Neptune Insurance Holdings Inc (NP) 2006 Q1 法說會逐字稿

Good morning. My name is Patricia, and I will be your conference operator today. At this time I would like to welcome everyone to the Neenah Paper first-quarter 2006 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 session (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 the 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 security 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 if that were to happen, a reconciliation of these measures to what management believes are the most directly comparable GAAP measures would be posted on the Company's website at www.Neenah.com. I would now like to turn the conference over to Mr. Bill McCarthy, Vice President of financial analysis and Investor Relations. Please go ahead, sir.

Thank you, and good morning. With me this morning are Sean Erwin, our Chief Executive Officer and Bonnie Lind, our Chief Financial Officer. I'll briefly summarize consolidated results for the quarter, and then Bonnie will review the performance of each of our business segments in more detail. Both Sean and Bonnie will then discuss our recent strategic announcements on the sale of part of our timberlands in Nova Scotia and the transfer of Terrace Bay operations. We will then open the call up to questions.

Earnings were released late yesterday afternoon. Consolidated net sales were $165 million in the first quarter compared to $197 million in the first quarter of 2005. Most of the change was due to a $30 million decline in pulp sales, principally due to lower volumes at Terrace Bay following the May 2005 closure of the No. 1 mill and the strike related suspension of remaining operations earlier this year.

Operating income was $6 million for the quarter and compared with $9 million in 2005 the latter which included a $4 million charge for the No. 1 mill shutdown. Reasons for the decline in operating income in 2006 included a much stronger Canadian dollar, higher costs for energy and raw materials and lower technical products results. 2006 also includes two new charges, first the adoption of FAS 123(R) which requires expensing of stock based compensation. And second, amortization of our investment in Oracle ERP system which started up in January. These two items, although non cash, resulted in additional expense of $2 million in the quarter.

Net income for the quarter was approximately $1 million or $0.06 per diluted common share. Earnings in 2005 were $0.18 per share including a $0.19 per share charge related to the No. 1 mill closure. I would like to now turn things over to Bonnie.

Thanks, Bill. I will review the results in each of our business segments and then comment on hedging, liquidity and some thoughts on 2006. John and I will wrap up with comments on the recent announcements covering the pending timberlands sale and transfer of Terrace Bay operations. Net sales in Fine Paper for the first quarter were $58 million, slightly above the same period of 2005 as higher selling prices and improved mix offset a 3% decline in volumes. While the total uncoated freesheet market showed modest growth in the first quarter, certain segments of this market, including text and cover, were still down.

About half of our Fine Paper business is in text and cover, including certain large annual report orders that shipped last year that did not repeat in 2006. Because these larger orders carried lower prices, our sales mix did improve over last year. During the quarter we introduced a revision to one of our flagship brands, CLASSIC COLUMNS, that is helping to create an increased presence for our brands with graphic designers. We also developed and recently began commercializing a new product for the retail channel. This represents an additional opportunity for distribution of our Fine Papers and supports our objectives to grow this segment.

Operating income for the Fine Paper business in the first quarter was $16 million, and this compared with $17 million in 2005. 2006 results reflected higher costs for energy and raw materials, as well as the impact of lower sales and manufacturing volumes. Hardwood pulp prices increased almost 10% versus the first quarter of 2005 and natural gas prices increased more than 20%, which would have been even higher if not for savings from our Minergy steam purchases. Benefits of higher selling prices and improved mix helped to offset some of these cost increases.

Turning to technical products, first-quarter net sales were $33 million, down from prior year sales of almost $36 million. Sales were affected by lower volumes with the majority of this shortfall in our tape business. In mid 2005 we gave up certain tape business due to pricing that had become unacceptable. This business has since been renegotiated with better pricing, and sales for these new products are beginning this quarter. Partly offsetting the volume impact were higher selling prices following increases implemented in 2005 and January 2006. During the quarter we continued to introduce new or improved higher value products in our decorative components, heat transfer synthetic label lines and look for these to contribute going forward.

Operating income for text products was $2 million in the first quarter compared to almost $5 million in the same period of 2005. Both the decline in sales and associated manufacturing inefficiencies related to lower volumes, contributed to these results. Costs for latex and energy were also significantly above prior year levels, although our selling price increases were largely able to offset these impacts.

Before turning to pulp I would like to point out that the first quarter in 2005 was exceptionally strong for our paper businesses, and comparisons versus this period reflect that. While we expected better paper performance in the first quarter of this year, results were nonetheless fairly consistent with the prior three quarters which tended to reflect the impacts of higher energy and material costs.

The pulp operations net sales were $79 million for the quarter versus $109 million last year. The principal reason for the decline was Terrace Bay where shipments were 40% below prior year. With the mill remaining down we expect Terrace Bay shipments in the second quarter will be about half the level of the first quarter and finished goods inventory will be depleted by the end of June.

In terms of market pricing, Northern bleached softwood kraft pulp averaged a little over $660 per metric ton for the quarter, slightly below the prior year quarter. However, softwood prices have increased rapidly in recent months and are now over $700 per metric ton. I would like to remind you however, that Neenah Paper has over 12,000 tons per month hedged at a price of $630 per metric ton.

Operating losses in our pulp business were $8 million for the quarter versus the prior year loss of $11 million, which included $4 million for No. 1 mill closure costs. Including this charge losses widened slightly in 2006 as a result of the stronger Canadian dollar, increased cost of energy and materials and higher costs at Pictou due to unexpected downtime. These factors were partly offset by spending reductions at Terrace Bay, net hedging gains of $2 million and approximately $3 million of Ontario Government reimbursement for 2005 forestry activities at Terrace Bay. In the first quarter of 2006 the Canadian dollar strengthened to an average of $0.87. This compared with $0.82 in the first quarter of 2005. Excluding results of hedging, the changing currency lowered our profits in the first quarter by almost $5 million.

Next I would like to cover a couple corporate items. Selling, general and administrative expenses were $16 million and compared to $13 million in the first quarter of 2005. Overall spending expectations for 2006 are generally in line with what we had previously communicated, although full year amounts for expensing stock based compensation and amortizing our ERP investment is now expected to be $6 million instead of the $5 million we previously communicated. With almost $2 million recognized in the first quarter. The balance of the increase in SG&A was due to timing of expenses for our annual report proxy, which went out earlier this year than last year and lesser changes in spending for R&D and a few other items.

Turning to our hedging program, during the first quarter we recognized gains of $3 million from currency hedges and a loss of $1 million on pulp hedges. In the first quarter we hedged $72 million Canadian. For the second quarter we have about $55 million Canadian hedged. And in each of the third and the fourth quarters the level is approximately $25 million. Hedge rates for all period are between $0.81 and $0.83.

As of March 31 the fair value of currency hedges was reflected as an asset on our balance sheet of $6 million. Pulp hedges totaled $37,000 in the first quarter at a price of $631 per metric ton. Hedging positions for the rest of the year are between 12 to 13,000 tons a month, and they are at a similar price. As of March 31 the fair value of outstanding pulp hedges was reflected as a liability on our balance sheet of $5 million.

Let me next cover cash flows and liquidity. In the first quarter cash from operations was $16 million and capital spending was $3 million. In addition to ongoing cash flows generated by our paper segment, first-quarter results benefited from a $10 million reduction in working capital at Terrace Bay following the suspension of operations. Our cash balance increased from $13 million at year end to $23 million at the end of March, and we again did not draw against our revolving credit facility during the quarter and continue to have ample liquidity in borrowing availability.

I would like to finish with some brief comments looking forward. The Canadian dollar has recently been trading at over $0.90 with Terrace Bay currently not operating each $0.01 change in the Canadian dollar now impacts pretax profits by approximately $2 to $3 million per year before factoring in gains or losses on currency hedges. As I mentioned, pulp prices are rising while northern bleached softwood kraft prices in the second quarter may average around $700 per metric ton. This gain will be partly offset by additional losses on our pulp hedges.

In the second quarter about half of our expected shipments will be hedged. Spending at Terrace Bay will continue to reflect reduced levels which declined even further in April after heating requirements subsided and we curtailed boiler operations. Cash from operations in the second quarter will also benefit from further reductions in Terrace Bay working capital, and we will make an $8 million semiannual interest payment on our bonds this month. As a result of the ongoing down at Terrace Bay and other updates in planned spending capital expenditures are now expected to be approximately $25 million in 2006. A majority of the spending will occur in the third quarter when we take our annual downs at our paper mills that have picked up. The revised estimate includes $8 million for the second final phase of our ERP implementation in the U.S. and assumes that spending for Pictou environmental items occur in 2007 or later.

I would like now to turn things over to Sean to discuss our recent strategic announcements.

Thank you, Bonnie. Neenah Paper has made a significant amount of progress since our last call in executing certain of our strategic initiatives. The recent announcements represent the outcome of a lot of work and effort by our employees, and I would like to thank them for their efforts. These are the folks that are making things happen. First, I would like to cover the sale of our timberlands in Nova Scotia to Wagner Forest Products. After completing our internal analysis and assessing current market conditions, we strongly believe that it is in our shareholders best interest to sell the major portion of the timberlands at this time. Because of the high demand for these kinds of assets, current valuations are attractive. The sale price of $280 per acre represents a very positive result, and the proceeds can provide an important means to help us invest in our future as a company.

It is also important that the sale agreement include a fiber supply agreements. This agreement has an initial five-year term with a subsequent five-year renewal period, and is based on market pricing. Our team at Pictou has been very involved in the evaluation and bidding process, a strategic challenge they faced was what changes are needed -- the mill will meet the financial objectives of the company with a smaller land base. I am pleased to say the team has taken up the challenge and has already begun to take steps to ensure that the mill remains competitive. As part of this they have changed local reporting practices to reflect 100% of there wood cost at market so they can better measure and manage the value they created in the pulp mill separate from the value of the woodlands operation in assets. I will let Bonnie discuss in more detail some of the financial impacts of this transaction.

As you have read in the press release, the sales value of this transaction is $140 million. After subtracting cash taxes, transaction costs, we expect to realize net proceeds of cash proceeds of $120 million upon closing. At the time of the spinoff the tax basis of the woodlands was stepped up to consequently, as you can see, this will be a very tax efficient transaction for us. Based on the low book value of the woodlands on our balance sheet we expect an after-tax gain of approximately $80 million assuming a 38% tax rate. Timing of gain recognition is currently under evaluation, although we do expect that a portion of the gain will be deferred. The sale will result in a higher fiber cost for the Pictou mill has a result of now purchasing a portion of the mills wood at market prices. However, in the process of evaluating and preparing for this transaction the team there has identified a number of areas where we can improve our operations, both at the mill and in the woodlands to help offset the higher costs for purchased wood.

Our intent is to use the proceeds to invest in opportunities that provide growth and attractive financial returns. The investments could take the form of acquisitions or reinvestment in existing businesses. We believe there are attractive options available, and we have already initiated a disciplined approach to identifying and screening potential acquisition candidates.

Thank you, Bonnie. I would next like to discuss the arrangement we recently entered into with Buchanan Forest Products for the transfer of our Terrace Bay operations. Buchanan Forest Products has been successfully managing sawmills and other forest products operations in northern Ontario for many years. They have supplied woodchips to Terrace Bay from their sawmills, and their operations are a natural fit with Terrace Bay. The resolution of the lumber tariff dispute between Canada and the U.S. also contributed to our ability to reach this agreement. The proposed transaction with Buchanan is clearly the best alternative and represents a win for all parties. But if this transfer to Buchanan cannot be successfully concluded, our Board has authorized the Company to proceed with the closure of the mill. However, we would much prefer to use some of these funds in a more productive manner.

By way of background, in 2005 at an $0.83 Canadian dollar, Terrace Bay generated operating losses of over $30 million excluding impairment charges and had negative cash flows of $40 million. So you know additional information on Terrace Bay results for '05 is contained in our 10-Q, which is being released later today. In 2006 with escalating costs and a Canadian dollar now at $0.90, the amount of losses was expected to be even larger. We were not willing to sustain these losses indefinitely, and the strike in the woodlands and resulting closure of the mills reinforced our efforts to resolve this situation.

General terms of the transaction are at that Buchanan will assume all assets and liabilities of the operations, including the pension plan, employee contract and other employee items. Neenah Paper will retain direct working capital consisting largely of finished goods inventories, accounts receivable and accounts payables. At the end of March the amount of this working capital was close to $30 million U.S. Neenah Paper will pay Buchanan an amount to help make the operation successful and fund any existing liabilities deemed necessary. While we are not disclosing the amount of the payment at this time, we do expect the depletion of working capital from Terrace Bay that will occur in the first half of the year, to be an important source of cash to fund the payment.

This transaction makes all the sense in the world to me and is a huge win for our employees, shareholders, customers and the local communities that would have been impacted by the shutdown. Buchanan contains access and efficiencies from additional woodlands in a reasonably scaled pulp mill operation that fits with his existing businesses. In addition to the impact on employees and their communities and the onetime cost associated with the closure, Neenah Paper would have had ongoing liabilities and cash costs associated with continuing to own a facility in future years. The transaction avoids all these issues. Closing will be dependent on certain items, including the Canadian government's approval to transfer the forest license, arrangements with Kimberly-Clark related to the pulp supply agreement and negotiations with the mill and woodlands employees to help support the cost competitiveness of the mill. I am very optimistic on the ability of all parties to work together to make this happen and communications with our employees, customers and the government are already underway. In fact, in a meeting I had with Ontario's Minister of Natural Resources earlier this week, he was extremely supportive of this transaction. We are targeting to complete the transfer by the end of June.

We are extremely pleased with the progress we have made toward our strategic objective of transforming Neenah Paper into a leading premium Fine Paper and technical products company. A lot of time and effort has gone into getting to where we are right now, and we look forward to completing these transactions and being able to focus more on our core paper businesses. In summary, we are tracking with our strategy and doing exactly the kind of things we told you that we would do in order to deliver value to our shareholders. So I would like to thank you for your interest and continued investment in Neenah Paper, and we look forward to sharing more with you as our story continues to unfold. I would like to now open up the call for any questions that you may have.

(OPERATOR INSTRUCTIONS) Mark Weintraub, Buckingham Research.

Good morning, and congratulations, Sean on the progress on your strategic initiative. I guess still lots of questions, though, I'm trying to figure out. A lot of numbers start out and just trying to put them together. On the Terrace Bay, I notice you are very careful with your wording and you indicated I believe --.

Thank you for noticing.

There had been a $10 million working capital reduction in the first quarter. I know you said there is another $30 million or so of working capital currently. Did you indicate what you expected to take out in the second quarter?

We are continuing to ship pulp from Terrace Bay, and actually pulp in the local warehouse -- I think it was last Tuesday morning, was depleted. So the pulp is in outside warehouses in Canada and the U.S., and we are continuing to sell Terrace Bay pulp. Those shipments should continue through June, and we will then collect proceeds from those sales. So we will continue to have working capital reductions through the second quarter.

Yes, I would say that most of that, the $30 million would be in the second quarter except for the accounts receivables have 45 day terms, so that will leak into the third quarter.

Okay, and then you said that you expected the working capital reduction from the first half of the year, which I guess is close to the $40 million, to be an important source of funding for Buchanan. I would interpret that it is not complete but it is significant. Is that a correct way to interpret it?

I tell you what, Mark, I look forward to early July when this is completed and we can release all of the details of it. We signed a letter of intent. I think I can't go into any more detail other than what we have. I know you are going to have to draw some of your own assumptions on this, and let me restate that I believe that this is in the best interest of all parties, including our shareholders versus the alternatives. And look forward to being able to show you in more detail why I believe that.

And are you able to tell us the alternative what the cash out of pocket would have been, do you to have to close it, or is that something you want to wait on?

I would announce that hopefully we never have to disclose that number, but I reviewed it in detail with the Board of Directors at our meeting, and I have the approval to do it. It's a short-term payment, severance related exiting certain contracts. And then some continued payments in terms of pension plan funding, OPEB's and then ongoing costs while we continue to own the site. So I think you will be pleased when we do disclose the details of this.

And on Pictou you indicated that there would be higher fiber costs, and you hoped to offset that with certain measures you are putting in place. Can you give us a sense of what the EBITDA or the EBIT or the 500,000 acres that are being sold, what is the opportunity cost, so to speak?

Bonnie, why don't you address that please?

Mark, we are in the process of developing plans to offset the expected higher cost of wood. But at this point we don't want to share specifics until that plan is really developed.

Okay, and can you help us -- is there a marked difference between the properties that you're holding onto and the properties that you sold? And is it a viable alternative at a later date to sell additional properties at Nova Scotia?

Two questions there. Let me deal with the first one on is there a difference between the properties. Surveys were done of the entire holdings. The land that we are retaining is -- there is good proximity to certain sawmills where we will continue to have our own relationships. So from a logistics standpoint it made sense. From a longer-term standpoint on Pictou we have no plans at this time for any further transactions. Obviously our businesses need to deliver on the financial objectives that we've set for them. And I expect that Pictou will continue to meet those objectives.

Okay, I'll circle back and let others ask some questions in the meantime.

Joe Stivaletti, Goldman Sachs.

A few questions. Some of mine were along those same line, but so the timberlands, so this is basically you've sold what you're looking to sell in the short-term. Can you give us -- does your view, though, after going through that process that the remaining half-million acres are similar in nature in terms of value to the one you just sold, or are they better or worse on average?

Well if you were just going to say hypothetically what they were worth, they are probably similar in value. But as I said, we have no plans to sell further timberlands or the mill at this point.

Right, right. And in terms of that the Pictou mill, are you -- I guess the way I was interpreting your remarks is basically that you have taken a difficult step with Terrace Bay that you think is the right thing to do, which sounds good to us. But in terms of Pictou you're making changes, and you are hopeful you will be able to get that mill to be profitable. What do you -- how do you -- what is the timeframe I guess is what I am trying to understand, and when do you think that mill will be -- do you think that mill will be EBITDA positive this year with the Canadian dollar where it is?

The Pictou mill in its history as I think I have said in other calls, has been a positive contributor to results in all cycles. We haven't publicly commented on Pictou's profitability other than to say it will remain a competitive facility. It will be very interesting, I believe, by the end of this quarter with Terrace Bay being reclassified as a discontinued operations, our performance at Pictou and our success in delivering value even with a smaller land base is going to be very transparent because it will be a segment really on its own.

Okay, and then on the technical papers you talked about this reduction in volume, your press release talked about timing, and then on the call you talked about sort of losing some customers for price and then getting some new business back. I guess the bottom line is I am trying to understand when volumes will be back up to levels of '05. Is that something we should see in the second quarter?

We're holding the team in tech paper accountable to deliver results and I believe when we review it on ongoing basis my expectations are that they will. The piece of business you are referring to was some tape business that we have had for a period of time that the customer or customers in this case received some offers from competitors last year, that we chose not to match because it would not have created value. We would have lost money on it. We gave up the business. And we have regained that business at prices that we find acceptable and will deliver results and shipments have already begun this quarter.

Okay, and next question was on the SG&A. You made a comment about how it was a little bit higher. You made reference to a full year sort of expectation, but I didn't know if you've publicly stated that number. I mean what would be a good number to be for us to be using on the SG&A line?

We never stated what our projection would be for SG&A on an absolute number. What we were referring to then is that remember pre-spin on -- even when we were spinning off we said we expected that our ongoing costs would be about $14 million higher. That is what we were talking about. Those where cash costs. So this SG&A that we saw in the first quarter was pretty much consistent with where we expected that it would be. Our comments on stock option amortization was that it was higher than what we had previously given you because we had said stock options and ERP amortization would be $5 million a year higher. Because we didn't have any in the prior year, and now we're saying it will be $6 million.

When you say the 15.9 of SG&A in the first quarter is consistent with your expectations, does that mean that is consistent with where it should be on an ongoing basis?

I would say that is a reasonable assumption, although there could be variations in our quarter due to the timing of expenses being recognized.

And just the last question I had now that you have indicated that once you get the proceeds from selling the timberlands you want to look at options or you are looking at options to grow your paper business. Can you talk at all about the types of -- I mean what is sort of the highest on your priority list in that space? Is it Fine Paper, is technical papers, what kind of how your sort of looking at that?

Let me address that. We have already developed some fairly rigid approaches to how we will assess acquisitions. We know what our strengths are in these businesses, and we know where we believe we can succeed. It is in the paper industry today as you know there are not a lot of companies earning above their cost to capital. So it is highly likely the candidates that we would look at would be situations where there would be significant synergies involved and by synergies I mean the hard synergies that are things that you know you can execute as compared to a soft synergy where you said it will lead to a higher growth rate in the market. So you will see that we will take a pretty disciplined approach to this. And we have identified some firms, but we're just beginning this process.

Okay. Thanks a lot.

[David Kim], [Post Advisory]

Good morning. I was wondering if you could help me out with some of the (technical difficulty) I think for Canadian dollar I heard 2 to $3 million for every $0.01 change. You have any sensitivity or updated sensitivity for NBSK pulp?

Right now the market on Northern softwood pulp is tightening. We are looking at pricing right now; as you know the market is in a state of flux right now. May will be in the 700 to 710 range with folks forecasting 730 by June. When you look forward with us, Pictou view is a 260,000 ton a year facility. So you can calculate the sensitivities based on that.

Do you have (indiscernible) for natural gas at all?

We're having a real hard time hearing you.

If you turn your volume up I would appreciate it. The Pictou mill now in general natural gas at the Pictou mill; the Pictou mill and the Munising mill both have generators at the mill turbines where they generate quite a bit of their power. Our natural gas exposure is primarily in our paper mills in Wisconsin. And as we've highlighted in past calls, we've entered into a relationship with a subsidiary of Wisconsin Energy called Minergy where we are now buying steam from them and have shut down some of our boilers. Our cost in the first quarter went up, I believe it was 20%. Our gas prices. So we were able to minimize the percent of the increase due to this new approach. The longer-term, there is some risk to that. The firm that we are buying the steam from has lost some business with the announced closure of Gladfelter's mill and Neenah. And they are reevaluating their approach, but we hope that this remains a viable operation because we benefit from it.

Just to confirm the hedges for Canadian dollar, was it $55 million in Q2 and 25 million for Q3 and Q4?

It was 55,000 in Q2 and about 25,000 for Q3 and Q4 -- 25 million rather.

And then the pulp hedges you said was 12 to 13,000 tons per month?

Per month.

For Q2 to Q4?

Yes, they are the same.

At 631 -- and what was the hedged price for the Canadian dollar hedges?

It is between $0.81 and $0.83 depending on which period.

Okay, and then finally I know this question has sort of been asked but I wanted to see if you could maybe give us some more clarity on in terms of Q1 I noticed the pulp EBIT was about negative $8 million. If we could say that Terrace Bay went away would it be safe to say that your pulp EBIT would be somewhat breakeven or somewhat positive?

I think as I said during the call that if you look at our Q this afternoon there are some Terrace Bay results for 2005. And you will be able to see Terrace Bay in '06 and Pictou really separated by the end of this quarter when we start reporting discontinued operations. You know Pictou is a competitive mill, but it is also an environment with a $0.90 Canadian dollar. And yes, you will know a lot more by the end of this quarter.

Thank you.

(OPERATOR INSTRUCTIONS) Frank Dunau, Adage Capital.

I just have a few questions. On a $3 million Ontario government payment for forestry, is that an ongoing thing or was that onetime thing or how should I think about that?

That is a onetime deal.

And on Pictou, is there any -- are there any minimum takes you have to take on that timber, and are there any minimum shipments that they have to make or how does that work?

We will be taking -- its a stumpage contract, and the quantities as stated in the agreements. Obviously there will be some normal forest reserves involved in it, but we don't really see any major risks with this agreement in our ability to fulfill our obligations.

And you sold 500,000 of your million acres and with the supply agreement, if you -- how much do you actually need the full million acres to seed Pictou, or I am just trying to figure out.

If you use sustainable forestry practices, which we do and which is included in the agreement with Wagner, we consume on an annual basis at Pictou fiber from the equivalent of about one million acres.

And just one last question on Pictou, you said you're going to make up the difference in whatever the higher procurement costs are in lowering costs some other way. Could you have lowered these costs without doing this agreement, or are they independent?

I think these costs would have -- should have been lowered anyway, but it gives us an impetus to do it. Having 100% of your wood needs met from company-owned lands and reporting wood cost at cost for the last 30 to 40 years can lead you to believe that you are much more competitive in your process then you may otherwise be and this gives us an incentive to improve even at a faster pace.

One question on the Terrace Bay. You said you needed KC's approval. Is that just an approval based upon transfer of ownership, or is there some terms within the contract, pulp supply contract itself that need to be changed for this to go forward?

We are in discussions with them. It is a pulp supply agreement to Kimberly-Clark that includes two mills, Terrace Bay and Pictou. And obviously with changes at Terrace Bay this will impact aspects of the agreement, and those discussions are already underway and Terrace Bay makes a very, very fine preferred pulp. And we think it can be resolved.

And is there anything magical about June first?

(multiple speakers) to get it done. I mean if we were going to make -- take other actions, it is appropriate that if this is an alternative, we need to know pretty quickly if this alternative is going to be successful. If not, we need to move on.

Thanks. That's all the questions I got.

Chip Dillon, Citigroup.

Good morning, it is actually Tim in place of Chip. I had a question on I believe you mentioned in Fine Paper that you were thinking about commercializing some of your paper into the retail channel. I was wondering if you could elaborate a bit more on that in terms of what potential opportunity? And also if you think there is at risk there that perhaps you lose some of the premium status on your other brands as you open this up to a wider channel.

As we looked at growth opportunities in Fine Paper we have always focused, and a vast majority of all shipments have been through our limited network of Fine Paper merchants. And that really is the only channel that we actively competed in with over the last 10 to 15 years, with the growth in small business and the change in the distribution of paper. The role of the retail channel including some of the big boxes has changed significantly. And if you look in those stores there is a premium segment that they do distribute. And it would be evaluating that and as Bonnie mentioned in her comments, we will begin selling into that channel this quarter. We view it as a attractive area of growth. The value of our brands are very important to us, and we would continue to support those brands. And I don't see us lowering the value of our position by selling through that channel.

Okay, and on the corporate expense, Bonnie, does all the stock option expense, is it run through there or is it expensed at all through the other segments?

It all runs through there.

So we should expect that, call it $4 million a quarter. Is that about right, or was there anything else onetime-ish in the first quarter?

$4 million a quarter for what?

For the corporate.

$4 million a quarter for stock options -- not for stock options because it --

No, no. I think your corporate expense is $4 million I believe, right. The first quarter -- is that a good number to use for the remainder of the year?

No, I think I am still confused at whether you're talking the stock options and the amortized ERP or if you're talking about corporate expense in total.

No, just in total.

Well, we don't guide on that. I think I have already answered the question that said in general when you look at SG&A we're pretty comfortable that depending on the timing of payments that is a fairly reasonable level.

Fair enough. And did you say there you took some unexpected downtime at Pictou in the first quarter this year, or was that in the first quarter of last year?

That was this year.

And do you know was that maintenance related?

It was recovery boiler related, and the team up there, as you may know with a recovery boiler you do not take risks. They took it down. They did the repair. It came back up. And I was very pleased to see the response from the team in Pictou not on this situation but they quickly then said okay, what changes do we have to make the rest of the year to make up this production, and they responded very proactively. But it did hit the first quarter.

Good luck in the second quarter.

Mark Weintraub, Buckingham Research.

Just following up on the last question, so roughly was the hit from the Pictou unscheduled maintenance?

What was it? I don't think we disclosed the amount. It was about $1.5 million.

Okay, and is there much in the way of seasonality in the Fine Papers and technical businesses second quarter versus first quarter?

Not as much second quarter. You tend to see more of a little dip in the third quarter, which is why if you're going to take the paper mills down for maintenance you do it in the third quarter. We carry finished goods inventory in Fine Paper, so you can take the small rolling downs. Technical paper we tend to take it by weeks in the summer months. And it corresponds to a lot of our customers in Europe, especially for abrasive papers. It tends to be the weakest quarter as you really saw with our results in technical paper, third quarter of last year.

And then lastly your cap spending indications came down some for '06. Now '07, do you have any preliminary view on what that is going to be? Is it going back up to the more like that 35, $40 million range or do you think that you actually are going to be able to come in lower in '07 as well?

To a certain extent it may depend on when we do the environmental project at Pictou for the wastewater treatment. That is really the big unknown, and yet next year we will be done with the second phase of our ERP, which is I think Bonnie highlighted, about $8 million but we won't have that. So even if we picked up some environment -- the wastewater treatment at Pictou, it won't be a full increase because of other reductions. So hopefully we won't jump back up to the 40 level. We have -- I haven't reviewed the '07 projects in detail yet, and as the year moves along we will give you a better feel as to the longer-term outlook.

Okay.

We have been a little busy in the last few weeks around here.

Understood. Congratulations again.

At this time there are no further questions. Are there any closing remarks?

Just very briefly once again I would like to thank you for your time and the questions. They were good ones. As predicted, 2006 has already turned out to be a productive and we think very active year for Neenah Paper. We expect to continue with the actions in support of the strategic priorities we reviewed with you in the past, which include transitioning Neenah Paper from a pulp and paper company into a company with a portfolio highly oriented to premium paper and technical products, to delivering top and bottom line growth in our core paper businesses. And three, providing our shareholders with attractive returns. And I look forward to communicating our progress against these and as the year progressives, and we have further calls. Thank you.

Thank you for participating in today's conference call. You may now disconnect.