Neptune Insurance Holdings Inc (NP) 2005 Q2 法說會逐字稿

Good morning. My name is Lori and I will be your conference facilitator. At this time, I would like to welcome everyone to the Neenah Paper second quarter 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).

I would 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 forecast.

A more detailed description of these uncertainties and risk factors is provided in the 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 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, if that were to happen, a reconciliation of these measures to what management believes are the most comparable GAAP measures would be posted on the company's Web site 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 Lori and good morning everyone. With me this morning are Sean Erwin, our Chief Executive Officer and Bonnie Lind, our Chief Financial Officer. I will first provide a brief overview of Neenah Paper's financial results for the second quarter and then turn things over to Bonnie to provide a more detailed review of business and financial performance. John will then finish up with comments on progress against some of our key strategies and objectives, and afterwards of course we will allow time for questions.

Earnings were released yesterday afternoon and hopefully everyone has had a chance to read through the press release. Second quarter consolidated net sales for Neenah Paper were 189 million compared to 207 million in the second quarter of 2004. While unit volumes in each of our paper businesses grew and combined revenues for paper were up for the quarter, pulp sales fell approximately 20 million versus the prior year due in part to lower volumes following the shutdown of the Terrace Bay No. 1 mill on May 1.

Operating income for the quarter was 14.8 million and compared with 37.3 million in the same period of 2004. Pulp operating results accounted for approximately 60 million of the 22 million decline in the quarter versus 2004. Of this, 9 million was due to a stronger Canadian dollar and 1.7 million was for restructuring charges for the No. 1 mill closure.

In addition, corporate expenses now being incurred as a stand-alone company were about 8 billion in the quarter and other higher costs for raw materials and energy, especially latex used in technical paper products, were only partly offset by cost saving programs and higher paper volumes. Second-quarter net income was 6.8 million, $0.46 per diluted common share. These results include $0.07 per share for the Terrace Bay restructuring charges. Cash balances continued to build and we again had no borrowings against our revolving credit facility during the quarter. I would like to now turn things over to Bonnie to more fully cover business results.

Thank you. First, I like to discuss the performance of each of our business segments and then provide an update on other cash flow and liquidity items. So let's start with business results.

Fine paper net sales in the second quarter were 56.8 million, up 1% versus the same quarter in 2004. The increase was primarily due to higher volumes which included sales from the new (indiscernible) portfolio which now is available nationwide. Compared to prior year, average prices were relatively flat as a 2% price increase on most branded products that we implemented in late 2004 was partly offset by incremental sales of lower priced non-branded business. However, the average selling price for the quarter was approximately 3% higher than in the first quarter as we increased the mix of branded products as we discussed in the last conference call.

Operating income for fine paper in the quarter was 16 million compared with 18.4 million in 2004. Results in 2005 reflect increased allocated corporate expenses as well as increased costs for fiber with hardwood pulp prices up 10% versus last year. We are also incurring cost this year for the launch of the inks (ph) portfolio, but nonetheless, operating margins for the quarter were still a very good 28% sales.

Technical paper sales volumes grew 3% versus the prior year, although revenues declined 1% to 34.4 million. While customer demand remains strong and we continue to operate with backlog, second quarter sales included a higher mix of lower-priced product lines such as our pre-mask and our tape products. Prices in the quarter were above the prior year, reflecting increases that took effect late last year. The announced selling price surcharge for latex was implemented during June and will be reflected in results starting in the third quarter. On an annual basis, we would expect it to contribute a little more than 2 million towards offsetting latex cost increases.

Operating income in the second quarter for tech paper was 3.1 million compared to 6.1 million in 2004. In addition to the less favorable mix, second quarter results included higher costs for raw material, particularly latex, which alone increased around 1.5 million for the quarter, as well as increases for energy and allocated corporate expenses. As I mentioned, the pricing surcharge will help to mitigate some of these cost increases on a going-forward basis.

Pulp net sales were 105.1 million in the quarter versus 124.9 million last year. The 16% sales decline principally reflected 18% lower volumes following the closure of the No. 1 mill on May 1. In addition, we sold less pulp from Pictou in the quarter since orders have been scheduled in accordance with an originally plan (ph) down in May that subsequently was postponed to the fourth quarter. Market list prices for pulp began falling in second quarter and were at lower than both the second quarter of 2004 and the first quarter of 2005.

Our mix continued to improve, however, as we had previously stated was our objective and during the quarter, 82% of sales were the higher value softwood pulp. Pulp operations incurred an operating loss of 2.6 million in the second quarter, including 1.7 million for costs related to the closure of Terrace Bay No. 1. Without the restructuring charge, the loss would've been around 1 million, an improvement over the comparable number in the first quarter of around a 7 million loss due in part to better prices and a weaker Canadian dollar.

Compared with operating income of 13.8 million last year, the single largest cost for the decline in profits this year was the stronger Canadian dollar. The C dollar averaged around $0.81 in the second quarter 2005 versus $0.74 in the second quarter of last year, increasing our pulp cost in U.S. dollars by around $9 million.

Other impacts on results included lower volumes, increase for costs, increased costs for chemicals and energy, the Terrace Bay No. 1 shutdown cost and the impact of wood costs and availability at Terrace Bay. Sean will discuss the wood situation in more detail later in this call.

Talking about the No. 1 mill closure, I would like to just briefly describe what is going on there. This project was successfully completed on schedule and through June, approximately 6 million of restructuring and onetime costs have been charged, so the total 8 million originally communicated. The remaining amount will be incurred during the third and fourth quarters and relates to costs for training and putting the mill in support assets and shutdown condition. Total onetime costs are expected to be consistent with what was originally communicated and we have now taken the necessary actions to achieve the projected savings of 2 to 4 million annually through reductions in headcount and other expenditures and services.

Turning to a few items not directly related to our business segments, corporate expenses in the second quarter were 7.9 million. This included about 6.2 million for administrative costs now incurred directly as a stand-alone company and 1.7 million for payments to Kimberly-Clark for certain transition services in 2005. The corporate expense in the second quarter of 7.9 million was higher than the 6.7 million incurred in the first quarter reflecting spending for seasonal items, such as our annual report and proxy, as well as increased spending for external audits and accounting services, including Sarbanes-Oxley compliance. Sarbanes-Oxley is taking a large amount of time and resources, but it is expected to be completed in accordance with our year-end deadline.

Turning to where we are at with our hedging program, during the second quarter, our currency and pulp hedging plans were in place and we systematically replaced currency hedges as they expired to maintain near-term coverage of about 9 million Canadian per quarter. As far as pulp hedging, we have no plans at this time to get additional hedges.

During the second quarter, currency was hedged at an average rate of $0.81 and incurred pre-tax losses from -- and we incurred pre-tax losses from currency hedging of about 1 million, or $0.04 a share. As of June 30, we had outstanding currency hedges totaling Canadian 333 million at an average rate of approximately $0.81. About half of this total will expire in 2005 with most of the remainder in 2006. The balance sheet reflected a fair value of $3.5 million for these hedges as of June 30, indicating that out for future hedge rates were favorable compared with projected future currency rates.

The Canadian dollar has recently been trading at about $0.82.

We made no changes in our pulp hedges during the quarter and remain with 15,000 metric tons per month of softwood pulp in 2005 hedged at an average price of $651 per metric ton and 12,000 metric tons per month in 2006 hedged at an average price of $631 per metric ton. During the quarter, pre-tax losses on pulp hedging contracts were about breakeven and the fair value of our pulp hedges on the balance sheet as of June 30 was approximately 7 million, reflecting expectations in the marketplace that future pulp prices will be lower than what our rates are hedged at. The list price for (indiscernible) today is $620 per metric ton following announcements this week by some producers of a $10 per ton reduction.

During the quarter, our liquidity continued to improve and cash provided from operations totaled $20 million. Our cash and equivalents balance grew from 24 million to 37 million and our debt remained essentially unchanged with no draws against our revolving credit facility at any point this year. During the quarter, we paid a dividend of 1.5 million and our first semiannual bond interest payment of about 8 million.

Capital spending in the quarter was 4 million, below quarterly depreciation and amortization (technical difficulty). For the first six months, capital spending totaled 11 million which is at a run rate below our full year expectations. One of the reasons for the lower spending in the first half of the year is timing of our pulp mill shutdowns, which are expected in the second half and where capital spending is higher. We have also delayed authorization of certain projects, including the effluent treatment project as Pictou and process improvements and down related projects at Terrace Bay. Consequently, we are now expecting capital spending in 2005 to be closer to $30 million with 2006 remaining at the $40 million level that we had previously communicated.

I would like now to turn it over to you Sean to cover the progress against some of our key objectives and our business activity.

Thank you Bonnie and good morning everybody. I will give you a business activity update and will structure comments to ensure we address our key objectives and programs for 2005 which we have previously communicated. These were, one, growth in our paper businesses; two, addressing Terrace Bay's competitive position and delivering value for our pulp operations and three, delivering cost savings in all areas of the Company to offset increases in materials and energy prices. I will finish with some comments on our outlook for the remainder of the year and then open things up for questions.

As in the last update, I'd like to begin with a couple of companywide activities. First off, we remain extremely proud of what our teams are accomplishing in terms of improved safety. During the second quarter of this year, our reportable incident rate has improved by over 50% from the previous year. Notably, our weighting (ph) mill employees have now gone over one year without a reportable incident and other locations such as the Neenah mill are also approaching the same record. This is outstanding performance our teams.

Secondly, employees from all functions and locations are also involved in implementation of Oracle as our ERP system platform with a first phase on track to start up in January. The teams are excited about the benefits that having a consistent, integrated system will bring to us, not to mention the payback from eliminating transition service agreement costs we are currently incurring.

I realize that we put our employees under a big load this year. As a new public company in today's environment, there is a tremendous amount of infrastructure and governance work required in establishing a public company. Yet at the same time, there are both significant business opportunities and challenges we need to focus on for our long-term success. I am pleased that our teams are taking out both of these with the same determination.

Now turning to key business activities and objectives, let's talk first about our paper businesses and our objective to re-establish growth in these segments. During the second quarter, the fine paper team continued to deliver year-on-year quarterly growth, marking the sixth consecutive quarter despite a weak market where per AFMPA figures, uncoated pre-sheet demand declined about 4% in the second quarter. Neenah Paper continues to outperform the market due to the quality of our products and the position and strength of our brands. This is coupled with concrete initiatives like the Eames fine paper launch that Bonnie covered and the recently announced plan to partner with a European producer of fine specialty papers.

In this latter case, certain premium translucent grades will be manufactured for us and we will market and sell these grades and expand our existing Ultra UV portfolio of products. This support our ongoing strategy to lead the market to trade up and it also illustrates our willingness to collaborate with other firms where we can grow our business and achieve solid returns even more so when significant investment and assets is not required.

In technical paper, we are working with selected third parties to develop new or improved products and recently launched two new line extensions in our Kimdura papers that were jointly developed with outside partners who are producing the base product for us. We continue to implement our growth initiatives in technical paper while operating our mill in (indiscernible), Michigan with a significant order backlog. Large backlogs clearly beat the alternative that many competitors are experiencing but also present challenges in servicing customer demand. As Bonnie highlighted, our sales mix in the quarter reflected more demand for lower-priced grade. We needed to deliver on customer orders for these products, and consequently this required substituting these orders for some of our higher-valued grade.

We are taking steps to address the backlog situation. In addition to the previously discussed utilization at capacity on fine paper assets, we initiated a program with key customers where we have begun to outsource production of certain grades to other manufacturers with specialty capability. In addition, we are looking at other international sourcing opportunities that could meet our needs, especially for the Asian market. These actions support our customers and will make machine capacity available to produce more higher value products. We expect to see additional demand for these higher value products. As an example, we have very recently negotiated the early termination of an exclusive distribution contract for our heat transfer papers, one of our most technically advanced and highest valued products. We will now deal direct with many major customers and are implementing programs we had already developed to accelerate the growth in this product line. So in spite of the weakening in the paper markets reported by many firms in recent calls, we remain focused and are delivering on our objective to grow our paper businesses.

The second key priority is addressing Terrace Bay's competitive cost position. As Bonnie mentioned, the announced closure of our No. 1 mill was successfully completed on May 1. While the closure was underway, our teams moved on to address other key elements of our own competitive cost position. We will continue to delay initiatives requiring major capital investment at Terrace Bay until we're confident that the site has an assured supply of softwood fiber at a competitive price. The primary focus has been on wood cost and availability, the latter of which has become even more critical lately.

We are taking steps to address this situation. Last month we initiated harvesting on a contract basis on the limited amount of company-owned land to increase our supply. In addition, we have initiated and begun to implement ways we can work with other firms within the industry to improve the flow of cost of wood to our operation. Initiatives include increasing our wood trades especially where we can acquire softwood and allowing wood haulers to utilize access roads on our forest license to reduce the transportation costs and working with saw mills to process more tree-length wood, thereby providing a much better yield and utilization of the trees off our license. While there is no one answer, we continue to move forward on a number of initiatives in this area.

A final key objective is to consistently deliver cost savings to help offset the increases in prices that we are seeing. In the second quarter, these programs were able to deliver $3 million in savings, enough to offset roughly 50% of the impact of the pricing increases for raw material and energies. Year-to-date, our teams have delivered over $7 million in saving. Improvements have come in many areas and throughout the business segment. Examples include material usage reductions from an improved bleaching process at Terrace Bay, a new die edition (ph) system in fine papers and labor efficiencies and productivity improvements in many areas. The importance of delivering these savings is being reinforced throughout the organization in order to ensure we continue to build upon our success.

Looking ahead to the second half of the year, I would like to remind everyone that we have scheduled annual maintenance downs in the third and fourth quarters of this year. Our paper mills take their downs during the third quarter and this year, we will be taking a slightly extended down in Unicene (ph) to install a new headbox to improve our technical paper manufacturing capability. The pulp mill downs are scheduled in the third and fourth quarters for Terrace Bay and Pictou, respectively. Timing of the paper and pulp downs in 2005 is consistent with when they occurred last year.

The pulp mill downs together have historically reduced Neenah Paper's profits by about 15 to $20 million per year due to the major maintenance spending and the impact of lower production in the quarters in which they occur. Pictou generally represented about one-third of this with the remainder being the larger Terrace Bay mill. This year Terrace Bay, the planned September maintenance down, has been reduced from two weeks to four days. This will significantly reduce the cost of the planned down. However because of that the current shortage of wood in the region, we now expect and have announced that we will keep the Terrace Bay mill down for an additional two weeks after the four-day maintenance down to allow wood inventory levels at the mill to increase. During this two-week period, both hourly and salaried employees will be temporarily laid off or taking their allocated vacation time in order to control the cost of this extended down.

I'm sure many of you have heard and read about the shortfall in wood availability in Ontario. The recent announcements of a 20% reduction in harvesting in Quebec have received most of the press but is no less severe than Ontario. This has been exacerbated by the recent fires and heat conditions in Ontario which have resulted in curtailed harvesting operations and other local forest products companies taking downtime. Following our down in September, we expect the impact of the recent fires and reduced sawmill production to have subsided and wood flows to begin to improve. We do not expect any problems in meeting customer orders during this period and the financial impact of the current down schedule is expected to be less than the historical cost of these downs due to the minimized maintenance downtime and spending at Terrace Bay.

Before concluding the comments, I would like to mention the status of our labor negotiations. We had contracts up for renewal at most locations this year and we are currently in talks with our Neenah, Whiting and Muni (indiscernible) mills and Terrace Bay woodlands will commence later this year. Since the last earnings call, we have successfully reached agreement on a new contract at our Pictou pulp mill. As is typical in that part of Canada, many of the economic terms of followed pattern bargaining agreement at other firms. However, we were able to jointly agree on language that gives us additional flexibility with the maintenance trades. This is an important element of this mill, is to remain competitive.

So in summary, I'd like to reiterate that while we are establishing our corporate infrastructure, we remain focused on executing the initiatives that we feel will drive shareholder value both this year and in the long run. These were, as mentioned, developing sustainable growth programs in each of our paper businesses, creating value from the pulp business and delivering ongoing cost saving. We continue to be proud of what our teams are accomplishing and look forward to talking to you as the year progresses about more of their accomplishments. We would like to thank you for your interest in many cases continued investment in Neenah Paper. I would now like to open up the call for questions please.

(Operator Instructions) Chip Dillon, Smith Barney.

Good morning. I apologize if I asked something that's very something that's very obvious. My Internet connection is down where I am. When you look at the volume, you mentioned in the tech papers business, I did not quite get that -- did you say your volume was up 3% year-to-year in tech papers?

Yes, for the quarter.

Okay, but the mix of course was down. When you look at the $3 million drop from last year's second quarter, how much of that would you say is -- I think you mentioned maybe 1 million of that was -- 1.5 million -- I guess half of that was the latex problem. But would the other half be -- how much of that would have been mix, and how much of that would have been energy and other things?

About 1 million of that is mix related and the balance is really energy and corporate overhead allocations to it.

And as you look at the third quarter, I would guess if you're getting 2 or so million a year from the surcharge, that won't offset all of it since that's like a $6 million annual rate, but a third of it, maybe one half of it?

Closer to half and the numbers are laid out Chip in front of all of the teams and they are looking for other opportunities to cover them. That's our job and so I would expect that you're going to see an acceleration in the cost savings program.

And then I guess the fine papers volume, that was up 1% you said?

Yes.

And then when you look at the pulp mill down time, you mentioned that -- let's say in the past, it would have cost you 10 to $50 million. It looks like the maintenance piece of that is probably maybe half that now, given some of the changes you have made. And then we need to tack on what we think the impact of this two-weeks down is. Is that a fair way of looking at it?

Yes. We are not breaking out all of those numbers as part of the call, Chip, but essentially what you're saying makes a lot of sense. We've done a thorough analysis of the costs of the extended down, that extra two weeks. We are minimizing down by going on a layoff approach and encouraging wherever possible employees to take vacation rather than the layoff. And so the cost of the downtime is going to be considerably less than the savings we would expect to realize by reducing the maintenance portion of the typical down that is at in total, between the two mills, I think Bonnie said was 15 to 20, but the Terrace Bay is roughly two-thirds of that. SO your number's pretty close.

So forget the two weeks for letting the wood build back up. You're talking about half that 15 to 20 or less would have been incurred. And what we need to do is make a guess as to what on top of that half let's call it will be brought back in because you're taking the two weeks down.

Fair enough.

It won't be much because of what you said you are taking these steps to get people to take vacations and all of that, right?

Yes. The key of the whole this is really while we will be aggressively building our wood inventory during that period, we need to get into a position where we have a 20-day supply of wood in the yard, chips in the yard so that we are not dependent on not having a rainstorm, not having this or that. We have gone as much as the industry has, has gone for many months where it is kind of hand to mouth as far as wood supply. We need to build up a little inventory and this is a difficult decision, but it is the right thing to do.

Gotcha. And when you look at the -- you mentioned the CapEx being cut back and your team is now looking at the next step by Terrace Bay with these wood cost initiatives. When do you think you will be at a point when either you will have to make these expenditures or shut the mills down, I guess? In other words, is there a time period that you have to make certain capital spending decisions or where you have to implement them or can you kind of keep this dragging on (multiple speakers)?

Good question. The things that we are delaying, Chip, are the process improvements and programs that were developed last year to really improve the competitive position of the mill. We are continuing obviously if it's maintenance, anything to do with environmental or safety, for instance, we are replacing the last round of old transformers this year. We are continuing with those programs. What we're not going to do is make significant investments in the process to improve it until we know that we have, one, an assured source of wood and wood that would allow the mill to be competitive. We don't think it would be prudent to make these significant process improvement investments and when the dust settles, still be left with an uncompetitive operation.

Thank you.

Mark Weintraub, Buckingham Research.

Good morning. Sean, just wanted to understand the decision to delay the effluent treatment at Pictou. I certainly understand all of the Terrace Bay.

Good question. When you think of the Pictou project which we have said was about a $16 million project, there's really three parties involved in that. We have our portion, which is the $16 million. The federal government and Canada and the provincial government have aspects that they have to deal with. And our program was set and ready to go, they are still developing and actually looking at some changes to the aspects of -- in the area that they have to deal with. And we are not going to proceed with our spending obviously until the whole program is ready. And so our current thought is, rather than we initially had I believe $5 million of the 16 in for this year, the current guess is that -- best guess on our part -- is that we will spend about 10 of it next year and 6 in 2007. The risk is that it would get pushed out further, not that it will be accelerated.

Understood. And then you gave us some historical estimates on the downside costs for pulp. I assume in the paper business that those are a much smaller number. Could you give us a sense of what those were?

It is typically a fraction of that, because especially at both of our fine paper mills, I think as most of you are aware, we're currently operating those on five-day schedules. So we don't have to have significant maintenance spending during the down period. So you will see a little bit of a volume dip, but most of that is corresponding to the weakest time in the market within the printing industry. The technical paper business, the month of August is typically their weakest of the year historically and that is when they take their down. We have built some inventory to cover the extension of the down. We will the down probably another week as we install a new headbox and wet end (ph) system on the No. 2 paper machine. But the business and planning groups have laid out and it's built into all their forecasts and models and they know what they need to do in the quarter.

Lastly, Sean, you mentioned several of the programs which you are pursuing to improve performance and increase value. One area where I don't know if you are prepared to give us some inkling on your thoughts at this point which did not get any comment was the Nova Scotia timberlands and where you are in your thoughts about potentially monetizing some of those assets.

Good question. We are currently evaluating those. There is multiple approaches that we can use that we have evaluated and we are evaluating, monetizing all or a portion of it and looking at the impact, the remaining impact on the operation and trying to develop an approach that will deliver the best value, both short-term and long-term, for our shareholders.

Is there any sense you can give us of the EBITDA power of the timberlands or anything that can help us try to evaluate what valuations might be feasible?

I wish I could help you with it, but I can't. What a can tell you is we are focused on trying to find the answer as quickly as we can.

Okay, thank you Sean.

Joe Stivaletti, Goldman, Sachs.

I was just wondering, you talked about, which I thought was a great approach, on the pulp mills to not look to invest significant money there until you have some commitments on fiber and what not. Do you have any rough feel for when you might be able to make a decision on that kind of thing in terms of whether to move forward with major capital spending or not?

Yes. It's I (ph) view of the things that we are working on. It's right now one of the highest priorities that I have and I know that the organization has, because as we started out on this last year, we knew that one of the areas that had the best opportunity to, one, create value for our shareholders and, two, if we are not careful hurt shareholder value is the performance of the Terrace Bay mill. So we are not showing a lot of patience in trying to find answers there. The team up there has been challenged. They're doing a good job. They are thinking differently. They are being very aggressive and we are looking at lots of different alternatives. And I cannot give you a specific date we will have this done in 60, 90, 120 days, but we are meeting weekly to drive progress up there and we expect to complete things in an orderly but very quick fashion. The move to shut the No. 1 mill was done quickly. The team successfully completed it. And while that was going on as I believe done mentioned in her comments, they did not wait around. They moved onto the next area and they are tackling these things with a lot of passion and aggression.

Alright. Good luck with that. I just had a couple of little questions. One is, it is very hopeful that you have outlined the additional sort of corporate expense that you have incurred as a result of being a stand-alone company. I was wondering what your thoughts were on those, if you were thinking that they are in line with your expectations to or how that had been. Because obviously, trying to estimate what it would cost to be a stand-alone company was -- took a lot of estimating. So I was wondering how you have done there and what you think about it going forward?

Bonnie, you answer it with some of the details and I will give you an editorial comment.

Joe, I think the easiest way to kind of keep track, it's not completely clean but it's still I think it's easiest with the information that we disclosed us if you just go to the SG&A line and you see after the first quarter, we were up 3.6 million on more cost in that line than what we had in the prior year. And then we're close to $4 million worse than last year so far. So that's kind of getting -- if you just annualize it, that is a run rate of about $16 million. So I would say, we are pretty much in line with what we have communicated to you. It may be a little bit higher than what we had previously communicated. It's not based on what we've seen to date, but our expectation is that perhaps our SOX costs and our auditing costs are going to be higher than what we could have anticipated prior to the spin. So we will keep you informed of what we know when we know it.

The scenario where, as Bonnie said, with the exception of really the some of the SOX work and we're into the testing phase now and some of the initial audit work with D&T (ph) when they were just getting going with us as a new public company. Some of those costs were a bit higher, but it's an area that we are looking at every month. One of the approaches that we have tried to implement here, being a much smaller company than Kimberly-Clark and it seems to be working, is that we're asking people who wear multiple hats in the Company. And rather than building up a corporate staff, we are trying to keep things as small as possible and are asking people in operations and in some cases customer service and sales to wear multiple hats where a person may be in charge of one of our operating assets and at the same time, is running a safety program for the Corporation or someone else may be in charge of employee development while they deal with local HR issues. So I think it's the right approach for us to try to keep it as small as possible. Some things we cannot avoid, like the SOX and the auditing cost, but where we can, we're not going to spend the money.

One final, one number I was wondering about. Pension contributions in the first half were 8.6 million and I was wondering what the corresponding amount was that you expensed for pension?

Year-to-date, we have expensed 6.2.

Thanks a lot.

(Operator Instructions) Richard O'Reilly, Standard & Poor's.

Your pulp business if my math is right (indiscernible) can you compare it with the first quarter because the sales went down four or five million and the profits -- and the loss went down even more. If you could just break that down tell us because it came down, it performed better than I would have expected.

I think Bonnie has the actual quarter-on-quarter numbers. It did perform better. However, I think in the comments, you did not hear us pounding our chest that it's better than by $6 million quarter-on-quarter because it is still lost some money. Granted, it wasn't nearly as large, but we're focused on creating value in the pulp business and we are proud that it destroyed a little less value this quarter than it destroyed last. So we are pleased. The operations did improve in the quarter, especially at Pictou mills. Pictou mill had record performance in the quarter, but overall this segment still did not create value for the shareholders.

Second question then, again on the corporate expense line, I think your guidance early in the year was 14 million. So I just wanted to make sure that 16 million run rate, that compares with what you thought was a 14 million number. Is that how I should be thinking?

Yes, because our guidance at 14 million really was an ongoing number, and we had said that 2005 and even 2006 could be higher for one time sort of things. That 16 does kind of compare to the 14.

Okay, fine. And how can I correspond that 7.9 million number to where on the income statement?

That's going to be in two different places on the income statement. So 6.7 of it is going to be in SG&A, and then the remainder of it is primarily going to be in cost of goods sold.

Okay, good. Okay, thank you then.

At this time, there are no further question. I will now turn the call over to Sean Erwin for closing remarks.

Thank you. In summary, let me up kind of where we began. We are very focused on achieving growth in the paper business and in spite of challenges both in the market and in running, especially in technical paper, a mill that is operating with backlogs, we are achieving against that objective. We remain very focused on the pulp businesses and are very active in developing and implementing the right answers to create value from those businesses. And we will intensify our efforts in cost savings the second half of the year to be able to mitigate any of the cost increases that we're seeing, especially those related to oil-related both products like latex and energy costs. And with that, I would like to thank you for your interest in Neenah Paper and we look forward to updating you at the end of this quarter.

Thank you for participating in today's Neenah Paper second quarter 2005 earnings conference call. You may now disconnect.