Neptune Insurance Holdings Inc (NP) 2006 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Neenah Paper second-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 forward-looking statements, as they are 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 regulation. As required by those regulations, if that were to happen, a reconciliation of these measures to what management believes are the most currently comparable GAAP measures will be posted on the Company's website at www.neenah.com.

I would now like to turn the conference over to Bill McCarthy, Vice President of Financial Analysis and Investor Relations. Please go ahead, sir.

Thank you. With me this morning are Sean Erwin, our Chief Executive Officer, and Bonnie Lind, our Chief Financial Officer. I'll briefly recap consolidated results for the quarter, and then turn things over to Sean and Bonnie to discuss in detail the performance of our business segments and progress against our strategic objectives. Once again, we have a lot to talk about in the latter area, with closing of the timberlands sale, a definitive agreement to transfer our Terrace Bay pulp mill to Buchanan and the announced acquisition of FiberMark's German operations.

Earnings were released late yesterday afternoon, and you may have noted Terrace Bay results are now classified separately as discontinued operations, and consequently excluded from continuing operations including segment information. In the second quarter, losses from discontinued operations were $0.74 per diluted share, compared to a loss of $0.16 per share in the second quarter of 2005. Our consolidated balance sheet and cash flow includes Terrace Bay results, with the balance sheet reflecting a net liability of $18 million, equal to the planned payment to Buchanan, in the categories related to discontinued operations. Bonnie and Sean will cover details of Terrace Bay results and the pending transfer later in the call.

Net sales from continuing operations were $143 million in the second quarter, an increase of 10% versus 2005, primarily due to higher pulp sales out of Pictou.

Operating income was $139 million, including a gain of $123 million from the timberland sale. Excluding this, operating income was $16 million, compared with $18 million in the second quarter of 2005.

Net income for the quarter was approximately $73 million or $4.94 per diluted share. Excluding gains of $5.11 per share for the timberlands sale and losses from discontinued operations in both years, earnings were $0.57 per share in the second quarter and $0.62 per share in 2005.

I'd like now to turn things over to Bonnie.

Good morning, everyone. Today, I'll review each of our business segments, and then comment on corporate and other items, including our liquidity position.

Let's first review segment results. Net sales in Fine Paper for the second quarter were $57 million, a second consecutive quarter of year-on-year growth. Current-year figures continue to benefit from higher selling prices. In the second quarter, this was partly offset by a less favorable mix, while volumes were relatively flat versus the prior year.

One of the causes of the less favorable mix was that our new Eames line wine was launched in the second quarter of last year, and we shipped a significant amount, including pipeline fill orders. While this has been a very successful new brand for us, quarter two of last year was an unusual period for comparison purposes.

Operating income for Fine Paper in the second quarter was about $16 million, slightly below 2005, but in line with what we earned in the first quarter this year. 2006 results reflect higher costs for energy and raw materials in a less favorable mix, partly offset by higher selling prices.

Hardwood pulp prices have continued to escalate, and are now up $50 per ton or 8% versus December. To help counteract this, we implemented a price increase of $3 per hundredweight at the end of June on our branded text and cover grades, which represent somewhat less than half of our total volume.

Turning to Technical Products, second-quarter net sales were just under $34 million, down slightly from prior year but up from sales of $33 million in the first quarter. Versus last year, quarterly sales reflected a less favorable mix, as we continue to rebuild our heat transfer business and have lower volumes of other higher-margin specialty grades. Overall, volume was down 2%. We did see a recovery of our tape business, which we talked about last quarter, and this business was up 6% year on year for the quarter. In addition, we've made progress with key customers on an improved heat transfer products for which sales will begin in the third quarter.

Operating income for Technical Products was $3 million in the quarter, the highest level since the second quarter of last year, and up significantly from $2 million in the first quarter. Versus last year, profits reflected higher energy and materials costs, as well as a less favorable mix. Latex costs have been fairly stable this year, but are still up year on year, as is softwood pulp and other major raw materials. However, our selling price increases have been able to offset a good portion of these impacts.

Overall, we feel our paper businesses, particularly Technical Products, have started to gain traction despite the year-on-year impact of higher energy and material cost. These comparisons should be more favorable in the second half, as much of the run-up in these costs occurred in the first half of last year.

As a reminder, we will be taking our paper mills in both segments down for annual maintenance work in the third quarter, similar to last year, and this will result in lower production volumes and higher spending levels in the quarter. The Pictou down is currently planned for the fourth quarter.

Let me next cover pulp. With Terrace Bay now classified as discontinued operations, pulp segment results are comprised primarily of the Pictou mill, [gains on] losses on hedging transactions and allocated corporate expenses. Net sales were $52 million for the quarter versus $39 million last year. Volumes increased 40%, due both to unusually low levels in 2005, due to timing of customer deliveries and higher shipments this year, in part due to record quarterly production at Pictou. Shipments for the quarter were over 76,000 metric tons. Net sales dollars include slightly lower sales of timber and byproducts from Pictou, and were also reduced by losses on pulp hedges.

[Georgia's] software pulp market prices averaged about $720 per metric ton for the quarter, and were up significantly versus both $660 in the first quarter of this year and $650 in the second quarter of last year. Keep in mind our prices to Kimberly-Clark reflect the one-month lag, and because prices rose rapidly in the quarter, our average price in the current quarter was about $15 per metric ton lower than market. While overall higher pulp prices benefit Neenah Paper, the impacts are somewhat offset in 2006, due to our pulp hedges. In addition, while exact numbers have not been disclosed, our agreement with KC does have ceiling and floor price levels, and if prices continue to escalate, this ceiling would come into play.

Operating income for our pulp business was $123 million for the quarter, including a $122 million gain on the timberlands sales. Including this, the segment generated a profitable of less than $1 million versus a profit last year of just over $1 million. Hedging transactions generated gains of $1 million in 2006 versus roughly breakeven in 2005, with increased gains on currency hedges offsetting increased losses on pulp hedges. I'll cover this more in a second. Other reasons for the change in profits were a stronger Canadian dollar and increased costs for energy and materials. These were partly offset by manufacturing efficiencies at Pictou and higher selling prices.

Turning to our hedging program, during the second quarter, we recognized gains in continuing operations of $2 million from currency hedges and losses of $1 million on pulp hedges. In 2005, both currency and pulp hedges were around breakeven for the quarter.

Without Terrace Bay, our exposure to the Canadian dollar is reduced, and is now approximately Canadian $50 million per quarter, and every $0.01 change impacts pretax quarterly earnings by roughly $0.5 million, excluding hedging. In the second quarter, the Canadian dollar averaged $0.89 versus $0.81 in the second quarter of 2005. During the quarter, we had hedged $55 million Canadian at a rate of around $0.83. As of June 30th, we have approximately $50 million of hedges in place for the remainder of the year, at a rate of around $0.81. Fair value of these hedges was reflected as an asset on our balance sheet of $8 million, with $4.5 million attributed to hedges that will expire in 2006 and the remainder for hedges expiring in 2007.

Pulp hedges totaled slightly over 30,000 tons in the second quarter, at a price of $632 per ton. For the remainder of the year, we have 12,000 tons per month hedged at a price of $631 per ton. As of June 30th, the fair value of these outstanding pulp hedges was reflected as a liability on our balance sheet of $8 million. With the transfer of Terrace Bay, we no longer expect to require pulp hedges, and have no plans to add to our position.

Before leaving pulp, let me comment briefly on Terrace Bay and on accounting for the timberlands sale. Terrace Bay sales were $13 million or 24,000 metric tons in the quarter. All remaining inventories of about 4,700 tons shipped in July. Operating losses for the quarter were $18 million, and compared to loss of $4 million in 2005. 2006 included charges of $6 million for severance payments and an accrual of $6 million for anticipated losses on the transfer of the mill to Buchanan. The latter charge reflect the $18 million payment to Buchanan, less $12 million of net liabilities that will transfer at closing.

Neenah Paper has continued to pay close attention to controlling cash flows, and year-to-date Terrace Bay operational spending has been minimized while working capital has been brought down by almost $30 million. As of June 30th, there was approximately $5 million to $10 million of additional working capital the belongs to Neenah Paper under terms of the agreement with Buchanan. Sean and I will cover details of the transaction later in this call.

Turning to the timberlands sale, I'd like to point out that the accounting for the gain on the sale has not been finalized. There is currently a question about whether terms of our fiber supply agreement contract constitute continuing involvement with the land sold. We believe our interpretation and accounting to be correct, but since there is a question, we have submitted a request to the Office of the Chief Accountant at the SEC for an evaluation of our methodology.

In June, we recognized a pretax gain of $123 million as a result of our determination that the gain recognition qualifies for the full accrual method under FAS 66. We also deferred remaining gains of $9 million based on our estimates of the value of certain non-market provisions in the fiber supply agreement, and expect to amortize that $9 million over the four and a half year life of the agreement. If our accounting interpretation of gain recognition is incorrect, it could require some or all of the gains booked in June to be deferred until the fiber supply contract expires. In either case, the accounting has no impact on the related cash flows.

Now, let's look at a couple of corporate items. Quarterly selling, general and administrative expenses were $12 million, and compared to $13 million in the second quarter of 2005 and $15 million in the first quarter of this year. The reductions were largely due to reclassification of legal and other costs to discontinued operations, and the timing of other expenses.

Taking a look at cash flows and liquidity, we ended the quarter with $179 million of cash, including the proceeds from the timberlands sales. We have invested our cash temporarily in a variety of short-term investments. Most of these are yielding around 5%, 5.25%. Excluding monetization proceeds, cash from operations was a very solid $28 million. Second-quarter results benefited from over $[50] million reduction in working capital at Terrace Bay, but also included our semi-annual bond interest payment of $8 million. Capital spending was $6 million in the quarter and $10 million year to date. We are still comfortable that we will not exceed $25 million for the year, including about $8 for the second phase of our ERP project.

Pension cash contributions, notwithstanding any additional fundings that will occur related to the Terrace Bay transfer, are expected to be in line with last year's levels. However, due to a lower discount rate used in calculating expense for pension and OPEB benefits, we are recognizing almost $3 million of higher expense this year. Our discount rates for the current year are based on the December rate of the prior year. We will have funding requirements for the Terrace Bay pension plan of $11 million in the third quarter, and an additional $7 million when the plan is settled and approved by Canadian regulatory agencies.

I'd like now to turn things over to you, Sean.

Thank you, Bonnie. Neenah Paper has made significant progress in a short time, executing against many of our strategic initiatives. We discussed some of these on our last call, and continue to have a lot to talk about.

So let me repeat what I said last time. These announcements represent the outcome of a lot of work and effort by our employees, and I'd like to thank them for their efforts. These are the folks that continue to make things happen here.

We have previously communicated three broad strategic objectives for Neenah Paper. First, we said we would transform ourselves from the pulp and paper company we were at spinoff into a company focused on premium Fine Papers and Technical Products. Second, we needed to re-energize these businesses for growth, and get them away from the harvest mode they have been in in recent years. And third, as a consequence of the first two objectives and additional actions we take, we said we would deliver attractive returns to our investors.

Let me comment on each of these objectives, if I could. One of the cornerstones in transforming Terrace Bay was to address the situation at Terrace Bay, which represented a large part of our company and was a substantial drain on financial and other resources, due to its high cost of wood and energy. As the Canadian dollar strengthened, taking action became even more urgent. After a number of efforts in various areas, we reached a preliminary agreement with Buchanan Forest Products in May to transfer Terrace Bay to them, subject to completion of various items including Canadian government approvals, financing, arrangements with Kimberly-Clark on the pulp supply agreement and negotiations with mill and woodlands employees. With the exceptions of the woodlands employees, all of the other items have now been resolved, and late last week, we signed a definitive agreement to transfer the mill to Buchanan. We expect to close the transaction this month.

The transaction remains consistent with what we previously shared with you. Buchanan will assume certain assets and liabilities of the operations, employee contracts and related items, and will be liable for future liabilities, while Neenah Paper will retain finished inventories, accounts receivable and certain short-term liabilities, and make a cash payment to Buchanan at the transfer. We did decide to retain pension obligations and certain other employee liabilities, in exchange for a reduced cash payment and that coincident with the transfer, we would fully fund and then settle the pension plan ourselves. The cash payment to Buchanan will be $18 million, and funding requirements for the pension plan, another $18 million, substantially less than the December 2005 liability. We have also taken actions to minimize other expenses and cash needs as a result of this transaction, and expect this to be very cash-efficient, with the depletion of working capital from Terrace Bay this year essentially paying for all of the onetime costs.

We continue to believe that this is a win for all parties -- Neenah Paper shareholders, Terrace Bay employees and their communities and Buchanan Forest Products. The agreement gives the mill a chance to operate successfully, and cash requirements are substantially less than would have been required if we had proceeded to close the mill.

A second cornerstone of transforming our company was to increase our presence in Fine Paper and Technical Products. We indicated acquisitions were one of the ways we expected this could happen. To support this and take advantage of currently attractive market valuations for timberlands, we moved forward with plans to sell half of our Nova Scotia timberlands. We announced the specifics of the sale of 500,000 acres in early May, and the team worked hard to get the deal closed by the end of June. Proceeds are now available for us to invest in our future, and as you may recall, this sale was very tax-efficient for us, with an effective effective cash rate of around 15%. We also negotiated a limited-term fiber supply agreement to give the mill security over wood supply, and our team at Pictou is identifying ways to minimize and offset the higher costs we expect to result following the sale.

This year, we also initiated a disciplined process for screening and evaluating potential acquisition candidates. Interestingly enough, FiberMark's German operations had been high on our target list, and the recent decision of FiberMark and Silver Point Capital to sell these businesses occurred at an opportune time for us. Consequently, I'm pleased to announce we signed a definitive agreement to purchase FiberMark's German subsidiaries for $218 million. We feel the price represents a good value to us, allowing us to deliver returns on our investment above our cost of capital.

In 2005, these businesses had sales of approximately $221 million and EBIT of $29 million, with depreciation of $7 million. FiberMark's German operations have a long history of success, with strong positions in many markets, good returns and a track record of growth. Some products such as tape and abrasive backings are in the same or similar markets we're in today. However, FiberMark has also invested in processes and technologies we don't have, and they have established an important presence in other markets, such as automotive cabin air filter media, a business that has grown rapidly and provides attractive returns. With the inclined wire paper machines and nonwovens and coating capabilities, their assets bring a wider range of technologies to us. Since over one-third of our Technical Products business is sold outside North America today and this continues to grow, having a global footprint and larger international sales presence will nicely match up with the locations of our customers and markets.

From a financing standpoint, cash on hand and available debt capacity will be able to meet the needs for both this transaction and the Terrace Bay transfer. However, we are in the process of evaluating various capital structure alternatives, to make sure we optimize the situation. The cash flows this transaction brings, combined with the elimination of Terrace Bay's cash losses, improves our ongoing liquidity position and should allow us to enhance our credit profile going forward. Very simply, we're replacing a unit that lost $30 million last year with one that made $30 million.

Strategically, this transaction brings scale to Technical Products, and a portfolio of technologies and products that we can leverage to continue to upgrade the product mix. We do not expect any significant restructuring or integration costs, and are excited about the opportunities to create value for our shareholders and customers by joining these two businesses. We're targeting to close the transaction early in the fourth quarter, and look forward to updating your further on our next call.

Obviously, these strategic items have taken a significant amount of time and resources. But at the same time, we've kept our focus on our core paper businesses. We continue to support our brands, and in the last quarter introduced a revision to CLASSIC COLUMNS, helping to create an increased presence and more choices for our brands with graphic designers. We have also continued to move forward with retail sales, and while not a significant driver of volumes this year, presence in this channel now represents an additional opportunity for growth.

We have an active pipeline of new products and Technical Products as well. In the second quarter, advances were made in several heat transfer products, furniture backing materials, label encoding bases for decorative components. We expect many of these innovations to be commercialized in the third and fourth quarters this year. We continue to invest in resources to improve our capabilities to serve our customers, and added capabilities from the new German operations will allow us to move ahead even further.

In general, we continue to look for ways to drive changes by doing things differently as a new company. One recent example of how we're doing this is a new incentive program in our Fine Paper mills that allows employees to benefit if they deliver targeted levels of productivity improvements and cost savings. This is a program based on continuous year-over-year improvement, and pays for itself multiple times over.

A third objective we had is to provide our investors with attractive returns. Our core paper businesses have deliver returns on capital that other companies are not even close to being able to provide. Our biggest challenge has been in pulp, and now, without Terrace Bay, our consolidated returns on capital will improve, and we will continue to focus on this metric as a key measure for our decisions.

So in summary, we're extremely pleased with the progress we've made and continue to make sure our objective of transforming Neenah Paper into a leading premium Fine Paper and Technical Products company. We are doing the things we said we would to deliver value to our investors, and doing them quickly and hopefully in a manner that exceeds your expectations. We recognize that we still have a lot to do, but we are well on our way to emerging as a different and stronger company. I would like to thank you for your interest and continued investment in Neenah Paper. We look forward to sharing more with you as our story continues to unfold, and I'd now like to open the call up to questions if I could.

(OPERATOR INSTRUCTIONS). Joe Stivaletti, Goldman Sachs.

I just wanted to ask a few follow-ups on these big announcements. On Terrace Bay, looking from July 1 forward, I just want to make sure that we understand what the right number is for cash that's going to go out the door. I looks like the $18 million plus the $18 million -- is that all the cash that's going out the door? Will there be any offsetting -- it sounded like there might be another $5 million or $10 million of working capital you're going to get in to offset that.

I think, big picture, essentially that is exactly correctly.

What we will have is we will have the $18 million payment to Buchanan, and we'll also have an $11 million contribution to our pension plans that we expect to make early in the third quarter.

Right. And then another -- what's the timing on the other $7 million?

The balance of that will be early next year.

So the balance on the other $7 million for the pension?

Yes.

It will be whenever the Canadian pension authorities wind up the plan, which could be up to 18 months.

Okay. Then, is it correct to then offset the $5 million or $10 million of additional working capital against that -- that's saying you're going to get another $5 million to $10 million of working capital from Terrace Bay over the --?

Yes, and as Bonnie mentioned, we really finished the finished goods shipments last month. So for the most part, this is just the collection of outstanding receivables.

Is there any particular big tax savings from this, making these payments on pension and the payment to Buchanan?

It's your typical tax savings. There's nothing about that structure that makes it particularly tax-effective.

Then, it seemed like your cash balance -- from what we see in the press release, your cash balance was a bit higher than I would have expected as of June 30. Have you paid the taxes that are due relating to the sale of the timberlands yet? It looked like that was going to be about $20 million.

Yes, I expect it to be about $20 million, and we have not paid them.

Then, in terms of the new -- the German operations, are you -- do you see a lot of synergies and cross-selling opportunities, with those businesses -- combining those with your existing businesses, or are they just separate and too far away from each other?

We do see very good opportunities. As we've mentioned in the past, the customer base for Technical Products is really global, with over a third of our business currently being outside of North America and with some of the growth, obviously, coming in some of the global markets. So there is some current overlap between the businesses. But we see synergies, both in that part of it and also good growth opportunities in those areas that don't overlap.

The final question I had was you obviously stated earlier in the call that you're transforming yourself to a specialty paper business, I believe. What can you tell us about your current thinking on the remaining timberlands you hold and the Pictou pulp mill, in terms of your -- is that for sale? How should we be thinking about that? Because obviously, there's a lot of value there, particularly in the timberlands.

We currently have no stated plan to sell the Pictou mill. We've stated on past calls that we evaluated at this point in time what the strategy should be, in terms of monetizing a portion of the woodlands. But as we've mentioned in the past, we will continue to develop our strategic plan and evaluate alternatives that either come available or we develop.

Would you envision, though, if something were to happen in terms of a divestiture, that you would keep those two assets together, as opposed to selling the mills separate from the timberlands or vice versa?

I really can't answer that. It all depends on strategic opportunities.

Chip Dillon, Citigroup.

For a brief period here, one could question why you would even talk to a high-yield analyst, but that might change, I guess, with the acquisition. Serious note, it looks like --

We'll always talk to you. You know that.

Well I do equity, so as long as you're not bankrupt, you and I will be talking.

When you look at the balance sheet, it looks like you're only up $48 million in net debt, and just to kind of follow up, if we add like $23 million for taxes and the acquisition costs, your net debt will be up close to $280 million or so. Therefore, you'll have like about a -- I mean over a 50% debt-to-cap ratio. As you look at your capital structure, is that something that you feel is about right, or do you have plans to then start to reduce debt once again?

We plan to use a lot of our cash to finance our acquisition of the FiberMark Germany businesses.

As we've evaluated it, the cash flow generation from our existing core paper businesses is extremely strong, and we would expect that to continue. Especially in our fine paper business, there aren't currently extensive capital needs.

So we believe we have an extremely healthy cash flow. We, as I mentioned in the comments, will continue to evaluate the appropriate capital structure going forward, but we're very comfortable with where we think will be after these transactions, removing Terrace Bay from the mix. Also, very candidly, we removed the significant cash drain that we've had in the past, and with projections for the business, we would expect to continue. So we feel pretty good about where we're at.

So, if your question was after they (indiscernible) you are projecting that we're going to be at about that 50 payment net debt-to-cap? Was that your question?

Yes, or a little bit higher, just to start out with. I didn't know if there was sort of a target range that you might practice going forward. So let's say in two years -- just because of what Sean just said, if you get below a certain targeted level, then you might feel at some point you might want to buy back stock or bump the dividend. But is there -- not that we would hold you to it, but is there sort of a targeted debt-to-cap ratio you look at, or do you ignore that and look at those coverage ratios?

We look at both. I think I've publicly said in the past that I would like to see our debt-to-cap come down over time.

Hello?

Can you hear me?

Did we lose you?

Whether we lost Chip or not, I would say we are looking at over time gradually improving our debt-to-cap ratio. That would be our answer.

Frank Dunau, Adage Capital.

I might just follow up I think where Chip may have been going on the other end. If you're comfortable, why are you evaluating the capital structure? Sometimes those are code words for issuing equity. I'm just trying to figure out if that is one of the evaluations.

No, not at all. We're a company that's going through, I think as we've just described in the call, significant change. The profile of the Company, both in terms of the businesses as well as our ability to generate significantly improved cash flows, is changing. We're a pretty new company. As we look forward, it's appropriate to look at all alternatives. We do have any code words in there for anything.

And we don't have any current plans issue equity.

The press release said that the acquisition had $29 million of EBIT last year, or operating income.

Right.

Can you tell us whether this year, the operating income, at least for the first half of the year, is up, down, or flat with a year ago?

No, not at this time. We're not going to make any of that public. We are obviously looking at current period results, and wanted to proceed on a transaction, but we can't disclose anything.

I'm just trying to figure out for modeling purposes going forward what type of number I should be putting in there.

On the transfer, and you're retaining other liabilities other than the pension. Is there an estimate for what the annual costs of those other liabilities are [that you're going to retain]?

It's our objective actually to minimize that amount, since we're no longer operating in Canada, which is, like Bonnie had mentioned, the action that we're taking on the pension plan. We're taking similar actions on certain other OPEBs. So the remaining costs after that are very limited in terms of materiality for the business.

Can you give us an estimate of how much it costs to get out from underneath the other liabilities? Or [is it like] a onetime payment or something? What those are?

As Bonnie mentioned on the call, that the total drawdown of the receivables or the working capital is going to cover most of the costs. We're evaluating what are the appropriate actions to take with the few remaining liabilities that we would have -- for instance, long-term disability payments. We're continuing with that responsibility, but as I had mentioned, I don't believe it will be material to our overall financial performance.

Chip Dillon, Citigroup.

I do have a follow-up. I lost you there -- can you hear me now?

You're a little shaky, but we hear you.

I had a couple quick questions. First, on the corporate and other expense, that fell to $2.6 million and perhaps reflects some of the changes in your relationship with Kimberly. Is that a good number to use going forward -- like $2.5 million per quarter?

Are you referring to that 2006 is about $2.5 million higher than 2005 year to date?

No. I believe in the second quarter --

You're looking at unallocated corporate costs.

Right.

Okay, can you ask that question again, then?

Is that a good going-forward run rate to use per quarter -- $2.5 million?

No, I would say that you'd be better off if you'd look at the year-to-date $6.6 million and use that more as a run rate.

Why was that low this particular quarter, then?

That had to do with timing and then the reclass of certain costs over to discontinued operations for Terrace Bay.

Then, on a separate note, you mentioned pulp prices, how they're moving up, and I thought you said something about a ceiling price regarding the Kimberly contract. Can you just tell us sort of how high pulp has to go before that would become an issue for you?

Yes, it's not a publicly disclosed number in our contract. There was both a -- for a period of time. It doesn't go throughout the life of the contract, but there is a floor and a ceiling in it. As Bonnie I believe said in her comments, that if the run-up in pulp prices continues, we would expect to hit it, but we haven't hit it yet.

Mark Weintraub, Buckingham Research.

First, on the German acquisition -- I apologize. I missed some of the first part of the call. Did you give an EBITDA number as well?

What we said was they had depreciation of $7 million a year.

(Multiple speakers).

What are capital needs for that business?

It's like our business, in that the sustaining capital in the paper part of it isn't dramatic. They do have growth opportunities in some very attractive businesses that we look forward to jointly evaluating with their management team, and comparing that to other alternatives we have.

Does the business buy much in the way of pulp, in curiosity?

Yes. Candidly, it's one of the synergies we think that we should be able to realize, comparing their delivered price and discount rates to other opportunities that are available in the marketplace. Trust may, it's one thing we know very well. So there should be some synergies there.

Can you give us a sense of order of magnitude, how much that business purchases? As I'm thinking about it, (multiple speakers).

Actually, Mark, the interesting part about the business is as compared to our Technical Products business, with the capabilities, the technologies they have, they use many more synthetic fibers than we do in the inclined wire paper machines, as well as, as I mentioned, they do have nonwoven capabilities. So in some ways, they are marrying together the capabilities that we have on paper with synthetic materials, so pulp isn't a major driver in that business. It will be some of the other specialty materials.

So is it your hope to be able to bring over some of that technology into your U.S. operations? Or are they different in ways that would not make that practical?

Yes and yes. I think both are correct. Before this job, I ran Kimberly's nonwovens businesses. Our Head of R&D who joined the team was the Director of Nonwoven R&D for Kimberly-Clark, and we do see opportunities to marry nonwoven technology with specialty paper. I think it's one of the reasons that we are excited with the FiberMark opportunity. They're ahead of the curve on that.

One more question on the German business, and then just one other follow-up. Is there any significant seasonality in that business that we should be aware of as we model things quarterly?

No more or less, than what you see in our businesses. In general, I think as you know very well, tends to slow down a little bit in the middle of the summer, just as our businesses do. So we would -- in our due diligence, we didn't see any unusual patterns.

Bonnie, just wanted to come back. You had mentioned typical tax savings related to the $18 million and $18 million -- the $36 million. How -- what would you expect order of magnitude to be getting back in cash terms from those outlays?

I don't understand your question.

Well, you'll be paying out $18 million in the onetime payment. I don't know there's going to be any tax implications from that, in terms of that cash outlay having an impact on cash taxes you might get back. Perhaps it doesn't. Then, likewise, on the pension, the $11 million and the $7 million, would you -- would that be deductible for cash tax purposes?

Yes, both of them will be deductible.

So is it order of magnitude $12 million or something that you would expect to be getting back from the combination $15 million?

I think that's safe order of magnitude.

Then, lastly, you guys have been tremendously effective and busy in getting your priorities accomplished. Can you give us a sense as to where your thinking is as to where the next round of priority is? Are you going to be digesting what you've done for a while? How should we be thinking about your mindset at this point?

I expect us to execute. That's where the value is driven. We will execute. We described in the past some of our plans to transform the Company. We're well down the path. We're not where we would expect to be. If alternatives or opportunities come along, we will obviously evaluate them. But I think we also want to make sure that we can execute, that we don't put so many things on our plate that we can't get them done well and drive value. Very candidly, last quarter was a pretty good test. We had some people that we worked pretty hard, and I appreciate their efforts.

Well, congratulations on moving forward.

Larry Clark, TCW.

Yes, a couple of questions. Can you give us an idea the impact to EBITDA going forward or earnings going forward? You sold this timberland. You're going to have higher costs. Obviously, the first half of this year, you had lower costs as a result of owning the timberland. I want to get an idea so we can do some modeling impact.

We haven't disclosed that publicly in the past. We have indicated that the cost would be higher. I think when we first rolled out the strategic opportunity, we had said that the team at the Pictou mill is evaluating what capital and non-capital programs they have to implement to get the cost back to at least -- if not where they were, to where they're still delivering returns that are acceptable to the Company. They're in the middle of that process now. As a matter of fact, there's a team beginning tomorrow morning that's evaluating the entire business plan as to the next upset there.

I can appreciate that, but you're not going to realize those costs immediately, and the assets left the balance sheet, so we want --

The opportunity, as we described upfront here, is with the valuations that were placed on timberlands and the tax efficiency of that transaction, that the risk that we would take in the short run or in the interim period, higher operating costs at Pictou, is more than offset by the opportunities that we think are available to increase value to shareholders by reallocating those proceeds into higher profitable businesses.

No, I understand that. But as a bondholder, I'd like to know whether we're looking at $10 million initially annualized or $5 million or $15 million. But I guess you don't want to disclose that.

Well, we will --

I think what we've said in the past is that if you look at the cost of the transaction and assume that timberlands typically go for anywhere from 12 to 18 times EBITDA, you can back into a number.

All right. Sounds good. In the FiberMark business in Germany, it looks like their CapEx in 2005 for the first nine months was about $5.5 million. So is it safe to say that we're looking at about $7 million annualized CapEx out of that for 2005 for those guys?

Yes, as I mentioned earlier in the call, we're working on our integration plan and 100-day plan with the team, and evaluating what their capital programs are. It may be more, it may be less, depending on the opportunities. We will have our integration plan and 100-day plan done at the time of closing. As I mentioned in the comments, we'll be prepared on the next call to give you a lot more detail on it.

Good. Finally, on the trueing up the pension obligation in Canada, ultimately $18 million, you had underfunded pensions at the end of 2005 corporatewide of $75 million. What impact -- what would that do to that $75 million number? Do we just reduce it by $18 million, or how should we look at the impact of these payments on your underfunded pension plan?

You really can't look at it that way, because the discount rate so far this year has gone up pretty significantly versus where they were at the end of last year. So if we were to revalue that liability at today's discount rate, it would be below $75 million.

But looking at last year, Terrace Bay represented -- our Ontario pension plans represented a significant portion of the underfunding.

So moving away from a change in discount rates, the impact is going to be greater than $18 million, it sounds like.

Yes.

(OPERATOR INSTRUCTIONS). Robert Howard, Prospector Partners.

With this FiberMark deal, it looks like that's sort of where you're using your cash from the timberlands sale and asset sale. It seems like a lot of your dry powder maybe is gone, and I was wondering where you're looking at, in terms of potential for doing further types of M&A things, or maybe what your absorption ability is and what are your thoughts there?

As I mentioned during the call, we do believe that we still have flexibility. We'll continue to evaluate opportunities that meet their criteria that we've established, which primary one is we want to make sure that it will earn above our cost of capital, so that we deliver value to our shareholders, which is what our job is.

So you don't say okay, we've got a couple months here where we are going to be just trying to absorb this new business. You'll still be on the lookout. If something comes up next month, you would be willing to jump on it, say?

Well, never say never. We've been -- we're pretty busy right now, but obviously, just like I said in the call, the FiberMark opportunity came up in the middle of everything else and because it was on the list, we felt we had to take a look at it. Keep in mind, with FiberMark, when that's completed, there's significant cash flow coming out of this business also. So from a cash and a flexibility standpoint, we should be in pretty good shape.

Back to Chip's point, if you're looking at that 55% or so debt-to-cap, you would have debt capacity.

Okay. When do you sort of feel that this acquisition is going to be -- how long do you think it's going to -- I know you said that there wouldn't be much in the way of costs, but just in terms of timing and getting everything worked together, when do you sort of see them being fully integrated in with you guys?

We mentioned closing early in the fourth quarter, and I'll be there Monday, and we will have the integration plan and we'll begin working on it. They have a -- their stand-alone existing business and with, we believe, a very strong management team. So I think this can happen fairly quickly. As we had mentioned, there is not significant restructuring anticipated.

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

I'd like to thank you again for your time and questions. As usual, they were very good ones. 2006 has proved to be a very active year, I think as you can see, for Neenah Paper, with a lot of change in progress as we move forward on some of the key strategic priorities. You may be tired of hearing them, but let me repeat them one more time. It is our objective to transition from a pulp and paper company into a company with a portfolio highly oriented to premium paper and technical products. We expect to deliver top and bottom-line growth in our core paper businesses, and we expect to provide you our investors with attractive returns. We look forward to communicating with you as we make progress against these objectives. So thank you very much for listening in on the call.

Thank you. This concludes today's Neenah Paper second-quarter 2006 earnings conference call. You may now disconnect.