Neptune Insurance Holdings Inc (NP) 2004 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Neenah Paper 2004 fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS).

I'd like to remind everyone that the presentation today contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management's beliefs and assumptions regarding future events based on currently available information.

Listeners are therefore cautioned not to put undue reliance on forward-looking statements as they are not a guarantee of future performance and remain subject to a number of uncertainties and other factors that could cause actual results to differ materially from forecasts. A more detailed description of these uncertainties and risk factors is provided in Neenah Paper's earnings release and filings with the Securities and Exchange Commission which you are encouraged to review.

Except to the extent required by applicable securities laws, Neenah Paper undertakes no obligation to update or publicly revise any of the forward-looking statements that you may hear today. In addition the Company may make certain statements during the course of this presentation that include references to non GAAP financial measures as defined by SEC regulations. As required by those regulations a reconciliation of these measures to what management believes are the most directly comparable GAAP measures is contained on the Company's website at www.Neenah.com.

Thank you. I will now turn the call over to Bill McCarthy, Vice President of Financial Analysis and Investor Relations. Please go ahead, Sir.

Thank you, Laurie, and good morning everyone. It is my pleasure to welcome you and officially kick off Neenah Paper's first ever quarterly earnings call. And I should probably thank you as well for your patience since we recognize March is somewhat late for a call on 2004 results. However since this was our first release as a stand-alone company we decided on this timing in order to ensure a complete and thorough review with Deloitte & Touche. We are also committed to accelerating earnings release dates as the year progresses to end up with more typical timing by the end of the year.

With me this morning are Sean Erwin, our CEO, and Bonnie Lind, our CFO. After I conclude my introductory comments and quick summary of results, I'll turn things over to Bonnie for a more detailed review of our business and financial performance in 2004; and then Sean will finish up with a review of key strategies and objectives for 2005 and some of our accomplishments to date.

We have also allowed time for questions and anticipate wrapping up in about one hour for now.

Hopefully everyone has also had a chance to read our earnings release that went out yesterday evening.

Before discussing the financial numbers, I want to clarify the basis of reporting for 2004 results which of course was greatly affected by the terms and timing of the spinoff from Kimberly-Clark last November 30th. For the first 11 months in 2004, as well as the full year 2003, financial statements reflected Neenah Paper as part of Kimberly-Clark.

More specifically, results during the first 11 months of 2004 do not include interest expense, the higher discount rates for pulp sales to Kimberly-Clark under terms of the new pulp supply agreement, and the ongoing higher level of corporate expenses that we expect operating as a stand-alone company.

There were two unusual charges associated with the spinoff that did affect 2004 reported results however. The first was the previously communicated non-cash impairment of our Terrace Bay pulp assets. This 112.8 million pretax charge was booked in the fourth quarter. The second item was for a onetime spinoff transaction cost of 4.5 million, pretax, that were largely incurred and paid prior to the spinoff but assigned to Neenah Paper.

Of this total 1.7 million was booked in the third quarter and the remaining 2.8 million was charged to the fourth quarter.

Now with all that in mind, let me provide a brief overview of 2004 earnings before turning things over to Bonnie. In all periods we are using basic and diluted common shares outstanding of 14,738,000 to calculate earnings per share amounts. Full year 2004 results were net loss of 26.4 million or $1.79 per share, including the after-tax charges of 72 million for the impairment and 2.9 million for transaction costs.

In 2003, full year net income was 38.9 million or $2.64 per share. Key drivers of results for 2004 were higher market pulp prices and volume driven growth in the paper businesses accompanied by improved manufacturing efficiencies. This was partly offset by unfavorable currency effects from a stronger Canadian dollar and higher operational costs at the pulp mills particularly in the second half of the year.

Fourth quarter 2004 results, including the full impairment charge of 72 million and after-tax transaction costs of 1.8 million, were a net loss of 69.7 million or $4.73 per share. In the fourth quarter of 2003, net income was 14.2 million or 97 cents per share. Fourth quarter 2004 results reflected another quarter of solid performance in the paper businesses but a decline in profits from pulp as the benefit of higher market pulp prices were offset by a much stronger Canadian dollar and higher operating costs for pulp operations which in the fourth quarter of 2004 included a portion of cost related to the annual maintenance shutdowns for both mills -- whereas these shutdowns for taken in prior quarters in 2003.

I would like now to turn things over to our CFO Bonnie Lind to more fully cover 2004 results.

Thanks, Bill. I will first cover in more detail business performance in the fourth quarter and full year then addressed some cash flow balance sheet and risk management items before concluding with a brief update on our projections for certain 2005 cost items.

Starting with business results. In 2004, total net sales of 772.1 million for Neenah Paper increased 9% over 2003 and all three business segments grew year on year revenue. Importantly, the majority of that growth was volume driven. In Fine Paper, sales were up 5% on 7% volume growth. In Tech Paper, revenues increased 9% on 7% increase in volume and in Pulp, net sales grew 11% with volumes up 2%.

A onetime reduction in net sales of 12.9 was included in December, reflecting a change in contractual terms for Pulp sales to Kimberly-Clark. Title is now transferred and our sales are recognized upon delivery, instead of at shipping point as it had been previously done.

In addition, sales for all periods now reflected change to reclassify freight cost which increased both net sales and cost of sales to be in conformity with generally accepted accounting standards. There was no impact to earnings from this latter change and the amount of the freight reclassification was approximately $45 million per year.

Excluding the onetime impact on sales due to the change in Kimberly-Clark terms, fourth quarter 2004 sales similarly reflected growth in all three segments and Neenah Paper revenues grew 4% overall. Fine Paper led the way with net sales up 9% and delivering a fourth consecutive quarter of year on year growth. Technical Paper net sales for the quarter were 1% ahead of last year and Pulp was up 5%. Excluding the impairment charge and transaction cost operating income was 77.4 million in 2004, up 22% from 63.3 million in 2003. Both paper businesses increased profits with Fine Paper operating income up 6% in 2004 and Technical Paper up over 30%.

Primary reasons for increases in the paper segment were growth in volume and improved mill operations. Pulp had an operating loss of 7.7 in 2004, excluding an impairment charge vs. the loss of 16.5 million in 2003. In this segment, benefits of Pulp market prices which in 2004 averaged over $85 in metric ton higher than 2003 for softwood and approximately $10 a ton higher for hardwood were partly offset by a stronger Canadian dollar which strengthened from an average of $0.72 in 2003 to $0.77 in 2004 and also by higher pulp manufacturing costs, particularly later in the year due to the timing of the annual maintenance shutdowns, higher wood and higher energy costs.

In the fourth quarter -- excluding impairment transaction costs -- operating income was 6.3 million down from 22.1 million in the fourth quarter of '03. This decline was principally due to Pulp where the external environment was quite challenging and results were additionally impacted by operational causes. The U.S. dollar weakened vs. the Canadian dollar in the fourth quarter of '04 to an average of $0.82 from a rate of $0.75 in quarter 3 2004 and $0.76 in the comparable quarter in 2004.

At the same time (indiscernible) Pulp market prices fell about $50 per metric ton in the fourth quarter of 2004 vs. the third quarter of 2004, although they were still approximately $55 a metric ton higher than the fourth quarter of 2003. Hardwood market prices in the fourth quarter of 2004 were actually more than $20 per metric tons lower than in the fourth quarter of 2003.

There were also some operational items in the fourth quarter 2004 that impacted result. The Pictou mill completed approximately half of its annual maintenance down in the fourth quarter of 2004 and while the bulk of the Terrace Bay shutdown was in September it did continue into early October.

In 2003, these annual maintenance downs were taken in the second and third quarters. We estimate the impact of the higher cost related to the Downs in the fourth quarter vs. the fourth quarter of '03 to be roughly $5 million. I should note that in 2005 our annual maintenance downs are scheduled in the second quarter for Pictou and in the third quarter for Terrace Bay.

Wood costs were also higher in the fourth quarter 2004 at Terrace Bay reflecting low chip and wood availability, in part driven by an unusually wet season.

Finally, in the fourth quarter 2004 selling general and administrative and other expenses increased from 9.7 million in the fourth quarter of 2003 to 19.3 million. Increases in 2004 resulted from approximately 5.1 million of additional expenses, both for corporate costs as a stand-alone company and for selling costs to support paper volume growth. 2.8 million for onetime transaction costs and a 1.7 million increase in other expenses net, primarily due to foreign currency losses resulting from the stronger Canadian dollar that I previously mentioned.

Keep in mind, none of the 2004 results reflect a full impact of changes in pulp discount, interest expense or corporate expense that we expect on an ongoing basis as a stand-alone company. For example, had the new levels of pulp discounts been in effect for the whole year reported sales and profits would have been reduced by 25.6 million.

Likewise, 2004 results only included one month of interest expense and amortization of debt issuance cost related to our $225 million of 10 year notes. This totaled about 1.6 million in December or around 19 million on an annual basis.

Bill already covered the changes in net income. I would only add that our effective tax rate for 2004 was 36.1% down from 38.5% in 2003 and that the reduction was primarily due to changes in legal structures and a resultant overall lower blended rate of Canadian federal and provincial state and local taxes.

Moving on to talk about cash flows and liquidity, as a new company, we are very focused on cash and liquidity and I'm pretty pleased to say that we ended 2004 with a cash balance of 19 million and no outstanding balances on our revolving credit line. Post spinoff cash generated from earnings was supplemented by improvement in working capital which did include about 7 million for payables that were paid by Kimberly-Clark in December, on behalf of Neenah Paper, and later reimbursed in January.

Capital spending for 2004 was 19.1 million including 5.6 in the fourth quarter and depreciation for these periods was 35.8 and 8.7 million, respectively.

2005 depreciation will be reduced by approximately 10 million per year due to the Terrace Bay impairment charge. We also expect amortization of debt issuance cost on the 225 million 10-year notes to about 2 million a year. This charge will be included as part of other expense on the income statement.

As of December 31, 2004, our credit metrics were in line with our expectations. The only debt at year end was the 225 million of 10-year notes that we issued at the spend. Stockholders equity at the end of the year was 218 million -- significantly better than previously reported, due to increases related to pensions and deferred taxes. This resulted in a year end debt-to-cap ratio of approximately 50% (ph).

Finally, we announced a quarterly dividend of $0.10 per share for stockholders on record as of February 4th. This dividend was paid on March 2, on our 14.7 million shares outstanding.

Turning to risk management. In order to prudently manage risk and raised volatility associated with the pulp business we have developed and begun to implement corporate hedging policies covering both currency and pulp prices. While none of this was in place at the time of the spinoff we have now begun slowly to implement our policy for 2005.

Finally I would like to provide an update on a few of the spending areas we've previously talked about. First capital spending in 2005 and 2006 is now expected to be roughly 40 million per year or 10 million per year less than originally planned. The reasons for the lower spending in '05 are due to 1, deferred -- we have deferred certain investments in Terrace Bay until we realized other noncapital improvements necessary for the long-term success of that business such as wood costs and availability and 2, we now expect that the environmental project at Pictou that we talked about in the past will be delayed to allow regulatory agencies and other parties additional time to evaluate the project.

Looking at pension and benefit plans in 2004. Total pension contributions for both the U.S. and Canada were about 16.6 million, with 4.2 million of that in the fourth quarter. 2005 contributions are projected to be around 18 million with roughly 13 million recognized in the income statement as pension expense.

Corporate and general expenses as a stand-alone company still expected to be up roughly 14 million a year versus historical levels under Kimberly-Clark. Additionally, as previously mentioned, we expect to exceed this by approximately 7.5 million in 2005 for payments to Kimberly Clark to allow us to continue to utilize some of their systems and services until we have our own platforms in place.

The majority of these incremental costs will be allocated to our segments in future reporting periods. Also note that these costs do not reflect any impact for a change in accounting standards that will require expensing of stock options. Neenah Paper -- we would expect this expense to be roughly 2 million on an annual basis.

As previously mentioned our effective tax rate in '04 was 36.1% and we believe we will be in line with this level going forward.

Cash tax rates tended to be lower due to accelerated depreciation and depletion and we expect that to continue. Finally as mentioned annual interest and amortization expense on our 10-year notes is expected to total around $19 million a year.

It will be important to consider these changes in spending as a stand-alone company in addition to changes in pulp discount to Kimberly-Clark when estimating 2005 results and in future considerations vs. 2004. Now Sean will speak about key priorities and objectives for us in 2005 and some of the actions we have taken to date.

Thanks, Bonnie, and good morning to everyone. I would like to review some of the things we have accomplished already in our brief time as a stand-alone company. As well as focus on a few of our key objectives and priorities for 2005. In particular, 1, achieving and sustaining growth in our paper businesses; 2, improving Terrace Bay's competitive cost position; 3, building a viable total market pulp business, and 4, delivering the cost savings and productivity improvements necessary.

First let me say it has been a very busy time the past four months here at Neenah Paper. I would like to really start by thanking our employees for an incredible effort. Our organization and teams were ready for the spinoff and hit the ground running. And we are already moving forward on a number of our initiatives.

We have established key performance metrics for our Company and are measuring and tracking our progress monthly. These items include safety, excellence and customer service, sales from new products, our processed reliability and cost savings targets as well as the more typical financial metrics like profit margins, cash flows, and working capital.

I would like to in particular comment just for a second on safety as we made noteworthy strides in many of our plants and reduced our reportable incident rate by over 20% so far with aggressive improvement goals this year. In our Whiting Wisconsin mill for instance we have now gone over 250 days without a single reportable safety incident; and our Terrace Bay plant was recently recognized as the safest pulp mill in Canada. So a great start for the new company in terms of safety which we believe brings so many other benefits with it.

Another key area for us has been in where we are now more focused with clear priorities and moving forward on a number of areas that are beginning to bear fruit in terms of new products and innovations and improving our relationships and support to key customers as well as strategic suppliers.

We recently relocated our corporate R&D group to a new leased facility near our headquarters here in Georgia. We have also begun to increase our R&D staffing levels which we have indicated was in our plan.

In the financial area we are already well underway with our Sarbanes-Oxley compliance efforts and as Bonnie mentioned, we recently paid our first dividend. Needless to say, we are pleased with our cash balance at the year end; and we watch it very closely, as Bonnie said, every day.

Looking to the future, we have a team in place that is designing and moving implementing Oracle is our planned ERP system with a startup date of January 2006. This will allow us to have migrate from the Kimberly-Clark systems we are currently utilizing and paying for and then in addition we will facilitate implementation of best practices in standardizations throughout our newly combined businesses.

The team leading this effort is experienced and the organization is committed to completing the project on target.

Turning to our key objectives, let's first talk about growth in paper. As most of you are aware our paper businesses were very profitable but were declining in terms of volume. As highlighted in last year's form 10 our Fine Paper business had experience 17 quarters of declining volume and our Technical Paper business had stable volumes but this was after a mill closure a couple of years before.

As Bill and Bonnie have highlighted with the 2004 results we couldn't be prouder of what our teams have accomplished. We are seeing good growth in both businesses. The message within the teams is that if we are the leaders in the Fine and Specialty segments we have to act like it. We believe it is our responsibility to grow both our share and the overall size of the markets themselves. The premium segment of the uncoated freesheet (ph) market where we compete represents only 3% of the total market and we believe it is our responsibility to demonstrate to customers how premium papers provide a more effective means of communication.

Increasing the premium segment from 3 to 4% of the total uncoated paper market represents a huge growth potential for our business. Our objective is to show our customers in the design community the value in trading up. I am sitting here with my $3.75 cup of coffee. I know this can be done. This week we announced the launch of our new line of premium paper granted under the Eames name. Those of you that know design know that Ray and Charles Eames are legendary within design circles for their innovation.

We have entered into a relationship with the Eames Office Foundation to utilize their treasure chest of materials to bring exciting new designs and finishings in premium paper to the graphic design community. This is our biggest Fine Paper product launch ever. The first new product brand offering by our Fine Paper team in 10 years. The response from our paper merchants to date has been great; and we are seeing good stocking commitments from them.

Our marketing and development teams have now already moved on and are now focused on other initiatives that we will announce later this year. As I said up front market leaders must lead and our folks are energized by this responsibility.

Our Technical Paper team is no less active. They have recently launched a new line of heat transfer papers and are working with our premier customers on many other new opportunities.

The second area of focus I mentioned has been improving Terrace Bay's cost position. As most of you know Terrace Bay has been identified as a high-cost Canadian pulp operation at least on independent benchmarking studies. Our recently announced decision to close the smaller number one mill and corresponding staffing reductions was a difficult decision but necessary but it is just a starting point in tackling the competitive cost position issue.

By closing the mill, we expect on an ongoing basis to improve cash flows by $2 to $4 million annually. We will focus our efforts on the newer more efficient larger number 2 mills and we may also shift our mix toward more profitable software grades. However wood cost and availability remain the primary area of focus and -- in addition to our existing efforts -- we are very pleased now to the working with Minister Ramsey at the Ontario Ministry of Natural Resources and are beginning to look at multiple ways to address this issue.

In addition, we have become -- already become more active in developing relationships with other forest products companies near us in Ontario to develop opportunities to work together to obtain the maximum economic value from our available timber. It just doesn't make sense to bring tree length wood into our meals for processing. We need to increase the use of lower cost residual chips.

In addition to wood cost we are also proceeding with other initiatives, such as cogeneration of electricity and changes to our labor practices in the woodland. We are by no means done with improving our cost position but are very actively addressing the issue. As Bonnie mentioned at the same time we are being prudent with our capital spending plans in pulp; and we will defer certain planned major projects until we are confident in our long-term solutions and the ability to deliver our targeted financial return.

Turning to building our overall capabilities as a market pulp supplier, we are making good progress. Our sales team has been successful in developing relationships and starting to build our business. Our goal is to realize higher mill net selling prices than with the KC contract and this is being realized. However based on Kimberly-Clark's requirements in certain supply chain projections, it really won't be until the second quarter and second half of the year until we have more significant volumes of market pulp available to sell.

In the meantime we have recently received FFI certification for the Terrace Bay forestry operation. We expect Pictou's certificate to be issued in weeks. This certification indicates we are following environmentally responsible practices in our forestry, development and harvesting -- something imported to ourselves and our customers.

We have also invested money to improve the quality and uniformity of our pulp and increase our capabilities to produce customer preferred wireless bale. To succeed as a market supplier, we need to be ahead of the curve in terms of the innovation and service.

The last area I would like to comment on is what we're doing to continue to deliver a year on year cost savings. As many of you have heard, we believe particularly in pulp -- a commodity product. It is critical to continually reduce costs and increase productivity.

In 2005, we expect the cost per item such as raw materials and energy to increase year on year. To address this, our teams are focused on delivering cost savings. These savings will come from both new initiatives to boost productivity and yield as well as by optimizing the results of previous investments.

With all of these efforts underway, I'm watching new things to make sure we maintain the right balance between building the infrastructure for a new company in this age of Sarbanes-Oxley and a company with multiple strategic initiatives in key areas. We know we could make either one a full-time initiative but it is important to do both and keep them in balance which we believe we are.

In summary, I would like to reiterate that our employees are in place, energized, and moving forward in a variety of areas to execute our plan. I was very pleased with the performance of the Paper group in 2004 with very good top-line growth coupled with solid improvements in manufacturing costs and operations. The spinoff has helped invigorate these businesses and we expect them to continue to perform.

While pulp continues to have its challenges, we are committed to reducing costs and improving profitability in this segment as well. I am proud of what our teams have accomplished thus far in the little time we have had as a stand-alone company and look forward to talking to you as the year progresses about more of our accomplishments.

Let me end by thanking any investors in Neenah Paper who may be listening in. As with any spinoff, there was significant trading volume in the early days and for those of you who held or bought, I would like to thank you for your confidence in us and to tell you we are all focused on delivering the results that you expect.

I would like to now open the call up to questions if there are any.

(OPERATOR INSTRUCTIONS) Todd Peters of American Century.

I just wanted to get a clarification here. You listed your total asset level at 566 at the end of the year and I want to know, does that, then, exclude the Terrace Bay number 1 mill off the asset as a BP&E?

Yes our total asset at the end of 2004 are 586.6 and that does exclude the impairment. Or the impairment has been taken out of it.

There was -- there will be an additional write-down for number 1, but it won't be a material number.

One follow-up clarification so your interest cost has been for the full year, you said it would be running about 19 million and your tax rate will be 36% going forward.

Yes.

Tim Fain (ph) of Smith Barney.

Congrats. Couple of questions on the Pulp segment. One is, the mix between hardwood and software today at both Pictou and Terrace Bay, the mix between hardwood and softwood. And then what you anticipate by the end of year or at least in second half as you have the number 1 hardwood line shut down?

Good question. It really varies by mill. Pictou is a single line operation, where they campaign it back and forth between hardwood and softwood; and it is currently above 75/25. 80/20. With Terrace Bay having two separate mills with the hardwood mill or what we are currently running hardwood in is the number 1 mill of about 125,000 tons. And that is roughly a 75/25 split also. With the closure of the hardwood -- or the number 1 mill in Terrace Bay we have the option of running the number 2 mill similar to the way we run Pictou with campaigning back and forth.

The demand for hardwood will, obviously, be reduced because we terminated the Terrace Bay portion of our contract with Kimberly-Clark. We did that the day of the announcement. So I would expect the mix at Terrace Bay to begin to drift up more towards softwood before the end of the year.

On the Pictou. Can you comment at all about what you're seeing in the export markets in the -- for pulp as well as what you're seeing here in North America? Currently not in the fourth quarter but here at the end of March?

The -- predominantly from an export standpoint for us at least to Europe is predominantly Kimberly-Clark volume and as highlighted in the Form 10 that is tied to some index prices coming out of Europe. So we are not actively exporting significant quantities to Europe. But we would expect that that would increase as time goes along; and we have established some relationships already. In terms of Terrace Bay, I would expect a very little of that to be exported offshore just with opportunities more in its natural shipping locale.

Can you comment on what you're seeing in terms of prices today vs. the end of the year?

I'm reading the same things you are on that. We are not actively selling it in Europe other than as I said on the index but we are seeing some significant increases in recently in hardwood and with softwood apparently being a little more balanced right now.

Mark Weintraub of Buckingham Research.

First. Wanted to understand at this point how much pulp are you selling to Kimberly-Clark vs. how much is going to other buyers?

It's actually with the change in Terrace Bay with the number 1 closure, the numbers will change rather significantly. We were producing roughly 750,000 tons of pulp a year. Our Kimberly-Clark contract was for 540,000 tons and with the hardwood it was split between the two mills. We had 80,000 tons of hardwood, 40 of which was coming out of Terrace Bay.

So the Kimberly-Clark contract will drop to 500,000 tons, but because KC was only taking 40,000 of that 125,000 tons in the short run, say, the balance of the year after the mill closes KC will be taking about 80% of our production up from 72% before we close the mill. Then it will begin to ramp down as you saw in the Form 10 after that.

So basically it is about 500 to K. C. and 125 to other folks?

Right. 125 and hopefully growing.

Right as the Kimberly business ramps down. Now that 500 -- that is all tied to index pricing. Is that correct?

Both Europe and North America, yes.

So there are separate indexes to the Europe into the North America or is it just --?

Yes because as you know in Europe customers tend to pay some freight from the port whereas in North America it is typically delivered. So you'll see a gap in price -- let's say between the U.S. indexes like RISI (ph) and some of the picks prices coming out of Europe. The difference is normally freight.

So for the U.S. I understand it is RISI that you're using for the index primarily?

It can be a combination of things. If there is disparity in the prices, there's a mechanism for that but for the most part, it's RISI.

I assume the great majority is North America as opposed to Europe but how much -- what are you using for the European index?

Pics (ph). The pics prices that are published.

Can you tell us now where are the -- I'm sure the index is -- the RISI index has been higher in the first quarter than it was in the fourth quarter. How much higher has that been?

The softwood prices in North America hit 600 on average but most people got the increase. It went to 680 in the month of February; and we are currently building off of that price with our discount.

We do have a one month lag in our Kimberly price.

So would it be then approximately accurate to assume that your first quarter is going to be $40 or so -- $35 to $40 per ton higher than your fourth quarter?

Remember to factor in the discount. Because there is a change in discount that you only saw in one month of the fourth quarter. Too, as Bonnie mentioned our prices to Kimberly-Clark, we lag the index both when markets on prices are going up and coming down by one month. What you'll see for the -- since it went up in February you won't see 680 for the full quarter. We are realizing that now; and you'll see the prices that the year started at for the first two months of the year.

So if I do that one month lag quickly actually comes out more like 30 rather than the type of number which I had mentioned previously, but then you get it in the second quarter?

Right.

There's many or more pluses with a lag as -- if there was a straight index price because my experience has been when prices start to fall they tend to fall quicker than when they're rising -- which is more orderly. So over time I think it won't be a detriment.

Just to clarify. So if the index is up 50 and let's say that your discount is 10% just to make our math easy. Does yours go up 50 or does it go up 45?

Our discount is a set amount. The discount as a percentage never changes.

So it would just go up to 45?

Well, you'd have to calculate that but it's a set discount amount effective against the index with the lag in price. So we are billing this month if you look at February RISI you would see the price in there at 680. We are billing that this month.

You also mentioned that you were establishing some corporate hedging programs on currency and pulp prices. Could you expand on that a little bit, please?

As we said in many of our presentations and meetings with analysts, hedging is a very important part of our risk management strategy. When we have a twofold objective with hedging, we want to mitigate the volatility in our earnings exposure and from changes in exchange rate and we also -- which is very important to us -- ensure liquidity to support our business plans particularly 2005 and 2006 when our capital spending is going to be ramped up.

For Pulp? The Canadian dollar, we are going to hedge that with derivatives on a systematic approach where we are willing to hedge it for a period of out to two years. For pulp we've evaluated the cost of benefit of hedging and feel that for the next two years hedging the price of pulp is a good option for us, depending again where that cost benefit gets to be. Because protecting against the downside is really viewed by us as being absolutely critical.

So you are going to use what? Forward (ph) exchange contracts on the Canadian dollar?

Yes we will.

Roughly how much of your -- have you determined what percentage of your Canadian dollar exposure you would typically seek to hedge?

I can (ph) tell you what percentage that we would target not to exceed. We are looking at going anywhere from 50 to 75% of anywhere -- six months to two years out.

Hedged?

Hedged.

So you are going to be very substantially hedged.

Pretty substantially hedged on the Canadian dollar.

Then on the pulp hedging what is the -- what is the degree of hedging that you are contemplating at this point?

Pulp hedging, again, it really depends on the cost benefit and I don't know how familiar you are with that market but the Pulp hedging market isn't nearly as liquid or as large as the Canadian dollar hedging opportunities so we are going to be doing that on an approach, where we basically will evaluate what price pulp -- at what price could we hedge the pulp going out two to three years even. But we would do it less systematically because it is dependent again upon what price you could actually execute the hedge at.

As you mentioned, the exchanges are not that liquid right now. Would you be doing this with a financial institution or at one offs? Private negotiation or would you be using exchanges?

I think if I understand your question correctly, we would contemplate doing this with financial institutions. We would also contemplate doing this in our contract arrangement with our customers.

And at this point in time have you made any significant pulp hedges?

At this point in time we have begun to execute pulp hedges.

We will be discussing that in more detail as we review the first quarter.

Speaker: Okay and in order of magnitude though is this like 50% or so of your business that you would be contemplating doing this for?

That may be a long-term strategy. But -- that we are just getting going on it. As I said we will cover that in the first quarter which will be upon us before we know it.

We would be pretty focused on hedging Northern softwood kraft (ph) volumes.

I have a couple of more questions but (MULTIPLE SPEAKERS)

Okay thank you.

Mark Saylor (ph) of (inaudible--background noise).

Was wondering if you could give me a little detail on the pricing that you are seeing in both the Fine Paper and the Technical Paper markets?

The Fine Paper market -- in both cases, we raised and we've announced that we raised prices on our list business in the fourth quarter and implemented those prices. The implementation in the Fine Paper came a little quicker than Tech Paper in that we are on allocation with some customers at that point in time. So we deferred the increase until we came off of allocation. We tend in the Fine Paper not to go up as frequently as you see some of the commodity larger commodity producers such as IP and Weyerhauser because we tend to not drop price like they do also. We are more commodity-oriented, uncoded freesheet producers.

So our pricing tends to be much more stable than theirs. We are selling our branded products at the list price this year, with our merchant community. We have also, though, as we are growing our branded business which is 80% of our volume we are using the low-cost available capacity that we have in our Fine Paper mills to more aggressively go after other large pieces of business such as major corporate annual reports and some major direct mail campaigns. For instance, very late in the year we did all of Lance Armstrong's Foundation paper in the mass mailing that he did.

And what this is enabling us to do is to effectively utilize the available capacity in a very profitable manner -- incrementally profitable -- as we build the branded business which we would expect to be our predominant focus in paper. So where our branded pricing looks solid and where we need to be more aggressive to go after big pieces, we are willing to do it because our cost position still delivers nice profits for us.

Looking at what you've said about the fourth quarter for net sales. I believe if I heard you right you had a 5% increase in net sales on the Fine Papers and 7% of that was volume. Is that -- am I looking at correctly, then, that you are losing a little on price or is that mostly a mix issue?

That was predominantly a mix issue and that's full year.

Okay that was for the full year.

Yes that was a full year but there was some mix issues in last year. We had solid growth in text and cover grades that tend to be a little lower-priced than per pound than writing grain. So it was a mix issue last year.

Then another question I had was concerning your capital spending plans for next year. If you could give a breakdown, maybe, by segment where you are looking to spend that money and how much of that 40 million is maintenance capital spend as opposed to investment?

As Bonnie highlighted and what we previously disclosed, our run rate in capital spending is roughly 25 million a year. Predominantly over half of that is in the pulp businesses, I'd probably say, two-thirds is in the pulp businesses. And as we had said in the Form 10 and during some of our earlier presentations that in '05 and '06 (ph) we have spent an incremental $25 million each year. We have reassessed our spending plans and, especially, as it relates to Terrace Bay. We are going to slow down some of the investment.

These are good projects but we want to make sure is that we have a long-term solution and both in terms of wood cost and availability and any other changes that we need to make in terms of work practices or relationships with the government and other -- or other firms in the industry in Canada. It makes more sense to get those things done first before we invest the capital at Terrace Bay because we want to be absolutely sure that we can deliver the results.

The second major spending change, really, for us is in Nova Scotia where we had significant environmental spending plans for wastewater treatment. We still plan to do that. But the project, we believe, will be delayed as federally (indiscernible) in Canada and others evaluate some of the work that they have to do that is associated with it. So the investment there will be delayed also.

So as Bonnie said, we will be cutting capital spending by at least $10 million this year from earlier projections.

One last question I had. In talking about your wood costs, do you feel that your timber assets are essential to hold or is it being talked about potentially getting rid of those?

We realize that owning 1 million acres in Nova Scotia that there is a tremendous value in those. We will evaluate the best way to capture that value is it maybe monetizing a portion of it. All of it. We will look at that in detail, to make sure that we are really capturing the value of that asset.

We will, as many of you have read in the Form 10 we have a tax sharing agreement with Kimberly-Clark where we've indemnified them if the IRS would ever pull the tax-free nature of this. So we want to be very careful as we move forward with some of these strategic alternatives, including woodlands.

Jeff Winn of Sandol (ph).

Two questions. I guess firstly on the volume growth number and the Fine Paper business. I think you said 7% for the year. Through the first nine months of '04 I think you were up 5%. Is that right?

I believe so.

Does that mean backing into the math at the volume growth in the fourth quarter was low double digits 10%?

Yes. We had a good fourth quarter volumewise. As I said in my comments, I couldn't be happier with the momentum that we are seeing in that team. The entire business team -- they are going to continue to grow that business. And we are not hearing people in that group talk about secular declines. It's "What do we have to do to grow it?" and "Grow the premium segment." So we're pleased.

So it sells like you think what drove that growth is Company-specific initiatives as opposed to secular or cyclical growth in industry as a whole.

I do. Even when you compare some of our numbers to recently published AF and PA numbers, I think that just clarifies that point.

Switching gears, you guys have talked about a sensitivity in terms of operating income to a change in the Canadian exchange rate. With the closure of the number 1 line does that materially impact the sensitivity at all? (MULTIPLE SPEAKERS)

No. What we've said sensitivity wise in the past was every change of $0.01 has a $6 million impact on (indiscernible) that relationship is essentially the same.

Christopher Miller of J.P. Morgan.

Follow-up on that last question. The sensitivity to the Canadian dollar. Does that include your hedges or is that an unhedged amount?

That's unhedged.

Given your hedges, a sense of what you call it, the net impact of the hedges -- what the sensitivity would be?

It would still be that same number for 2004 because we were virtually unhedged.

Follow up a little bit on the Pulp business. Lots of reports of reasonable capacity growth in the Pulp business in the second half of 2005 and into 2006. Your view of that. Do you expect to see capacity growth. Where do you see the impact on Pulp pricing over the next 12 to 18?

I think, obviously, pulp prices have historically been very sensitive to supply, demand, and capacity being the main driver. I think most of you have seen that there is significant capacity coming on the second half of this year in Latin America, almost all of that being hardwood pulp, eucalyptus pulp. And it was the projections of the impact that this would have on the market that was a factor in the decision to close the number 1 mill at Terrace Bay.

So we would expect to see significant impacts to the changes in capacity that will come later this year.

Then on a secondary note, International Paper they announced the sale of their industrial papers business (inaudible) pressure sensitive papers. Did you compete directly with that aspect to their business and is that any sign of consolidation on that side of the business for the time?

No. Not on that side of business. That would be more on the commodity end and then another specialty that we don't compete in where we did compete with IP is in their premium paper businesses that was acquired years ago when they picked up Hammermill. This would be Strathmore and Beckett and they recently disclosed that they had an agreement to sell that to Mohawk Paper which is a privately held firm in the East Coast.

So we are continuing to see consolidation within the premium segment with there really only being three major players (indiscernible).

Sherman Chilla (ph) of Impala (ph) Asset Management.

I want to ask about the hedging as well. Just, philosophically, as you look at your currency exposures, what is going to drive your views as to what you want to be 50% hedged for six months or 75% hedged for two years or whatnot?

I take your question to mean why would you be 50% versus 75% versus 100% hedge?

Yes I'm really trying to get a sense of was there philosophy behind any hedging actions you may take?

I can answer it the simplest by saying we are not attempting to be 100% hedged because we don't think we are that good at predicting our costs. And we don't want to separate the accounting consequences of having no underlying. So that is really what would drive the 75%.

But in terms of whether it's going to be 50 or 75%, I think part of the thing we' looked at is any of the correlations between market pulp prices and the Canadian dollar. And so we really want to make sure that we have a good understanding of where market prices are going before we hedge out.

In other words while you talk about hedging for the currency suffer from pulp it's effectively the same thing. You are looking at the hedging, your net pulp profitability cash flows?

Yes.

On that regard should I be looking at your growth exposure to pulp being the number times the average pricing? Or should I be looking at your -- the cost exposure?

I would focus on the cost.

So something on the order of $400 million of potential maximum hedge exposure?

That seems reasonable.

Looking at the pulp business going forward. You have identified some things that you would need to do and would like to do on the cost side going away from holes, tree chipping and what not. What has to happen for that to occur? And what other measures can you look to implement to reduce the wood costs and other costs of the pulp business?

I think that's a major part of it. It's obviously not the only one. The team up there with working with people here has a list of 40 things that they say we have to do but the forests in Canada has gotten very sophisticated and the use of the fiber really down the value chain and we don't believe that our operations have moved forward with the rest of the industry.

So we are establishing relationships with other users of the fiber; and we want our source of supply really to be the residual chips coming from some of these higher value uses such as OSB, or plywood, sawmills. It's one of the reasons why our Pictou operation -- not just because we own the trees but we are very very effective on how we manage the flow of fibers. It is one of the real competitive advantages that we have at Pictou and we are trying to replicate that in Ontario.

I apologize, I'm not familiar with your wood's strategy at Pictou versus Terrace Bay. So you have agreements with secondary processors. Whether it be sawmills or (MULTIPLE SPEAKERS)?

Yes.

So if you were to be able to move to that regime (ph) for Terrace Bay what are some of the metrics I should be looking at in terms of and trying to qualify what the potential savings might be?

We haven't disclosed that. But if you look at published data in RISI actually recently did a report that shows some average cost between average cost producers in Canada and high cost producers or highest quartile, you see the price gap or cost gap is dramatic and you can see why we are so fixated on getting this done quickly.

I'm sorry to focus so much on this but sounds like you need full operations or you need to work out arrangement with not only the provincial government but also with local manufacturers.

It's a shared process. I think we can both get value out of it by working together, which is why we met early this month with the Minister of Natural Resources.

For the ministers there's no real -- for them it's really -- you are looking for an approval to allow the logs to go to another process before it comes to you?

I think it is a cooperative program. We laid out the issues to them and we cut back just 130 jobs and cut back 32 jobs that over and above this recent announcement when we did that in December. This is all about also protecting our remaining jobs both directly in the mill and indirectly. So we are getting the support from the government. They need us -- the other suppliers of higher value fibers such as saw timber and veneer, they need some (indiscernible) to use their chips too and we're their boy. We are going to be aggressive in this area.

One last question if you do not mind? I think, Bonnie, you mentioned some of the cost items coming forward for '05, including raw materials and energy. Any -- I don't know about you -- I would expect you to quantify some of those but what are some of the usage numbers that you have for that I could at least play with and make my own assumptions on the deltas and pricing? So for energy should I be looking at quantities of oil or gas that you use or -- and for raw materials is it -- what are the unit measurements for, that I should be looking at?

We are -- some of this has been detailed in our Form 10 last year from an energy standpoint and let me do it very quickly for you. We have a lot of self generation in Pictou almost 100% self generation. Mussey, (ph) Michigan we have turbines up there so electricity or not -- major issues at both of those.

Terrace Bay is one of the key cost issues we have up there. We are one of the lowest self generators in the pulp industry at just about 40 percent. So one of our key objectives for this year is to establish a relationship on cogeneration. Actually, surprisingly, the unit -- energy unit we are seeing cost go up percentage wise, the most right now is coal, which is what we use at our Mussey, Michigan mills. So we are very focused on energy and controlling those costs right now.

So when you make reference to the energy costs pressure just sort of coal that you are referring to?

I'm sorry I didn't catch the --

So it is really coal that's a major change in energy cost for '05?

Coal and last year electrical costs went up in Canada so Terrace Bay saw a big increase; and natural gas prices are going up but it's not a dramatic cost for us.

Then for other raw materials is it --

One we're focused on in other raw materials right now is latex for Technical Paper business in an oil-based product. We have strong relationships with key strategic suppliers and we are working very closely to control those cost increases.

Frank (inaudible-- background noise)

Couple of technical questions all right and then a couple of others. Just on the $19 million interest expense and amortization. Is that going to be broken out at 17 million on the interest line and 2 million on the other income line?

Yes it will.

In terms of hedging pulp you said you wanted to protect your downside -- I think I heard that. So does that mean you'll be interested more in selling or buying puts than selling forward or doing a combination of the two or how are we going to do this?

I don't think we are really ready to talk about the mechanics of how we're going to do it.

Okay and I don't quite know how to ask this question; but I guess earlier the investors were thanked for buying stuff and you guys hope to meet our expectations. I think I got two published first -- or two published estimates out there one is $1.95 for the year. Another $4.30. I know we could all have different estimates for pulp and currency but which would be a better way for me to expect?

I will feel a lot better three or four quarters from now when everything is out and people understand these numbers. We don't obviously comment on analyst reports but I will feel better once we all have a couple of quarters under our belt.

Because there are a lot of moving parts and I guess we're all trying to figure this out.

Emanuel Weintraub of Integra (ph).

On the margins in the Fine Paper business we had sales up $4.5 million but almost no increase in operating income. Is there a chance for an improvement in margins there going forward?

Yes. Obviously, margins are something that we always want to improve. We are focused, first, on growing the business and the business team is doing a wonderful job of that as we fill up our capacity such as with branded products we should see an increase in margins just due to the fixed cost utilization. Keep in mind when you look at our segment information that we are allocating our corporate expenses to the individual business segments, as opposed to leaving a large corporate unallocated. Some of the people in the business units may not be wild about this but the approach is this is the best way for people within our teams to see what the real cost of the Company is.

And so we are hoping that they grow and increase margins while we cover some of the incremental costs of being a private company. Or a public company.

So this corporate expense line of a negative 5.4 million, that's not going to be an ongoing type line?

I will turn to our crack CFO and --

Yes that will be. That's unallocated corporate overhead in addition with what Sean was talking about was the overhead that will be allocated to the business segments.

And there was some allocated corporate overhead in the fourth quarter?

Yes there was.

Just, really, just one.

(inaudible -- background noise)

Mark Weintraub of Buckingham Research.

Just following up on that. So if I understand correctly you've indicated that corporate and transition expenses would amount to, roughly, $21.5 million in '05. Is that correct?

Correct.

Order of magnitude.

Order of magnitude. But that is not all going to show up in the corporate line. Some of it is going to be in the segments. Now in the fourth quarter, it was the 5.4 but then I think 2.8 million was a one-time item. So I took that out and that put the corporate expense at 2.6 million. But then there was some other corporate that would relate to that 21.5 million that was actually buried in the segments?

Yes.

Is that like a million or something?

I don't have the exact amount in front of me but it was just one month. And we are also -- being the first month there were some corporate expenses that were one off expenses for us. But the incremental -- when you look at us from an overall standpoint, the incremental costs are in line with the numbers that you mentioned. The 14 and the 7.5 one time and then the other charges that you are taking out -- most of those were allocated to us by Kimberly-Clark pre spiff.

I guess what I'm trying to figure out is that if I'm going to be running roughly 5.5 million for corporate etc. per quarter in '05 and my fourth quarter was 2.6 million -- not including what everyone was allocated in the segments -- but that would be -- it's roughly a 3 million increase on the quarterly rate?

I'm not sure I followed all of your math. I can just explain to you again that of the 14 (ph) million that we talked about, that is incremental to what was already been allocated to us in our businesses by Kimberly-Clark. And then that 7, 7.5 -- the transition services agreement? That's incremental as well.

Just shifting gears just to make sure that I understand what you're saying on a pulp business as well. So it is in the fourth quarter if we adjust for the pro forma you were giving me. I think you lost about $16 million in that business? 16.1 million? Is that correct?

She is looking right now to make sure (MULTIPLE SPEAKERS) agrees with her number.

Which I don't (MULTIPLE SPEAKERS) that sounds a little high.

Basically I took the 124.7 I added back the 112.8 and then I took off the 4.2 million, which would have been the impact of the Kimberly-Clark supply agreement being in place the whole time. And that took me to 16.1 million. And then the question is, then in the first quarter you had 5 million less in downtime expenses and if your prices are up $30 per ton or so that would be another 5.5 million or so. And then, are there any other significant moving parts that somebody should be thinking about, going into the early part of the year?

Some of the conditions that we faced the very end of year carried over. We had some obviously had some weather-related issues periodically in the winter in Canada, there were major blizzards and Nova Scotia that interrupted some rail service. So you tend to do a little more freight in certain years or truck freight than you may in others. So you'll have some blips but there aren't major strategic or market changes that you should be aware of that you are not.

Just lastly. Sean, you mentioned tremendous value in the Nova Scotia timberlands. Can you expand a little bit? What should one interpret tremendous to mean? Range?

I'm prone to use words like that. We own 1 million acres. We own just over a million acres of timberland in Nova Scotia and it's on our books for $5 million. Okay?

And I assume it's worth a whole lot more than $5 million?

I would hope so. If not I'm going to have to buy a lot of timberland myself.

So you don't expand on what you meant by tremendous.

No.

Todd Peters of American Century. Mr. Peters, your line is open.

That question has been withdrawn. We have reached the allotted time for questions and answers. Mr. McCarthy, are there any closing remarks?

Just a couple of comments. As I mentioned at the start of the call we will accelerate our earnings releases though the year and we will be sharing first quarter results -- not quite in 2 weeks as somebody said but in mid May. And just in conclusion on behalf of the entire Neenah Paper team, I would again like to think everyone for their interest and have a good afternoon.

Thank you. This concludes today's conference call. You may now disconnect.