attractive food and beverage segment, and we continue to benefit from the explosive growth of the coffee pot market.

From a new product and new market perspective, we continue to make progress in the growth and development of our technical specialty segments, and remain confident that revenue growth from these new products will occur as we look toward the future.

In terms of near-term demand and pricing outlook, demand for tea bag was unusually strong during the third quarter, which is due to slightly colder and rainier weather in Europe than is typically experienced this time of year, as well as some operating problems experienced by a key competitor.

As previously stated, demand for coffee filter papers remains very strong, and we have a leadership position in this segment.

The demand for overlay papers was quite strong for the quarter as well.

Near-term outlook for pricing in this business unit is stable, with some price increases being implemented for food and beverage products.

Let's move to engineered products.

This business produces customized solutions for the digital imaging, casting and specialty release, pressure sensitive and industrial specialty markets.

Some products include things such as inkjet papers, heat transfer papers, medical, non-woven, playing cards and postage stamps, to name a few.

For the third quarter, sales were up approximately 1%, and volumes were favorable by approximately 10% versus the same quarter a year ago.

This continued volume growth was largely driven by increased sales of uncoated specialties across a number of our market segments, which represents a shift in mix within North America, strong volumes continuing in digital imaging and inkjet products, and we have been very successful in scaling up several new pieces of business in a number of our targeted product areas, which speaks to the new product development process that continues to work very well for us and enables us to quickly bring products to market.

As stated before, we continue to see a lot of pull from the North American specialty market.

Customers continue to approach Glatfelter to be their supplier of choice, as more smaller, non-integrated mills continue to experience difficulty.

Near-term demand in pricing outlook -- the near-term demand for this business unit is strong, with some year-end inventory drivedown expected from certain customers, and pricing is stable.

Now, I'd like to say a few things about printing and converting.

This business unit produces premium quality fine papers for the book publishing and envelope converting industries.

Net sales for the third quarter were 2% below third quarter of 2003, and volumes were down 5% in the comparison.

Each of these reflects the impact of shutting down capacity at our Neenah, Wisconsin facility in the fourth quarter of 2003.

However, continuing the trend that began earlier this year, the trajectory of this business has changed for the better.

Backlogs are strong, prices have increased and we're recovering book publishing market share that was lost in 2003.

One of the factors contributing to our improving book publishing volumes is Performance Plus.

This is a new product and service program introduced during the second quarter that is designed to strengthen Glatfelter's market leadership in book publishing.

Our envelope and converting papers segment also turned in a very strong quarter when compared to the third quarter of 2003.

Some comments on near-term demand and pricing outlook: Demand is relatively strong in North America, and we expect this trend to continue as order backlogs remain full.

But we do anticipate some seasonal slowdown as we approach the end of the year, and our pricing outlook is stable after implementing price increases in most product categories.

For example, in July, we implemented a second price increase for our envelope papers that favorably impacted the third quarter, and we successfully implemented two price increases for trade book papers that were fully realized on July 1st and October 1st.

Couple of comments on new product development: During the third quarter, approximately 58% of our net revenue came from products less than five years old.

Volume growth in engineered products and long fiber and overlay contributed significantly to this performance, and we expect this trend to continue.

As far as operations, during quarter, all of our mills ran well and production volumes continued to improve at Neenah, Wisconsin, which is very encouraging.

This concludes my comments.

I'll now turn it back to you, George.

Thanks, Dante.

As you have just heard, we're continuing to see the positive trend in our business that began earlier in the year.

To me, it boils down into five points.

Demand remains strong and pricing conditions are generally improving.

Our growth plan for engineered products, long fiber and overlay, and printing and converting is on track and continues to produce attractive volume growth.

Our business strategy of improving mix and reducing costs is on target and it's delivering the benefits that we anticipated we would receive.

Dante talked about new product development.

We continue to drive it as an engine of growth across the company.

And last, but certainly not least, the balance sheet's strong and getting stronger.

We continue to extract value from non-strategic assets.

During the last call, I discussed the North American Restructuring Program.

This is a company-wide initiative designed to reduce operating costs and further improve the product mix I referred to earlier.

Through this effort, we expect to generate financial benefits beginning in the latter part of this year that will approximate $15-20 million annually, beginning in 2006.

I can report to you today that the early stages of the project are meeting our expectations, and we're on track to deliver the anticipated benefits of the program.

Additionally, we discussed in this morning's release the successful negotiations to modify a long-term steam supply contract at our mill in Neenah, Wisconsin.

This was a critical component of our Neenah restructuring initiative undertaken about a year ago.

We believe the new contract further positions us to more fully realize the expected benefits of the restructuring activities at this facility.

When I explain what drives this business to people, there are four strategies that come to mind.

You've heard them alluded to throughout the context of this presentation.

The first is continue our drive to become the specialized producer by growing revenue in high-value niche markets.

Today, these markets comprise about 70% of our sales portfolio.

Our goal is to drive this number to 80% by 2006.

The second is to focus on our long fiber and overlay business unit and execute our growth plan by doing two things: First, penetrating higher growth niche segments of the global non-wovens market; and secondly, leveraging our inclined wire paper machine technology to serve growing high-margin market niches.

The third strategy is the one I just talked about -- improvements of the 15 to 20 million dollars through our North American Restructuring Plan.

We've executed the necessary actions.

We're tracking to our plan, and we're seeing benefit and will going forward.

And finally, maintaining the financial strength of the balance sheet, strength of the business, Glatfelter's an investment grade company with a strong balance sheet and healthy credit ratios.

That's very important to us.

I'll conclude by saying that I'm pleased with the progress that we've made on these four key strategic efforts.

Furthermore, I'm gratified, as well as excited, frankly, to note that we're beginning to see the results.

Clearly, issues remain for our business as well as for our industry.

Looking forward, we remain cautious about the impact that higher prices of energy and certain raw materials could have on global economic conditions, as well as on our company.

Historically, the fourth quarter of this year has presented -- of the year -- has presented seasonal challenges to our business that will likely, again, play out this year.

At the same time, it's fair to say that we've done a lot within this company during a pretty difficult time and it's beginning to pay off.

In general, I like what I see going forward.

I would like to thank you for your participation in today's conference call, and I'll now turn the call back to Glenn to open the line for questions.

Thank you, George.

That does conclude the prepared remarks portion of our call.

At this time, we are prepared to answer questions you may have.

I would like to ask our conference call operator to provide you with instructions for this portion of the call.

Thank you.

Thank you, sir.

The floor is now open for questions.

If you do have a question, please press star-one on your touch-tone telephone at this time.

If at any point your question is answered, you may remove yourself from the queue by pressing the pound key.

Questions will be taken in the order that they are received.

And we do ask that while posing your question, you please pick up your handset to ensure proper sound quality.

Once again, if you do have a question at this time, please press star-one on your touch-tone telephone.

Please hold the line while we poll for questions.

Our first question today is coming from Mark Connelly of Credit Suisse First Boston.

Please go ahead, sir.

Thank you.

Hi, George, hi John.

Hello, Mark.

Question -- and sorry, I didn't mean to leave you out, Dante.

That's okay.

First question, with respect to the comments on the long fiber business and the ramp-up and mix, can you give us a sense of sort of how much potential that has to go?

Are you running relatively full with, you know, a less than optimal mix of products, or is there both a volume and a product mix evolution?

Mark, this is Dante.

I would say that generally speaking within the long fiber and overlay business unit, we're running close to full capacity.

We do have some room to grow incrementally, and our focus is on achieving that, as well as continuing to enrich our mix.

So the big volume increase came last year with the rebuild of the PM Number 9, as you might recall.

Right.

Now, has all of that running full -- has that -- in your mind, has that impacted the prices in the market in the lower value stuff?

No, not really, because we've seen a considerable amount of growth in the food and beverage market.

A component of that is the explosive growth I referred to in the coffee pot business.

Right.

And that market's grown over 400% since '91 and we still see pretty strong growth in the tea bag papers.

That's attributed to some of the developing markets, you know, Russia being one of them.

So I don't believe that the capacity introduced into the market has been that disruptive, and -- .

Okay.

So the real revenue opportunity in that business is going to be mix?

Mix first and then there's still a little bit of room to continue to grow volume and optimize all of our assets.

Okay, okay.

And jumping over to the book paper business, talked about market share being up.

Can you give us a sense of where you think that paper pricing is relative to what you would consider a normal spread versus, you know, more commodity grades, or what you think would be normal for this cost environment maybe?

Yeah.

That's always a challenging question to answer.

What I can do is reflect on the recent activity in the felt market, and we've seen a pullback over the last six weeks, which is about 10% below the peak that we saw earlier this year, but still 7% higher than the beginning of 2004, and we've had price increases that I referred to in our trade book business.

So we're starting to catch up, and the spread is starting to widen and approach a more normalized spread from our perspective.

Okay, okay.

And a more broad question on the numbers, the SG&A number was -- looked like very tightly controlled.

Is that something that we should be looking at as a more or less sustainable kind of number versus sales, or is there anything funny in this quarter?

No, this is -- John, Mark.

No, I would say it's the -- it's-- there is nothing funny there.

Okay.

And there is some foreign exchange, actually, that makes it higher than it would have otherwise been.

Okay.

Outstanding.

Thank you.

Thank you.

Your next question is coming from Mark Wilde of Deutsche Bank.

Please go ahead with your question.

Good afternoon.

Hi, Mark.

Couple of -- couple of questions.

First of all, in the long fiber business, Dante, can you help us just thinking about who you compete with in this business and, you know, what kind of currencies they're doing business in?

I think one of your competitors is in the UK and is the second one in North America or in Europe?

If you look at the food and beverage segment, our two primary competitors, one is in the UK and has two production facilities in England and the other has a production facility in Scotland and one in Connecticut.

Okay.

So we're looking at pound sterling and U.S. dollar.

Okay.

How much of an effect is, would you say that the rise in Euro is having for your operation in Germany?

Well, as we've stated before, there are puts and takes that come along with a stronger Euro.

If you look at the translated earnings, it's had a positive impact.

And if you look at the year over year quarterly comparison, it's been about a penny additive this year.

I can also state that in certain regions of the world where we may be competing against competitors who have a U.S. dollar denominator cost structure, or where business is transacted in the dollar, that it's put downward pressure on pricing in order for us to maintain our market share.

So it's very difficult to kind of help net out the puts and takes there; but hopefully, that gives you at least a little bit anecdotally what's going on there.

And just one more question on this business, Dante.

If I think back to, say, what happened to the tobacco paper business back over the last, you know, 10 or 15 years, you know, a lot of that I think moved towards Asia.

Is this a business where you think ultimately, you know, you need to have a base outside of Europe, or Europe and North America?

I would say short-term, no.

But we do have a component of our operation in Asia, which is an important part of the supply chain, which is our pulp mill in the Philippines.

So that gives us access to an expensive and somewhat difficult to get fiber and it gives us control and cost advantages in the supply chain.

So you can't understate the impact and importance of that on long fiber and overlay.

I also look at the size of the market where most of the consumption is -- the technical requirements, the switching costs, the various to entry -- and when you put all that together, I think short term there are much more attractive, more commodity-like markets that have much larger scale to them that would be more attractive for Asian production capacity.

Okay.

Now, I wonder if we could just kind of switch gears and just help us understand what some of the moving parts will be here in the fourth quarter.

You know, you mentioned some seasonal easing, but you also mentioned that there's some price rolling through yet in printing and converting.

I don't know how the correction in the pulp market is going to roll through to your cost in the fourth quarter, so if you could maybe just walk us through some of the elements of that.

Maybe John Van Roden and I can tag team on this.

Okay, all right.

John, would you like to start?

Sure.

Well, I mean, yes, you can break all of those out, Mark, and obviously, pulp is -- has gone down, and that's going to help.

There are some price increases, which is going to help.

Usually, as we pointed out, from a seasonal standpoint, it's a down quarter, and we're certainly seeing that.

We are going to see some of that.

Some other raw materials are up.

So, you know, when it's all balanced out, I think that, you know, we will still feel the effects of the typical seasonally tougher quarter, balanced by some of the good things we see.

Okay.

Would you imagine, John, that we would see -- you know that, somebody from the outside will see any benefit from any of the restructuring programs in the fourth quarter?

Not that much.

Most of the benefits from that program will hit us in '05, and all of them in '06.

Okay, and can you just update us on -- give us some sense of how Neenah is running now?

I know that that's been a, you know, a fairly difficult process over the last 12 months.

Sure.

This is Dante, Mark.

It has been a difficult process for all of us, but I'm very pleased to tell you that the operational issues that had plagued us in the first half of the year are behind us, that the mill is running much better and is running at production and quality yield levels that are consistent with the prerestructuring levels.

So I believe that we've gotten the worst part of it behind us.

We also made reference to the restructuring of the steam supply agreement for that mill, which will now give us a better fix on our energy costs, and we won't be so exposed to volatile natural gas, which will also be helpful.

So I think we've made great progress.

The work isn't done yet.

We still have more to do.

But I'm feeling better about where we are in Neenah today than I did six months ago.

And I wonder, George, you mentioned kind of continuing to look at non-core assets, which I take mostly to be timberland at this point.

Could you kind of update us on your thinking about that, and then also, you know, on thoughts about acquisitions?

Well, with respect to non-core assets, I think we cover this pretty much every quarter, Mark, and it's something that we think a lot about within this business.

We are constantly looking at where assets add value, where they don't, and making decisions on that basis, and that's -- that reflects the work that we've done with our timberlands.

To try to stage it for you, I think it's safe to say that the bulk of the HPU sales -- higher, better use tracks of land -- are behind us at this point in time and we've indicated a couple of sales that we hope to conclude here going forward.

We're going continue to look at the rest of the woodland space.

We'll look at it strategically.

Where we believe that we need to retain woodland to preserve our cost of fiber to the mill in Pennsylvania, we'll do that.

Where we think we can extract greater value there by monetizing that asset, we'll do that as well.

But, you know, that will be an ongoing part of our management strategy.

With respect to acquisitions, you know, we're always open to good ideas that would be able to drive value, but the watch word, as far as I'm concerned, is discipline.

The -- the prototype of a good acquisition candidate for us will be one, first of all, that occupies highly defensible, highly specialized market niches.

It will have to be in a part of the world that we understand or believe that we feel we can understand.

It's got to be a business that isn't broken.

We're not -- not in the fixup business.

That's not a skill of ours, so we look for a healthy business, one that's populated by strong management ,and very similar to the template that was presented when we acquired the Shoulder and Hersh Company [PHONETIC] back in 1998.

Those assets are few and far between.

That's fine.

We're patient.

If the right opportunity comes by, we'll be ready to move.

If not, you know, we're very satisfied to continue to work on the structural issues we have in the markets and some of the issues that we've talked about here earlier within the span of the current business structure.

Okay.

Great.

Thanks, George.

Sure thing.

Thank you.

The next question is coming from Alex Mitchell of Scopis Asset Management.

Please go ahead with your question.

Hi.

Good quarter, though I must say it was kind of hard to understand the press release -- it took a couple of times to read.

Could you tell me what the Cap Ex is for next year?

Yeah, this year, it's going to be roughly $28 million in '04.

And '05, we're looking at roughly 35.

Okay, and do you have an estimate of what depreciation will be?

About 52.

Okay, and I mean, other than acquisitions, are there any other uses you may have for cash?

For the excess cash?

Well, not at the moment.

It's -- you know, that we have planned, except to continue to pay down debt.

So you're satisfied with the dividend -- the level of the dividend?

Yeah, think we are at the moment.

Alex, the dividend's really important to this company and we think it's a good way to drive value to shareholders.

A year ago, we made a pretty significant adjustment to that dividend.

What we have now is one that we feel is at the right level.

We feel we can sustain it throughout the cycle.

We feel it's a healthy dividend, with a little over 3% yield today.

It's healthy within the span of our -- our industry, and we feel as though that's about right for us right now.

The other thing that I would comment on with respect to the challenges that you alluded to, with respect to the press release, it is something, frankly, that we struggle with.

I don't know whether you've followed our company for very long, but part of what you read about is a company that's going through some foundational change from a company that had, you know, pretty high exposure to mature low growth markets to one that has really developed a differentiated model -- specialized business model -- populated it with a management team that understands how to run a business like that, and is driving the business through pretty dynamic markets.

So I'm hopeful that in time, it will be easier to understand this company and certainly read about it in the quarterly press releases, but what you see is reflective of pretty much the life we live right now and it is a bit challenging to understand.

I know, I -- that's fine.

I -- I am relatively new to the company, but -- anyway.

Thank you very much.

Certainly.

Thank you.

The next question is coming from Frank Bisk of Pilot Advisors.

Please go ahead with your question.

Hi, good afternoon.

I just wanted to -- the price increases that you implemented in July and October, was that just for the book business, or also the envelope business, and are they both fully sticking, partially sticking -- do we know yet?

Sure.

Frank, this is Dante.

We had two price increases for our envelope business.

One was in the May timeframe and one was in the July timeframe, and the announced price increases stuck, and we had two price increases for our tray book papers, which is the single largest component of our book publishing mix, and those were fully implemented July 1st and October 1st, and those were also implemented at the announced levels.

Okay.

Great.

And then just to clarify, the fourth quarter you say is seasonally challenged.

Just why is that?

Is it just, you know, Christmas time or Thanksgiving, or just things slow down across the whole industry?

I'm just curious as to why -- and is it every one of your segments?

It's not every one of our segments.

It's more typical for North America.

In long fiber and overlay actually, the fourth quarter can sometimes be quite busy, because as we get into the colder weather, that drives tea consumption and tea bag sales, so that's not a bad thing for us.

But in North America, you'll see a lot of our customers who run their fiscal year on the calendar year, they look to drive down inventory as the year ends -- as the year end approaches.

You do have some of our customers that take production down at the holidays.

So it's a typical year end slowdown.

Great.

Thank you.

Nice quarter.

Thank you.

Thank you.

The next question is coming from Will Nascovitz of Heartland Funds.

Please go ahead with your question.

Hi, good afternoon.

Hello.

Hi, there.

Just a quick question on the Neenah switching to a contract associated with coal versus natural gas.

Have you ever -- is there some type of -- can you quantify the difference there or can you just give a little more details regarding that contract?

It will be difficult for us to get into the specifics of the contract, but at its highest level, what we were attempting to do was to eliminate the extreme variability and volatility of our scheme costs in Neenah, and the -- the contract that we had was tied to natural gas prices, and so we sat down with our supplier and worked through an agreement that was fair and equitable for both parties that still made sense for them and gave us less volatility over an important input cost.

So the way we peg the price of steam to coal, coal is less volatile than natural gas, and we feel that we were able to reach some terms and agreements that were fair and satisfied the needs of both parties.

Now, is this something that you could apply to other mills as well, or --

No.

Simply stated, in Spring Grove, we have a coal generation plant, and we're a net producer of electricity.

We actually sell to the grid, and Neenah, we purchase all of our steam from a third party supplier.

Okay.

That's right.

Okay.

Now, just -- could you help -- I'm kind of a generalist here, but you help me with -- just can you talk about the spread between uncoated [INAUDIBLE] -- and pulp.

Can you just give me the -- some background there so I can help understand this dynamic here?

John -- [INAUDIBLE] would you like me to?

Well, actually, Will, we use -- we have talked about in the past, is North American uncoated free sheet prices as being the, kind of the proxy for the pricing that we use in our printing and converting segment, and pulp prices is being one of the major raw materials that's used.

So that spread got down to an all time low in about the first of this year, and has since that point gotten, --gotten quite a bit better with uncoated free sheet pricing going up.

Pulp pricing went up during the year, but in the past month or so, it's going down.

So that, that spread now is getting close to a mid-cycle point where, you know, obviously that's a lot better for our profitability.

Okay.

Well, thanks for your time, and good quarter.

Great.

Thanks.

Thank you.

The next question is coming from Mark Connelly of Credit Suisse First Boston.

Please go ahead with your question.

Thanks.

I just wanted to follow up on one point, and now I can't remember who made it, but you made a comment about being relatively better positioned relative to some non-integrated mills, and I'm just curious if you could expand that and tell us how important you think it is to be integrated in this business in the long run as opposed to the short run?

Mark this, is Dante.

I'll give you some follow-up commentary.

I made that comment regarding some of the engineered products.

Right.

The uncoated specialty market segments that we're continuing to grow in.

And if I look at the competitive landscape and what our kind of unique selling position is in the market, most of the people we compete against are smaller, older, non-integrated mills that have a cost disadvantage, production inefficiencies, when you compare it to the Spring Grove mill where most of these products are being made, where, as you know, we're 85% integrated, and we not only make our own pulp, we make our own base sheet, and then we convert it, coat it with the value-added component, and then take it to market.

So for a number of reasons in those markets, we see that as a distinct advantage, whether it's a cost advantage or a speed advantage -- we talked about the productivity that we've gotten out of new product development and how we've been able to take our revenue from products less than five years old from 25% of total sales five years ago to 58% year to date, and how we've been able to compress the cycle time from idea generation to commercialization by 25% over the last two years.

And one of the key contributors to that is the fact we're integrated, we have more control over the process.

So for a lot of reasons, we see that as an advantage and that's also why many customers in the market have approached us because they also subscribe to that same thought process.

How confident are you, Dante, that you have profitability advantage at the end of the day, though, given that, you know, most pulp businesses in the long run haven't really done all that well on their own?

And I can definitely see that you've got the speed and the integration and some advantages there, but are you really confident that being integrated is going to make you more money in the long run?

I guess that's a question that's subject to a lot of active debate, and there are people with varying opinions and I'm certainly not an expert on that.

But what I can do is give you a perspective that we have on how we can optimize our North American assets and how we can optimize the Spring Grove mill.

And we've got a significant sub-cost in our pulp mill.

We believe it's one of the most environmentally sound pulp mills in North America, if not the world,d and we don't envision having to spend a lot of capital in the near term to continue on at that level.

So it is what it is, and if I look enterprise wide, we're 60% integrated, so we kind of have a little bit of a natural hedge.

We're active players in the market of pulp and we've got a pulp mill in Pennsylvania and a pulp mill in the Philippines.

So we're comfortable with the balance that we have, and we're focused on optimizing our profitability in North America across both business units.

Thanks very much, Dante.

That's very helpful.

Mm-hmm.

Thank you.

The next question is coming from Mark Wilde of Deutsche Bank.

Please go ahead with your question.

Yes.

I'd like to go back to just the issue of the restructuring programs, and I wondered if John can give us a little help thinking about how those will roll in as we go through next year and into -- into 2006, and try to do this with reference both to Spring Grove and the benefits at Neenah.

Well, Mark, once again, we have publicly stated that we will get $15-20 million of benefits from the program in -- for the full year of 2006.

We have not -- not disclosed what those benefits will be for 2005.

It will be a significant portion of that, so I think that's the best I can do, given that we haven't -- we haven't disclosed more than that, and -- and we're not going to at this point, but I think once again, we will get a pretty good portion of those in 2005.

Would you say we're seeing any benefit from Neenah right now, or is that something that we're also going to see in a roll in over the next 12 months, 24 months?

Yeah, we are starting to get some now, and we'll get more next year.

Okay.

I think -- Mark, this is George.

The point that may be helpful is to understand that with respect to the elimination of jobs that we talked about, most of that has been completed -- all of it at Neenah and virtually all of it at the Spring Grove, Pennsylvania facility.

So a lot of the heavy lifting is done.

Now what you're seeing in North America is sort of reconstructing, if you will, the workforce, the jobs.

That's what we -- that's what Dante had mentioned earlier.

That's occuring in Neenah.

That's the process we're going through in Spring Grove.

The difference between the two mills is in Neenah, we also took down production facilities that we felt were non-core or no longer competitive.

In Spring Grove, we've maintained production volume while reducing about 20% of the workforce.

The way we're able to do that is through strong collaboration with our local union here in Pennsylvania, and that process is moving forward, I think, quite will at this point.

Yeah.

I guess really, George, all I was trying to do -- if you'll think about, you know, just that Spring Grove at $15-20 million a year that's, you know, call it 35 or 40 cents a year for you guys pretax, so it's -- you know, it's 8 or 10 cents a quarter.

Just trying to understand, you know, when we start to see that kick in.

I thought I heard someone early in the call suggest that some of that benefit would start to show up at the tail end of this year.

I did suggest that and I think that we are seeing the early stages of some of the financial benefit, driven by primarily the reduced positions, the position elimination, as well as some of the mixed shift initiatives that, you know, we talked about as well.

So we're seeing some of the beginnings of that, but it's way too early for me to quantify that for you today, and I think John's characterization of when we really hit the curve coming into 2005 is accurate.

Okay, and then finally, just on this whole issue of pulp, we've seen a couple of $30 a ton list price productions.

I know it always takes a while to roll this through, and I know you guys buy some specialty grades that may not have moved down as much as kind of standard MBSK, but I wondered if you could give us any guidance about what you think pulp costs might do third quarter to fourth quarter.

Mark, this is Dante.

Our opinion in third quarter to fourth quarter is that we think pulp pricing will be relatively stable between now and year end.

There may be an attempt to bouie the prices back up, but I think if you go back to the bigger picture, from January of '03 until present, including the two $30 reductions, MBSK is up 30%; and again, if you talk about the proxy for our printing and converting business, and we typically lag a couple of quarters when some of these input costs start to escalate, that, you know, we still have some catching up to do.

So from right now, we feel reasonably comfortable with where our pricing is and where our backlogs are as it pertains to the short-term changes in market pulp.

And as you know, that could change pretty significantly week to week, especially what happens in China, which is sometimes a coin toss.

Okay.

All right.

Very good, thanks.

Mm-hmm.

Once again, if you do have a question at this time, please press star-one on your touch-tone telephone.

There appear to be no further questions at this time.

That does conclude this afternoon's teleconference.

Thank you for your participation.

You may disconnect your lines at this time, and have a great day.