Neptune Insurance Holdings Inc (NP) 2006 Q3 法說會逐字稿

Good morning, my name is Vanessa and I will be your conference operator today. At this time I would like to welcome everyone to the Neenah Paper third quarter earnings conference call. (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 believes 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 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 other 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 the SEC regulations. As required by those regulations, if they 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.

Thank you. I would now like to turn the call over to Mr. Bill McCarthy. 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 will 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 objectives.

As a reminder to Terrace Bay results are classified separately as discontinued operations and are excluded from earnings and segment information in all periods. The consolidated balance sheet and cash flows, however, will reflect the impact of Terrace Bay.

Net sales from continuing operations were $141 million in the third quarter, an increase of 11% versus 2005, with higher volumes and higher prices in all three segments. Operating income was $11 million in the quarter compared with $15 million in the third quarter of 2005. Each of our paper segments and our Pictou pulp mill had better results this quarter, however, consolidated profits were lower due to hedging and currency effects in our pulp operations.

Net income for the quarter was approximately $5 million, or $0.31 per diluted common share. This compared with $7 million, or $0.47 per share, in 2005. I would like now to turn things over to Sean.

Good morning. Before discussing business results from each of our segments, let me comment briefly on our safety objectives, as we have in the past. The performance of our mills and teams in terms of safety continues to be amazing, and is something we are very proud of. The past quarter was a very safe one in Neenah Paper. During it our Neenah mill past two years without a single reportable injury. During the call you will hear us talk about the transformation of Neenah Paper. I continue to believe it all starts with safety and the pride that it generated, which carries over into all the other aspects of how we operate as a business.

Now turning to our business results, in Fine Paper net sales in the quarter of $54 million increased 4% versus the prior year. This marked the third consecutive quarter of year-on-year growth. The improvement was driven by a solid volume increase of 3%, as well as higher selling prices, which on average are up about 3% this year for our branded products. As reflected in the results, the Fine Paper business continues to play to its strength and is focused on sales of profitable premium branded product.

In the third quarter we launched our Neenah Green environmental platform, which includes both FSC certified and processed chlorine free product, as well as other environmentally friendly programs that are leading the way in the premium paper industry. We are also now the largest purchaser of renewable green energy in the state of Wisconsin. These products and programs have been enthusiastically received in the market and reinforce our current position as the leader in this area.

Operating income for Fine Paper was approximately $13 million in the quarter, an increase of 4% versus the prior year. The growth in profits resulted primarily from increased volumes and selling prices, which offset higher prices for pulp, labor and other raw material. Operating income for the quarter also benefited from savings from our Ring the Bell cost program and lower selling and administrative expenses. Similar to last year, we took planned downtime at both our Fine Paper mills in the quarter. And we also have talked about (indiscernible) in our Technical Products (indiscernible).

Turning to Technical Products, third quarter net sales were $34 million, up 17% from the prior year. The higher sales resulted from a 12% increase in volumes and higher selling prices. Volume growth was achieved across almost all productlines and was particularly strong in the higher value specialty papers, labels, and abrasives, and also in our tape business.

Operating income for Technical Products was $1 million in the quarter, up significantly from last year, but still short of the levels we would expect. While profits increased versus last year due to the higher volumes and selling prices, operating costs also increased due to a high level of activity for development and production of new product.

We continue to address rapidly rising costs for pulp and prices for latex. Latex is the most costly raw material used in Technical Products, and while prices have stabilized this year, they are still up on a year-to-year basis. To address these factors, we implemented additional selling price increases at the end of September.

To summarize our paper results, volumes for the quarter were very good and we're looking to build upon this performance. Selling price increases have been implemented and have offset raw material and other input costs which, except for pulp, have been moderated. We're holding our teams accountable to deliver productivity improvements and cost savings that will further deliver bottom line growth. So far this year Ring the Bell cost initiatives in our paper businesses have resulted in over $6 million of savings.

Let's turn to Pulp. With Terrace Bay classified as discontinued operations, our Pulp segment results are comprised primarily of Pictou mill operations, as well as results from hedges and allocated corporate expense. Pulp segment results in the third quarter also included a gain of $1.5 million from our recent timberlands transaction.

Net sales of $54 million for the quarter compared with $48 million last year. Volumes increased 11% due to the timing of customer delivery and a planned reduction in inventory to meet key customer demands while Terrace Bay was shut down. Shipments from Pictou for the quarter were 75,000 metric tons versus 67,000 metric tons last year. Production in this quarter was also 67,000 tons, resulting in the inventory decrease. Net sales reflected increased selling prices, however, much of this benefit was offset due to losses on pulp hedges, which are accounted for as a reduction to sales.

In the third quarter operating results from Pulp segment continuing operations were just below breakeven compared to $5 million of income in 2005. The principal causes of this decline were pulp hedges and currency effects. At a mill level, Pictou was profitable and higher prices and volumes were able to offset increases for fiber and other cost input.

A key area of focus has been developing plans to offset higher fiber costs from the sale of 500,000 acres of timberland which we completed in June. The impact of this was not fully reflected in the third quarter, as the mill was still consuming existing inventories of chips.

The team at Pictou has identified a number of initiatives to drive down costs via improved productivity and throughput, labor efficiencies, and changes to existing fiber sourcing and supply chain. We plan to implement many of these in the fourth quarter and over the next year.

Next I will let Bonnie cover corporate and other financial items.

Good morning everyone. I would like to start off with an update on hedging. During the third quarter we recognized in our continuing operations a net loss of $2 million from hedging. This was comprised of a $2 million gain on currency hedges and losses of $4 million on pulp hedges. In the third quarter last year currency and pulp hedges generated a slight gain of almost $2 million, therefore there was a $4 million swing unfavorable in results from hedging compared to the prior year.

The Canadian dollar averaged around $0.89 this quarter versus $0.83 last year. We did have hedges in place during the quarter totaling C$37 million at an average rate at $0.83. As of September 30, we had C$32 million of hedges in place for the fourth quarter at a similar rate and approximately $45 million of contracts expiring in 2007 at rates ranging from $0.81 to $0.89.

The fair value currency hedges was reflected as an asset on our balance sheet of $5.5 million, with approximately $2 million that would be recognized as gains in the fourth quarter based on current exchange rate. The third and fourth quarter levels of hedges of around C$40 million are in line with expected post Terrace Bay levels of coverage. Our sensitivity to the Canadian dollar is now lower as well, with a $0.01 change impacting pretax profit by $2 million.

For pulp hedges we essentially have 12,000 tons per month of pulp hedged at a price of $631. And if you remember, these hedges were purchased to protect the Company from volatility in pulp prices while we operated the high cost Terrace Bay pulp mill. As of September 30 these pulp hedges have an unrecognized loss of $5 million, which will be incurred in the fourth quarter. As was already mentioned, all pulp hedging contracts will be completed by December and we have no plans to purchase new contracts.

Next, I would like to cover our results from discontinued operations. Plans to transfer the Terrace Bay operations were announced in May, and certain charges related to the expected loss on the transfer were already recorded in the second quarter. The transaction was completed on August 29, and third quarter pretax losses from discontinued operations were $31 million. This included a $26 million non-cash charge related to curtailment and partial settlement of the pension plan, and other losses primarily for operating costs at Terrace Bay up until the transport date.

With the exception of future pension related charges at the time of final plant settlement, there should be very little remaining costs associated with discontinued operations. In the third quarter of 2005 pretax losses for discontinued operations were $14 million.

Overall, we are very pleased with financial aspects of the transfer of Terrace Bay. Cash influence from the drawdown of working capital more than offset the onetime costs related to the transfer. Other costs incurred during the year will also managed to minimal levels, and we believe were much less than what we would have had if Terrace Bay continued to operate.

Let me next discuss corporate financial items. Our SG&A expense for the quarter was $13 million, which is up 6% versus the prior year. Principal drivers continuing to be new expenses for stock options and amortization of our initial Oracle ERP investment. Combined cost for these two items were approximately $1.7 million in the quarter, and that split between SG&A and cost of sales.

Our effective tax rate for the quarter was 40%. Year-to-date our rate is 38%, and this is where we would expect the full year to end up.

Net interest expense for the quarter dropped as expected from $4.5 million to $2.8 million, primarily due to three months of interest income on proceeds from the sale of our trees. With these cash proceeds used in October, for our German acquisition, and new debt drawn against our revolver, net interest expense in the fourth quarter will increase.

Looking at cash flows and liquidity, we ended the quarter with $160 million of cash versus the June 30 balance of $179 million. During the quarter we made cash payments of approximately $30 million for the Terrace Bay transfer, concluded $19 million paid to the acquirer, and $11 million for pension funding. Overall, our operational cash flows offset a good part of these onetime costs.

Capital spending was less than $6 million in the quarter and $15 million year-to-date. I will talk more about what our expectations for capital spending are for 2006 and 2007 later in this call.

As announced we completed the purchase of FiberMark's German operations on October 11 for $218 million. We financed this with $160 million of cash and $58 million of debt drawn against our revolving credit facility. In connection with acquisitions, we did revise the terms of our credit facility. We extended the terms through November 2, 2010. We reduced associated interest rates and fees, and we upsized the facility slightly from $150 million to $165 million.

In summary, our credit metrics and financial position are stronger than ever following the transfer of Terrace Bay, and with the added cash flows and debt capacity that we have available from the new German operations. This leaves us with adequate financial flexibility and resources to take advantages of any opportunities that arises going forward.

Let me finish up with some comments on our outlook for certain items starting with the fourth quarter. Probably the biggest impact in the quarter will be the Pictou annual maintenance down, which is now completed. Similar to prior years increased costs related to these downs tends to be around $7 million, depending on the length and scope with cost reflecting both higher maintenance spending and lower production volumes and efficiencies

With our selling and general expense runrate, it has been reasonably consistent throughout this year. I would expect that the fourth quarter is going to increase a little bit, maybe by about $0.5 million or more due to integration costs that are related to the German acquisition. Pulp prices will be higher in the fourth quarter versus the third quarter, significantly higher than last year.

As previously mentioned, we will recognize the remaining losses on our pulp hedges of about $5 million in that quarter. These losses will be partly offset by gains of currency hedges.

Our pulp supply agreement with Kimberly-Clark does have ceiling and floor price caps that extend through next year. And while we haven't disclosed the exact numbers of where the ceilings and caps are, it is safe to assume that at current prices the ceiling will come into play. In the fourth quarter about one-third of Pictou's production will be subject to the price cap.

Looking at 2007, most forecasts show pulp prices starting to decline in the first quarter. For the full year average prices in '07 might not be too different from average prices in '06, however, the quarterly comparisons are likely to be mirror images of each other.

A couple of other items to note related to Pictou. When we sold the 500,000 tons of timberlands in June, $9 million on the gain on the sale was deferred. We are consequently amortizing this gain through the end of 2007 at a rate of $1.5 million per quarter. Now as Sean mentioned, we have cost reduction plans at Pictou, however, before it any of these potential offsets, fiber costs next year are expected to be about $6 million higher due to the sale of the timberlands.

Capital spending in 2006, including Neenah Germany now in the fourth quarter, is expected to be $25 million to $30 million. Which year-to-date spending was only $15 million, we expect a higher spending rate in the fourth quarter due to the Pictou maintenance down and the inclusion of Germany.

2007 capital spending is expected to be approximately $45 million. This concludes spending of about $25 million for major projects in Germany to increase capacity and productivity in our operations.

Corporate expenses will increase in 2007 for amortization of the second phase of our ERP investment, and also for another layer of stock compensation expense under FAS 123R. These costs will be allocated between SG&A and cost of sales, but in total will increase by approximately $2.5 million for the year.

With our German operations and the sale of Terrace Bay, we also receive the allocations of our corporate expense. And in 2007 approximately $3 million of those costs previously charged to pulp will now be reallocated to the Technical Products segment.

Finally, we expect to incur a future non-cash charge of approximately $40 million with a potential cash payment of up to $6 million at the time of the final settlement of the Terrace Bay extension plan, which we expect to occur in 2007. These costs will be included in discontinued operations.

Sean, if you would like to take things back.

I would like to talk first about our recent German acquisition, and then conclude with a brief discussion of the transformations that is now well underway in Neenah Paper. Bonnie and I recently returned from Germany where we you had meetings at all three plants, which included reviews of their budgets and five-year plans. We remain very impressed with the caliber of the people and business teams in these operations, their knowledge of customers, and the marketplace and their positions in those marketplaces, as well as their plans to grow these businesses.

Neenah Germany complements some of our existing businesses and also provides us access to new and growing markets with leading positions. Two examples are transportation filtration where our German business provides some of most advanced product in the market today in nonwoven wallcoverings where we now hold an important position in this growing segment of European wallcoverings market.

Investment in these businesses have been limited in recent years. And as Bonnie mentioned, we have approved capital spending projects to increase capacity and improve productivity, and are excited about the prospects for growth in these markets and the financial returns these investments are expected to provide us.

We've also developed detailed integration plans for the combined businesses. And sales and marketing teams from the U.S. and Germany are already meeting regularly and have begun working together to ensure we serve our global customers with one face in the most effective manner. We believe there are a number of opportunities to optimize supply chain, enhance cost efficiencies and improve customer service, and are already moving forward with these changes.

We believe there are a number of benefits in operations. In this week teams from each of our units are meeting and starting to benchmark to see where we can learn from each other to adapt the most efficient and lowest cost processes in production sourcing, and also leverage our combined scale in agreements with suppliers.

At the time of the acquisition, we indicated important benefits could also be achieved through combined research and development. Neenah Germany's technical capabilities and knowledge of specialized paper and nonwoven assets, coupled with their existing expertise in saturation and coating on different base papers is expected to result in new and unique products to serve our customers' end market.

I would like to end with some comments on where we are and what we have been calling the transformation of Neenah Paper. As we have mentioned before, one of our key strategic objectives was to change from the pulp and paper company we were at spinoff into a leading premium fine paper and technical products company. Let me use our reported 2005 data for comparative purposes to illustrate what we believe was -- already been accomplished.

Our net sales in 2005 was about $730 million, of which more than 50% came from pulp operations, a segment which had limited growth potential and a lot of volatility. We have now replaced Terrace Bay sales with higher sales from Neenah Germany, creating a bigger company with revenues of around $800 million, almost 80% of which is paper, providing us with a greater ability to grow the topline.

We generated almost $7 million of EBIT from paper operations in 2005, however, more than half of this was offset by losses in pulp, principally Terrace Bay, which resulted in net EBIT of around $24 million, excluding our impairment charge. We replaced the unit that lost $30 million with one that is earning in the mid-20s. Consequently, we now generate much more EBIT, and our operating margin should increase from low single digits into the double digits.

By almost any measure you look at, we believe we are now a much stronger Company with better prospects for growth. As Bonnie indicated, financially we are in good shape and have the ability to invest in organic growth or acquisitions that would add value. Cash flow from operations are higher and return on capital, a key metric for how we measure our performance, should triple also ending up in double digits.

Profit margins and returns on capital from our paper businesses are outstanding, and our unlike most other companies in our industry due to our strength in brands and technical know-how. Our core businesses are performing, and with Neenah Germany we have another business which we expect to leverage for growth.

As I said in the last call, we are extremely pleased with the progress our teams have made so far in transforming Neenah Paper. We are doing the things we said we would to deliver value to our investors. We recently completed an update of our five-year strategic plan and reviewed it just last week with our Board. The plan shows, and we continue to believe, that Neenah Paper has significant opportunities for generating additional shareholder value going forward.

Let me end by thanking you for your interest, and for many of you your continued investments in Neenah Paper. I would now be happy to open the call up to questions. Thank you.

(OPERATOR INSTRUCTIONS). Chip Dillon, Citigroup.

Just one little housekeeping thing. I know, Bonnie, in your presentation I just want to make sure I got this number right. What was your guidance for the corporate expense in '07? And what was the 3 millions shift from tech -- from pulp to tech papers were again?

I didn't guide on what I thought corporate expense would be. The shift from allocated overhead was $3 million out of pulp and over to tech products.

That starts as of when?

That starts as of the first quarter of 2007. I did indicate for SG&A in total that I expected costs would be about $2.5 million higher just for the amortization of the second phase of our ERP investment, as well as another layer of stock option expense under 123R.

That is for the full year?

That is for the full year.

Then on the sensitivity, the penny -- 2 million is that annualized?

That is annualized.

Then when you look at the fourth quarter in pulp, what were the shipments? I know you said the production was 60,000 some tons, but what were the shipments?

In the third quarter, it was 75,000 tons. So we had a inventory draw down.

So 75. And I would imagine in the fourth quarter that number will be in the 40s or 50s probably.

The production, we had good production last month. We will -- it will be slightly lower this month due to the down obviously. We don't disclose or forecast that, but I would guess the mid-60s would be a safe number.

Would a good guess be that maybe if you looked at the third going into the fourth, when you look at all the moving parts, it looks like, as you mentioned, you will get better pricing because we can all see the market pricing, but you will have less volume. I guess that washes each other out. But all in all that would suggest about a $7 million sequential decline?

Topline. Yes, we will have lower sales volume.

And better pricing, subject to the (multiple speakers).

Right, but I am thinking on the bottom line you mentioned that the fourth quarter, the cost in the fourth quarter of the downtime would be about $7 million? Did I hear that wrong?

That is a historic number that is a safe bet.

That makes sense. In terms of the -- you mentioned that in the fourth quarter one-third of what you make will be subject to a cap with the contract with your former parent. Is that all the pulp you're selling them? In other words, is all of it subject to the cap, and you are therefore only selling one-third of your pulp to them, or is there more that is not subject to a cap going to them?

Good question. The contract has a floor and a ceiling price. Right now no one is worrying about the floor, but the ceiling applies just to shipments into the U.S., and only for 2007. Anything that we would ship into Europe, the cap wouldn't apply. Then we do sell a significant quantity into the market also.

Got you. Is it fair to say that one-third of Pictou's output, give or take, in '07 would be shipped to your former parent in the U.S.?

I think that number is -- I will get back to you, but it is a pretty good number.

Looking at the -- you mentioned the CapEx is going to be $25 million at FiberMark. I believe, and I know it is very much a paper talk, if you will, talking about tons because this is such a high-end area, but can you talk a little bit about how that is going to enhance in the future the results?

I understand that FiberMark is more or less 50,000 tons of very specialty oriented paper. And if you could just talk a little bit about either volume increases or cost improvements that you expect from that, how that would come on?

Sure. You know a little background on the Company, Chip. As we looked at the business and both through due diligence when we developed our longer-term plans for it, in some of their key business areas the high-value end, areas where the market is growing, they have been out of capacity for a couple of years and there hasn't been the investment to increase this.

These are products such as filtration where the market continues to grow globally. They have a very nice position, both in terms of share and from a product standpoint. We're supporting the growth of that business, which is one of the key reasons we were excited about the opportunity to acquire it. The other area is at mill closer to Frankfurt. And this is more of a traditional expansion. They are out of capacity. We are replacing the headbox, and it will give us about a 10% throughput increase that should be sold out as soon as they come up on it.

It is a project that were included in the business plan that we developed prior to the acquisition, and we're carrying through with our plans for the business.

That throughput will be finished by the end of next year, is that right?

In both cases the plans are that both projects will be completed in '07, and will begin to be reflected in '08 results.

Lastly, this is more for Bonnie. As we look at the balance sheet, I see here you are showing net debt of -- it looks like about $60-ish million. I just didn't get a chance to look, but did the FiberMark transaction close -- that obviously is already closed, correct, as of September 30?

That closed in October 11.

What did the balance sheet -- how does it change from September 30 to then or to now?

What we're going to have is we're going to have a 8-K disclosure on December 20 that is going to show the pro forma financial statements for Germany for 2004, 2005 and year-to-date 2006. And I said that I had like $160 million of cash at the end of September. I used $160 million of cash to fund this acquisition and then grew almost $60 million on the revolver.

That is 5 0?

That is 6 0.

6 0. Because I think you said it was a $218 million acquisition, right?

Right. $218 million. All the cash was basically gone by the time we did this deal, and then we drew on the revolver.

Then the only sort of -- so you are done with buying this. And the only other cash thing that is sort out there is related to Terrace. If I'm not mistaken, is the -- I think you said $6 million at some point, right?

Yes, we have $6 million that we are expecting to contribute to the pension plan when we do the curtailment, the settlement -- the final curtailment and settlement of Terrace Bay. We also have a liability of about $7 million for Terrace Bay OPED. But that is going to pay out over a longer period of time.

This $6 million might happen in the fourth quarter, is that right?

No, the $6 million will happen in 2007.

The $7 million is like over years?

Over a year, right.

What we did is we wound up the pension plan for all of the current retirees already. That is done. That was in the funding in the quarter. We filed with the regulatory agencies to wind up the balance of it for the employees now working for Buchanan. And that takes a little longer to get the ruling, but we don't expect that cash settlement to be more than $6 million. And as Bonnie mentioned in her comments, believe it or not by next quarter we are going to be getting to the point where we are not going to talk a lot about Terrace Bay. It should be wound up.

Included in our results already from the third quarter we did make an $11 million contribution to the Terrace Bay pension plan, but that is already going to be in our third quarter numbers.

All the working capital runoff is already reflected in September 30?

Yes, you'll see that with the September numbers.

Mark Weintraub, Buckingham Research.

Thanks for the thorough run through. Maybe just to finish up on the topic of taxes, cash taxes, etc. On the timberlands gain, are there any outstanding cash taxes yet to be paid, or is that totally done and/or is it going to get offset by losses in your Canadian operations? How do you see that playing out?

I have to say yes to all of that. So, yes, we're done with the cash taxes that we are going to have to pay with Pictou. It did offset some losses from Terrace Bay, but in the third quarter we paid about $6 million in cash taxes.

Okay. Sean, you had mentioned that the acquisition had earnings in the mid-20s. I just wanted to -- can you just remind us what the DD&A on the business is?

If I recall, it is about 7.

It is about 7. Okay. Is that kind of the type of EBITDA number we should be expecting from this business in the low 30s. Is that at least until you have put into place the programs that you have underway? is that how we should be thinking about the cash flow generating capability?

As Bonnie said, you'll have the audited financials out in the 8-K and the year-to-date September in a little more than a month. But if you -- lacking those numbers -- current low 30s is probably a very safe number.

Not it that matters greatly in the grand scheme of things, can we take one-eighth of that for the fourth quarter contribution, given that you're going to have it basically for about half of the fourth quarter?

Business is strong. We're doing the audits right now, settling everything up. I have no reason to tell you not to, but I will feel a lot better when I see audited financial statements.

Joe Stivaletti, Goldman Sachs.

Just to make sure on the cash flows, sort of the nonoperating cash flows that have occurred since the financials, since the September 30. Really all it is is the transaction where you purchased the German operation and grew drew on revolver. But it sounds like these other things, there hasn't been any other kind of big non-operating cash flow. And you're saying that the working capital flowing out of Terrace Bay was largely wrapped up by the end of September?

(indiscernible) saying that.

Taxes, including on the timberlands sale, were all taking care of by the end of September?

We expect cash taxes in the fourth quarter.

Excuse me.

I said we do expect cash taxes in the fourth quarter.

But that is --.

That is related to income.

Right. I think at one point there was talk about like a $20 million tax on the sale of the timberlands, but that was (multiple speakers).

That is still true. But what we were able to do is offset gains with losses -- offset gains on the timberlands sale with losses at Terrace Bay.

Right. That was all taken care of in the third quarter, right?

Yes.

Basically away from some operating cash flows, your revolver, the drawing you made -- the $58 million drawing you made on the revolver to buy the assets is largely the only sort of major thing there in terms of use for that revolver?

I'm not exactly sure because your voice was fading. But, yes, when we did the revolver draw that was to accomplish the acquisition of the German business. As we did say in the fourth quarter, we do expect though higher cash flow -- outflow related to the Pictou shutdown. And also that our capital spending rate in the fourth quarter is expected to be higher than what it has been in the other quarters.

Right. Did you say that total revolver is now 165 or 155 in terms of the size of the facility?

Gross facility was 150 and now it is 165.

165, okay. The last question I have is just sort of if you could give us any updated thinking on your remaining assets in Canada, both the pulp mill and the timberlands? Should we be thinking about those as a likely ongoing part of your Company, or should -- do you think of them as something where you're going to look opportunistically to exit out of that business?

Let me address that. First, let's keep in mind that Pictou is clearly not Terrace Bay. And terms of the financial situation Pictou over a pulp cycle tends to always be EBITDA positive. There will be some higher cost there due to us monetizing the trees. But teams 1are working their way through that. We expect Pictou to meet or exceed the financial targets that we have for the corporation. We have said on past calls, we are working with them on the program. And we will consider other options that make sense and provide value for Neenah Paper shareholders. But it is not a Terrace Bay situation.

(OPERATOR INSTRUCTIONS). Frank Dunau, Adage Capital.

I've got a few questions. Just briefly housekeeping-wise, September gain -- that $1.1 million, that is before tax, right?

It is pretax.

I should use like a 38% tax rate or something if I want to --?

That is the tax rate for the Pulp segment.

I also assume that the stuff -- the $9 million is a non-cash gain? There's no cash involved going --?

No.

I think I've got a couple of more housekeeping. At the end of the second quarter the taxes payable on the balance sheet were $21.2 million. And you said you paid $6 million, at least I think I heard that, out on the timberlands. But then you also said you don't have anything more to pay, so is that income payable line going to zero or 15 at the end of the third quarter or someplace in between?

I'm not a strong enough tax guy to (multiple speakers) number will be, but what I can tell you is that we have paid the taxes that we owe for the Pictou timberlands, if that is what you're really trying to get at.

The 21.2, was there anything other than income tax payable at the end of the second quarter, anything other that related to Pictou? Was there other stuff going on? No biggie. I don't need -- I don't need an answer right now and that one if you don't have it.

You might call Bill, but what we're thinking here is that all of that is going to rollup to -- we have the Pictou timberlands gain, we have the losses that are associated with Terrace Bay, and that -- all of that when you add it altogether.

Then on the pulp, you drew down pulp inventory in the third quarter. And Pictou has got maintenance downtime. So they really can't build anything in the fourth quarter. Is there in the first second quarter do we have to build inventory in the pulp operations, or what is going to happen there?

We're on a long-term sourcing model. You'll see some slight increase on that, but it is not step changes, so you shouldn't the a dramatic change. The draws of our customers in pulp are fairly steady. Their demands are fairly steady. We adjust some of the differences in safety stock level.

One last question. In the press release when you all announced the purchase of FiberMark Germany, you said it had an operating income of $29 million -- approximately $29 million in 2005. Now you said -- I think I heard you say that the EBIT of the operation in 2006 will be in the mid-20s. Are they having a down year, or are we --?

They are having a year exactly that we thought they would have when we did the acquisition. We were there just a couple of weeks ago I spent a full week there. And I haven't seen anything on the downside of the business plans that we developed to go forward with the acquisition. They have some of the same raw material input issues that other paper companies have faced and other using resins. They use more resins, but I haven't seen anything that surprised us and anything that would counter the plans we put together for the business.

Let me ask it this way. The $29 million operating income number in the press release, is that an EBIT or an EBITDA number?

That was an EBITDA number -- EBIT, I am sorry.

EBIT number?

Yes. As I said in the call, you will see the audited financials for the last two years and year-to-date in the few weeks.

What is it, December 20th?

I believe so.

I have to wait for December 20 to actually see the real numbers -- not the real -- the actual numbers. You are not going to help us between now and December 20?

At December 20 you'll see all of the numbers.

(OPERATOR INSTRUCTIONS). At this time there are no further questions.

Let me just finish up then. I would like to thank you for your time and the questions. As we have said before, Neenah Paper is, we believe, a much stronger Company with better prospects for growth than it has been at any time since we were spun off. We are excited about our ability and prospects to generate value for the shareholders. And look forward to communicating our additional progress as we go forward with these programs. I thank you.

This concludes today's Neenah Paper conference call. You may now disconnect.