Magnera Corp (MAGN) 2006 Q3 法說會逐字稿

Good morning, my name is Tony and I'll be your conference operator today. At this time I would like to welcome everyone to the Glatfelter's Third Quarters Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn the floor over to your host [Glenn Davies. Sir, you may begin your conference.

Good morning and thank you for attending this morning's call. My name is Glenn Davies and I'm with the company's corporate finance group. Here with me this morning is George Glatfelter, our Chairman and CEO, John Jacunski, Senior Vice President and Chief Financial Officer and Dante Parrini, our Executive Vice President and Chief Operating Officer.

A few comments before we begin. First, during today's call we will be referring to adjusted earnings. This is considered to be a non-GAAP financial measure, since it excludes from earnings the effects of certain non-recurring items. In this morning's release, we've provided a reconciliation of adjusted earnings to our GAAP based results together with the discussion of why we used adjusted earnings. The earnings release is available on the Investor Relations page of our corporate Website, Glatfelter.com.

I'd also like to remind you that any statements 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 2005 annual report filed with the SEC, for important factors that could cause our actual results to differ from any results which might be projected, forecasted or estimated in any of our forward-looking statements. And lastly, in this morning's release we announced the availability of slides intended to supplement the information that we will discuss on today's call. For those of you listening on the phone; and if you haven't already done so, the slides can be obtained by visiting our Investor Relations webpage. Those of you listening through the webcast can access the slides directly through the webcast link. Although we will not necessarily speak to each slide in the order they appear we may refer to some of them as we comment on our results to enhance your understanding of this morning's discussion. With that I'll now turn the call over to George.

Thank you, Glenn and thanks to everyone for joining us on today's call. Earlier this morning, we issued our earnings release for the third quarter of 2006 and I hope you've had an opportunity to review it. As we do each quarter, I'll provide some introductory remarks about our overall business. Then John will discuss the financials in more detail. Finally, Dante will cover the third quarter highlights from an operations perspective, most notably on the Chillicothe integration.

Today, we've reported third quarter net income of $5.4 million or $0.12 per share which is up significantly from 2005, largely reflecting improvement in our legacy businesses. The story of the quarter basically boils down into three things. We experienced strong improvement in our legacy business in both Composite Fibers and Specialty Papers. Synergies relating to recent acquisitions are behind our originally established schedule. And timberland sales are progressing and we've expanded the volume of properties that are on the market.

These activities reflect continuing execution of a three-pronged strategy that we created and shared with you back in 2005. We believe that this strategy is the best way to deliver sustainable value to shareholders. We remain focused on improving the performance of our core or what we call legacy businesses, growing our business through the successful integration of acquisitions and expansions and maximizing the value of our timberland holdings to satisfy current cash needs as well as optimize long-term returns. These things are what matter most.

As you will note from today's release, our transformation towards building a new Glatfelter is continuing. And although we've had a challenging quarter, we are confident that we are on the right path. Before we move on to our overall third quarter highlights I'd like to spend a moment on our Chillicothe acquisition. It's clear that this acquisition is testing our operational strength, and frankly, we believe we are meeting the challenges that are being presented. In hindsight, we underestimated the time it would take to effectively convert Chillicothe into a book paper manufacturing mill.

We recognized this challenge in August and put in place an aggressive improvement plan to deal with it. As a result, over the past few months, we've experienced significant operational improvement at this facility as Dante will later share with you. The bottom line is that we've made the right move in the right way in acquiring Chillicothe.

The facility has a solid operating platform and a committed workforce. We intend to capitalize on that and drive real value. I want you to know that I'm every bit as excited about this acquisition today as I was the day that we made it. We now expect Chillicothe to be neutral or slightly accretive for 2006. But I want to emphasis that our long-term synergy expectations remain unchanged for Chillicothe, which we still expect to be accretive by 45 to $0.50 in 2007.

The second acquisition that we made this year is the Lydney Mill of the JR Crompton Company located in the UK. This acquisition is currently under review by European competition authorities. As we have previously announced the European Commission's review of the Lydney facility is continuing and has now entered a phase II review. Thus our integration plans for Lydney remain essentially on hold, which is delaying the achievement of any significant synergies that we had targeted for this facility. Both Lydney and Chillicothe are essential components of our vision, to become the global supplier of choice in specialty papers and engineered products.

We clearly understand that the successful integration of these two major acquisitions remains critical to achieving our long term goals, but acquisitions are only a part of the story of our third quarter. We feel it's also important to understand that our legacy businesses performed well throughout the quarter.

During this period, we experienced a strong pricing environment for specialty papers and significantly improved shipping volume from composite fibers. We were also quite active in executing our woodlands monetization plan.

As you know, earlier in the year, we announced our strategy to sell a substantial portion of these timberlands, the proceeds of which together with operating cash flow, will be used to reduce our debt. We continue to move forward with the timberland monetization program, and in fact have expanded our original program to include an additional 20,000 acres here in Pennsylvania. Based on current market conditions, we expect to complete approximately 15 million of timberland sales in the fourth quarter, and at least another 50 million in 2007.

John Van Roden, currently executive vice president is leading this effort, and I'm pleased to announce, will continue to do so after his retirement at the end of the year as part of an ongoing consulting arrangement.

To conclude my opening remarks, I'll reiterate that our legacy business is performing well, our woodlands plan is on track, and although the integration of the Chillicothe and Lydney acquisitions is behind our original expectations, we are confident we will generate expected benefits.

In this regard, I think it's important to consider that the challenges we're experiencing today are short term in nature, and we're determined to get back on the track of long term growth and achieving the full potential of these investments.

At this point I'd like to ask John Jacunski to go through a more in-depth discussion of our third quarter financial results. John.

Thank you, George. For the third quarter, we reported net income of $5.4 million or $0.12 per share. After adjusting for costs associated with the Neenah shutdown, acquisition integration costs and timberland sales as outlined in our earnings release, we earned $10.6 million or $0.23 per share. This compares to adjusted earnings of $3.9 million or $0.09 per share in the third quarter of 2005.

As shown on slide 4, for those of you with access with the slides on our website, overall, the primary drivers of the change in earnings on this basis in a quarter to quarter comparison were operating income for specialty papers increased EPS by $0.07; operating income for composite fibers increased EPS by $0.05. Increased interest expense due primarily to the debt incurred to finance the acquisitions reduced EPS by $0.05.

A favorable effective tax rate increased EPS by $0.03 and the 2005 third quarter results include a charge related to our former Ecusta facility of $0.04. Operating income for specialty papers was $10.1 million, an increase of $4.7 million in the quarter over quarter comparison as shown on slide 7.

These results were driven by an increase in selling prices of $5.6 million, offset somewhat by higher raw material and energy prices of $1.2 million. The Chillicothe facility generated operating income of $3.6 million with $1.5 million of that coming from higher selling prices on book products.

In our composite fibers business unit, operating income was $5.1 million; an increase of $3.2 million from the third quarter 2005. As shown on slide 14, this increase was driven primarily by a 20% increase in shipping volume, excluding the impact of the Lydney acquisition, and the benefits of our Euro cost reduction program, which totaled $1.9 million during the quarter.

These benefits were partially offset by generally higher cost environment, including a $1.9 million increase in raw material and energy cost. The Lydney facility contributed $400,000 to composite fibers operating income this quarter.

In total, the Chillicothe and Lydney acquisitions were accretive to earnings by $0.02 during the quarter. Our tax rate on adjusted earnings was 27% during the quarter. This lower effective tax rate was driven primarily by state tax law changes that reduced our deferred tax liability.

Our third quarter results include a total of $5.6 million of acquisition integration costs and $3 million charge related to the shutdown of the Neenah facility.

We expect additional integration costs of $1 million in the fourth quarter of 2006 and $2 million in 2007. Our total charge this year related to the Neenah facility shutdown is $53.7 million, of which $33.3 million is non-cash.

During the quarter, we paid $15 million of cash related to the shutdown costs, and we expect to take an additional charge in the fourth quarter of approximately $1 million with no further charges in 2007.

Capital expenditures for the first three quarters of 2006 was $35 million. We expect capital expenditures to be $40 to $43 million for all of 2006, and $35 million to $40 million for 2007.

Turning to the balance sheet, our net debt as of September 30th was $401 million, an increase of $35 million since June 30th.

This increase is primarily driven by acquisition integration costs and the shutdown costs for the Neenah facility. Our debt to total capital as of September 30th was approximately [50]%.

We expect to reduce our debt going forward with cash generated from operations and proceeds from timberland sales. This concludes my comments on our financial results. Dante will now provide comments about our business unit performance as well as our Chillicothe improvement plan.

Thank you, John, and Good morning. Let's start with composite fibers. Third quarter 2006 net sales were approximately 63% ahead of the same quarter a year ago, which is due to the Lydney acquisition and strong volumes across all segments.

Selling prices were unfavorable in the comparison by $1.5 million. Unit volumes overall were up by approximately 56% in the quarter to quarter comparison or approximately 20% when adjusted to exclude Lydney.

In the food and beverage segment, which is our largest, volumes were up by 114%, or 19% after adjusting for the Lydney acquisition. Each of the other segments in composite fibers performed well during the quarter, each generating in excess of 15% volume growth.

Although pricing declined in the comparison, it has stabilized compared to the past two quarters. And our Euro program, which is designed to improve Composite Fibers financial performance, contributed $1.9 million during the quarter, and is tracking ahead of plan.

We fully expect to achieve our goal of delivering $7 to $9 million of annual financial benefits. A few comments on near term demand and pricing outlook, food and beverage demand remained strong, which is consistent with current levels. Near-term demand for Overlay products is expected to slow down compared to three months ago.

The longer term prospect for balance supply and demand in this segment, especially in Europe, remains uncertain and sales of metallized papers and technical specialties look solid for the fourth quarter.

From a pricing standpoint, we anticipate stable prices across most of our product lines.

Now, let's move on to our specialty papers business unit. For the third quarter net sales were up approximately $102 million, reflecting the inclusion of Chillicothe this year. Adjusting to exclude the impact of this acquisition, net sales were up 6.7% due to stronger pricing conditions that contributed $5.6 million versus the same quarter a year ago. Specialty papers volumes increased 51%, all due to the Chillicothe acquisition.

Now I'll offer more specific comments by market segment. Book publishing revenues were down 2.8% and unit volumes were off 9.4% largely due to below expected production levels in Chillicothe.

In the carbonless paper market segment, volume shift declined 8%, and revenues were down 7% compared to the same period a year ago, reflecting a slightly improved mix. Envelope and converting papers revenues were up 15%, which reflects improved pricing in the white papers market, and unit volumes were up approximately 5% in the quarterly comparison.

As for engineered products, revenues were up 6.5%, and unit volumes were up 2% from the third quarter last year. As for near term demand and pricing outlook, our backlogs remain strong, although we do expect some seasonal slowdown, especially in the carbonless segment during the fourth quarter.

Pricing is stable across most product lines. We do expect the previously announced carbonless price increase to be fully implemented by the end of Q1 2007, which is projected to have a $6 to $8 million financial impact for the year, and will help mitigate the impact of rising input costs.

Now turning to new product development. During the third quarter, approximately 50% of our net revenue came from products less than five years old, which is consistent with our previously stated targets.

Now, a few comments on mill operations, we have regularly scheduled maintenance outages at each mill during the fourth quarter of 2006 that is consistent with past practice, and we have no extraordinary projects scheduled.

A few comments on each business unit. For composite fibers, operations in Germany, France and England ran well and benefited from much higher volume during the third quarter of this year compared to last year, and we are experiencing higher input costs as well, primarily related to energy and fiber.

As for specialty papers, Spring Grove performed near expected levels during the third quarter.

I would now like to focus more time on Chillicothe. We believe Chillicothe's performance bottomed out in August following the Neenah facility's shutdown and the total capacity transfer after June 30th. Although we expected some ups and downs in Chillicothe's performance during the initial integration stage, it became clear to us during the month of August that we needed to expand our operational improvement plans.

Our operational improvement plans for Chillicothe is focused on accelerating training for book paper production and process improvement, reinvigorating and enhancing the mill's preventive maintenance program to reduce unplanned downtime, and completing previously planned capital investments of $3.8 million during the next two quarters to help improve performance.

Our improvement plan is progressing under new leadership at the mill, with solid experience in book paper making. We are leveraging an expanded team of professionals that include former Neenah and current Spring Grove based book paper experts as well as external subject matter experts. I'm pleased to report that we have generated improvements in both book paper production and total mill production volumes at Chillicothe.

As shown on slides 10 and 11, book paper production volume has increased by 25% over the past two months and total mill production volume has improved by 7% during the same time period. That concludes my remarks I will turn it back to you George.

Thank you Dante. As I hope you can see, we are committed to our operations improvement plan at Chillicothe and beginning to see some significant results. As soon as the Lydney situation settles, we will vigorously pursue the synergies that we believe are available there.

As I look at the broader picture, I feel that we end this period with the company pretty well positioned. We are well placed in key growth markets in specialty papers and engineered products and we are working to expand our global footprint, and further unlock our potential in those markets.

We've generated additional cost reductions and enhanced business processes through initiatives such as the successful Euro program. And through the monetization of our non-strategic timberland assets our balance sheet remains strong. Overall, we believe that with the market advantages we enjoy, strategic initiatives and additional contributions from our acquisitions, we will successfully reposition our company for long-term success.

I guess, to conclude, I would say that these are exciting and they are certainly challenging times for the Glatfelter Company. Those of you who have participated in past calls often have heard me reference the few things that matter most to our success. As I look into the fourth quarter these few things are, first of all get Chilli back on track, so we can deliver on our promises and demonstrate that we are good stewards of shareholders' cash.

Secondly, continue to build on the strong performance of our legacy businesses, and then third, make smart and timely decisions to maximize the monitory value of our timberland base.

Each of these things lies squarely within our control, each is supported by a solid plan. We need to manage the plans and I'm confident in our ability to do that, that's why I feel so positive about our business going forward. I would like to thank you for your interest in our company and at this point we will be happy to answer your questions. Tony I will turn the call back to you.

Thank you ladies and gentlemen, at this time the floor is open for questions. [OPERATOR INSTRUCTIONS]. Our first question is coming from Bruce Klein of Credit Suisse, please go ahead.

Hi good morning. I'm wondering on Chillicothe, if you feel, I mean, it's sort of a straight line improvement now, I knew that you had a couple of good months but with some CapEx spend and stuff, do you think you turned the corner there or do you need to take a step back at all to go forward.

Hi Bruce, it's Dante. As we stated in our remarks, we are very pleased with the performance improvements that we have seen in Chillicothe over the last two months. And we've got people focused on the issues that we think are most important to improve the performance.

We've also put our target lines on those graphs to indicate where we expect to arrive in 2007 so that we can achieve the goals that we publicly stated, and I'm confident that we're on a good track to do that.

And I don't know, John, if the with asset sales, [I think from] timberland if there's a requirement in the bank credit agreement to pay them down or do you have free rein of that cash?

Under our bank agreement there are required or mandatory prepayments in the term loan with proceeds of the timberland sales based on a leverage ratio. At this point, based on our current leverage ratio, we would be required to use the proceeds to pay down that term loan.

And then volumes for composites were very strong -- why were they so strong there, 20%?

Yes Bruce, it's Dante. I think that speaks to the position that we have in our key markets, and the value proposition that we take to the global food and beverage markets. And as we said across all segments, we were up at least 15%. So I think it's good focused execution, and we're well placed in our markets and customers are responding to that.

And lastly, the Pennsylvania timberland, that's not HBU property; right?

Bruce, it's George. HBU has a pretty broad definition. I would characterize this as lower tier HBU. Probably, the applications for this ground would be recreational. So I would certainly characterize it significantly above pure forest land in value, but perhaps on the lower end of the HBU continuum.

Thanks guys.

Thank you.

Thank you. Our next question is coming from Mark Wilde of Deutsche Bank. Please go ahead.

Good morning George, John, Dante.

Good morning Mark.

Good morning.

Good morning.

I'm just going back to land for a minute. You had earlier given guidance of about $150 to $200 million in proceeds. Does the addition of this 20,000 acres in Pennsylvania, do we need to adjust that bogie now?

Well, clearly Dante's -- excuse me Mark, this is George. Clearly the addition of that value will have a positive impact on the range. I would tell you that there is a lot of activity engaged in this particular segment of our holdings right now. So I'm really not inclined to try to put a value on that for you at this point in time.

Thanks. And just a couple of other issues on land sales, George, kind of thoughts on the remainder of the land, much of which I think is in Pennsylvania?

Well, actually the land that is remaining within the company is in Pennsylvania, Delaware, and Virginia. Were you specifically referencing Pennsylvania?

Well, I was -- you had the 35 or 40,000 acres that's out there already, then you've added 20, I think there's about 80 in the company all together. So there's an extra 20, but it doesn't sound to me like you're marketing right now.

Yeah, let me see if I can frame it for you. We have 29,000 acres in Pennsylvania right now, 20,000 of those now are on the market. In Virginia, we have 40,000 acres; of that 20,000 is considered to be HBU, the remaining 20,000 is considered to be prime timberland, and we do not at this point have plans to market it. And then in Delaware we have smaller holdings, 11,600 acres, all of that's considered to be HBU.

Okay. All right, the land sale -- the 15 million in the fourth quarter, is that that Delaware sale that I think you've announced but that hasn't closed yet?

No, that is not included in the amount that I gave you.

Okay, all right. Also I just wondered if you could kind of update us on where pricing stands right now in businesses other than carbonless paper. I saw this morning that Ahlstrom is out with a whole series of price hike announcements; I don't know whether any of that touches any of your businesses?

Hi Mark, it's Dante. I've not caught up with the Ahlstrom agreement or announcement, so I can't comment on that specifically. But I would categorize pricing in nearly all of our business as being quite stable right now. On the papers like book and envelope and some of the other converting type grades, we've had a good run up of pricing and that's holding for us right now.

All right, and then finally, just tax rate, John Jacunski, for kind of the fourth quarter and beyond?

Well, I think, we are expecting about 35%. In the fourth quarter, there is a couple issues that are hanging out there. One is the research and development credit that expired at the end of last year that -- it is possible that it could be re-approved in the fourth quarter. If that happens we will certainly end up with a lower tax rate and then we -- we have a number of tax audits under way. And at this point it's hard to comment on the outcome of those. But those could also influence our tax rate in the fourth quarter. But I think generally speaking going forward, we expect to have a tax rate of about 35%.

Very good, thanks.

Thank you. Our next question is coming from Bill Hoffmann of UBS. Please go ahead.

Yes, good morning.

Good morning, Bill.

Just a quick question about the specialty paper segment, obviously, which includes (inaudible) and Chillicothe. I want to get a sense of how much seasonal softness you see in I guess, primarily the book business and also if you can talk a little bit about carbonless and the competitive conditions there, whether there is any share shifting going on?

Bill, I can speak briefly to your first part of the question. I think Dante may take the carbonless question, but if you look at our last two years in specialty papers, going from the third quarter to the fourth quarter, our volumes generally declined about 8% or 9% and that's reflective of the seasonality in the business, given the holidays and things of that sort. So that's -- that's what's happened over the past two years. And I think that's a reasonable expectation for the fourth quarter this year.

Do you run it slower to deal with that or how do you -- how do you manage that with the assets?

We have -- it varies but we have -- in some cases we have volume -- production assets that go down for holidays and other cases we run through, but we're managing our inventories looking at early next year and expected demand, and so we will try to manage our production to meet what our near-term expectations are.

And would that be an expectation of relatively stable demand going into next year?

I think so, yes.

Okay.

And this is Dante, Bill. Regarding carbonless, as you may know, there is no series of data that is publicly available to quantify the market. I think if you look at the two big players, the decline in volume in Q2 was quite similar and I would expect that they would be rather similar in Q3. I referenced the slight mix improvement. What I meant by that is that the sheet to roll ratio for us improved a little bit and that's -- that's a good thing. So I think by and large, we are tracking with the market.

What percentage are you producing in sheets?

We don't disclose that but the vast majority of our business is roll.

Thank you.

Thank you. Our next question is coming from Mark Connelly of Credit Suisse. Please go ahead.

Thank you. Couple of things, if I can start Dante, with Chillicothe, when you talk about the challenge of having expanded grades, is it a machine startup curve issue or is it related to the pulping facilities, or where in the facility is the real challenge?

It's not in the pulping facility. So I would categorize it as paper-machine operations, and part of it is the learning curve and training that goes from everything from stock prep to grade sequencing, matching colors, bulk base, [sweet] finish, those type of details, and then finding the right mix of products by machine. And we've had to make some adjustments during the third quarter to provide greater stability and more consistent operating performance.

So are you running your -- the old Neenah grades on multiple machines now?

Yes.

Okay. And was that always the plan?

Yes.

Okay. And I assume the bulk of that is on one machine, is that right?

No, I would say, Mark, that the bulk of the book grades are made on two machines, and -- which we call the [Chopeco] side, so PMs 23 and 24. And we do make some book grades on PM 10 and the vast majority of carbonless is made on 12 and additional carbonless is made on 10.

Okay, okay. So that will account for some of that complexity.

Sure.

Now you talked about the enhanced maintenance stuff. Do you have a number for what that's going to cost above and beyond what you thought it was going to cost before?

No, I would tell you that -- I don't know if John commented on this, but our projected CapEx is in line with what we had previously communicated. And the $3.8 million that we're going to spend over the next two quarters has always been earmarked in our plan as -- and it's in within the range that we had expected.

So how is it enhanced if it's not changed? I'm just trying to figure out what's what.

The expected outcome is enhanced productivity, less downtime, and better product quality. I don't know what --

Yeah, I think Mark, part of the answer to the question is -- it's shifting how we're spending maintenance dollars. So more maintenance dollars on working to prevent downtime, which would result in less maintenance dollars spent on break and fix.

Okay.

We don't see a significant -- we don't see a bubble of expense needing to be spent on maintenance in the fourth quarter to get to where we want to go to. It's more a shifting of the spending.

Okay, now I understand. As long as I got you John, you had given us a ballpark of the sort of integration charges of about $12 million at one point. Do these new numbers that you've given us -- it looks like they add up to something different, but I'm just wondering if they're really adding up the whole thing. Has that actually changed?

So I think we had said a total of about $15 million of integration cost and --

That's right, sorry, $15 million.

And we've spent YTD about 11, and I talked about another $3 million; $1 million in the fourth quarter and $2 million next year, which would get us about 14 in total. And we did have a little bit that was really the CapEx, so we're pretty well in line with what our overall target was when we initially announced the acquisition.

Okay, perfect, and just two more things. With respect to composite fibers, you talked a lot about the volumes. Was the price down primarily on mix or did the price dip there and now it's stable again?

Our prices in the third quarter were essentially stable with the second quarter and the first quarter of this year, excluding Lydney, which we did not have a year ago. And they're down when we compare to the third quarter of last year. So if you recall last year, we saw -- yeah, we saw prices declining throughout the year. So we are basically on stable pricing.

Okay, I misheard that. And just one very last question in terms of new product stuff, we talked about the 50% being less than five-years old. Is that pipeline where you expect it to be, George, right now? Are you comfortable with it given the -- maybe the increased importance of it as you have Chillicothe to keep running full too?

I am, Mark. I think that Chillicothe gives us actually greater flexibility in that regard than we have previously, and could unlock the capabilities to really drive new products. So I'm very comfortable with where we are right now.

Okay, thank you very much.

Thank you. Our next question is coming from Stuart Benway of Standard. Please go ahead.

Yes, good morning. You said in your press release that the energy and raw materials costs are expected to rise further in -- I guess, in the fourth quarter. It seems to me that at least the energy costs have been down here recently. So I was curious as to why they're going to go up, and maybe it's more raw materials cost on the paper side or can you expand on that?

Sure, that comment was made more specifically related to our composite fibers business unit. And some of the trends in energy costs in Europe, particularly around electricity, as well as the pricing for natural gas has tended to move up. Our natural gas pricing in Europe is tied to oil, and is on a lag. So, we're seeing the price of natural gas rise a little bit, but we also are expecting electricity prices to increase, and that's been generally throughout Europe. So that's what that comment was aimed at.

And regarding the carbonless business, the volume there has been weak, as you said and -- but you also said that you expect price increases to come through in January, I believe. It seems to me it will be difficult to get price increases in a declining volume environment. Is there capacity coming out there or --?

Stuart, it's Dante. I would say that capacity is being pretty well managed to match demand. And that the historical performance of announced price increases and implementation has been pretty consistent, and as we stated earlier, we have a pretty diverse portfolio of products, and we've got other things that we can make on our machines in the event that we would have unexpected declines in carbonless volume. But we -- based on costumer interaction and feedback that we have, we do expect to be successful in implementing this price increase.

Thank you.

You're welcome.

Thank you, ladies and gentlemen. As a reminder, the floor is still open for questions. [OPERATOR INSTRUCTIONS] Our next question is coming from [Mark Civario] of Xylem Global, please go ahead.

Good morning, gentlemen.

Good morning, Mark.

The first question I had related to the Chillicothe program in your new strategy to get that back on track with your expectations. You've kept your accretive expectation at a pretty high level. Can you give us a sense of -- on a quarterly basis how that ramp is going to occur? Is it mostly a second-half '07 event in terms of achieving that $0.45 to $0.50 earnings contribution?

Mark, we haven't really broken that guidance down by quarter. We've outlined this morning, in the slides that we presented, the target production levels that we need to achieve to reach our estimates for next year. And you see the improvement that we've been able to make in the last few months there and we expect that improvement to continue, and it will allow us to on average next year meet those production levels, and meet the guidance we provided. But we haven't broken that down by quarter, and we're just not prepared to do that right now.

And as we look at '07, and just relating it to the volume figures you shared with us within specialty book, I think you said revenue is down about 2.5% but volume was down around 9.5%. What is -- is that a loss of customer business as you've been transitioning? What is the market decline if there is one going on in the book area to give us some context around that 9% number? I think you had already addressed the carbonless decline as being more or less in line with what you believe the industry is doing.

Hello Mark, this is Dante. The book segment is not declining at 9% or anywhere near that. That is a reflection of our below expected production levels. So we couldn't make it, so we couldn't sell it. Clearly our inability to produce at plant levels was frustrating to our customers. But -- and in some cases they had to go to other sources of supply for specific orders.

But we're very fortunate to have strong relationships with our customers that have been built over many years of meeting and exceeding expectations. And our customers are standing by us knowing that the issues that we're facing are really short term in nature. And our acquisitions have positioned us to be a more viable and strategic supplier in the long-term.

What do you look at the book paper market growth rate as being on a three to five-year basis?

Yeah, if you're modeling, I would say, flat, could be up a percent or two a year, could be down a percent or two a year, but I would say that generally speaking it's -- that's the range that it will operate in.

All right, just switching to the Lydney transaction that is in phase II, what percent of deals over there actually go to a phase II review?

Mark, it's George, and I don't know the answer to your question. What we've been told by the EC is that when they generally move to a phase II review --

Yes.

-- they need more time to consider the investigation. We've been told that just because this happens doesn't in any way prejudice the final outcome, and it doesn't imply that the transaction is more likely to be prohibited than cleared. It's just a question of needing more time to reach that decision. But I just don't know the percentage.

Yeah, I was getting more concerned that the probability of completing the transaction was diminished because it did move to a phase II stage.

No, that is not our understanding at all.

Okay, if for someone reason it were not to be approved, and hopefully that's a low probability for you, the opportunity -- well you have to turn around and sell the asset, I guess?

Well, there are potentially a variety of remedies. That would be clearly the most onerous. But I'm just not prepared to speculate on it at this point.

Okay. And I guess, finally on the fourth quarter outlook here, you have signaled already seasonally lower volumes. You're going to have some downtime, as well, related to projects and then some higher integration costs. So the ex-Timberland contributions the fourth quarter will be a bit more challenging. Hopefully, Chillicothe shows a better improvement. But overall for the Company we'd be looking directionally lower.

Mark, I think the comments we made were that from a seasonality perspective in the special papers business, we'll typically have lower shipments in the fourth quarter.

Right.

Composite fibers, doesn't have quite the seasonality in the fourth quarter compared to the third quarter that we do in the specialty papers business. From an integration cost standpoint, we incurred $5.6 million of integration cost in our third quarter. We only expect to incur a million dollars in the fourth quarter. So that will certainly be better, so --

And prices should be flattish sequentially, there is no incremental kick up in any of the areas, it sounds like.

There is the potential in the carbonless price increase that we announced in the third quarter. We expect --

But that's next year, right?

No, we said -- previously we said that that could be half a million to a million dollars in the fourth quarter. So it's relatively small. But we could have some benefit there.

Okay. Thanks very much.

Sure.

Thank you. Our next question is coming from [Graeme McMaggie] of Deutsche Bank. Please, go ahead.

This is another question about the Lydney facility. Could you remind us what your investment is, what the financial impact was in the third quarter, and your expectations for the ongoing financial impact prior to the EU making any decisions?

Sure Graeme, our purchase price for the Lydney facility was $65 million. The third quarter, it was at 400,000 operating income for the quarter, but it was a penny dilutive on an EPS perspective. And --

Allocating interest cost.

Correct.

Okay.

And we haven't provided a specific estimate going forward of what it will do in the fourth quarter. So I'm not going to comment on that.

But could you discuss how it's operating currently? How the anticipated operation is going to be fourth quarter, first quarter, relative to the third quarter without any EU decision?

I think we don't want to comment specifically on the mill performance. But before the EC review, we need to -- the final decision we need to operate this as a stand alone business. So you can expect that it'll be operated in a manner -- in the fourth quarter and first quarter consistent with how we are operating it today.

Thank you.

Thank you, ladies and gentleman. As a final reminder the floor is still open for questions. [OPERATOR INSTRUCTIONS] Our next question is a follow-up question coming from Mark Wilde of Deutsche Bank. Please go ahead.

Yeah, I'd just like to follow up a little bit on kind of pricing in the business. Yesterday, our competitor that's in both commodities and specialties reported, and they showed kind of quarterly pricing on the two sides of the business. And it seemed to me, looking at their numbers that the specialty pricing was lagging pretty significantly. And in fact, for their numbers, the gap between commodity and specialty had narrowed dramatically over the last 12 months.

I just wonder, Dante or George, is there anything different going on in the specialty paper business right now versus kind of prior cycles that's making it tougher to get price, particularly in light of all the cost pressure we've seen?

Hi, Mark, it's Dante. I would say, no. There is nothing particularly different. And I would just comment in general, not necessarily particular to any one company's business. But when you're in an environment where the more commodity like products have significant price increases and multiple price increases, it's not unusual to see the spread between the more commodity like products get bigger compared to the specialties. Conversely, when you're in a down cycle the more commodity like products pricing falls off pretty quickly and the specialties remain much more consistent. There is a lot less variability there. So I don't know if that helps you.

Okay, but I have kind of watched that through prior cycles but you don't pick up anything else that's different here.

Not from our vantage point, no.

Okay. And then I think this is pretty obvious, but there are a number of specialty paper -- there are some specialty paper assets that are in the market right now. It's fair to say, you know, you've got your hands full with Lydney and Chilli.

Mark, it sure feels that way to me.

Yeah, all right, George. I thought it is pretty obvious.

Thank you. There appear to be no further questions at this time. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.