Neptune Insurance Holdings Inc (NP) 2006 Q4 法說會逐字稿

Good morning. My name is Phyllis and I will be your conference operator today. At this time I would like to welcome everyone to the Neenah Paper Reports 2006 Fourth Quarter and Full Results 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 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 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 web site at www.neenah.com.

I would now like to turn the call over to Mr. Bill McCarthy, Vice President of Financial Analysis and Investor Relations. Thank you. Mr. McCarthy, you may begin your conference.

Thank you and good morning, everyone. With me today are Sean Erwin, our Chief Executive Officer and Bonnie Lind, Chief Financial Officer.

I will briefly review consolidated results and then turn things over to Sean and Bonnie to discuss in detail progress against objectives, business segment performance and our recent purchase of the Fox River Paper Company.

In the fourth quarter our net sales were $177 million compared with $136 million last year. 2006 sales included about $50 million from Neenah, Germany, for the period following the October 11th date of purchase. Operating income was $9 million for the quarter, up significantly from less than $1 million in the fourth quarter of 2005. The increase reflected much better results in our pulp segment as well as the inclusion of Neenah Germany. Net income from continuing operations for the quarter was approximately $3 million or $0.21 per diluted common share. This compared with a loss of $3 million in the fourth quarter of 2005.

For the full year, net sales were $594 million up 11% versus last year and up 2% without Germany. Consolidated operating income increased from $53 million in 2005 to $168 million in 2006 including a gain of about $126 million related to the June and Timberland sale. Without the gain, operating income fell by approximately $10 million with about half this decline, due to higher non-cash corporate expenses and the remainder reflecting higher input costs in our paper businesses that were not fully offset by our selling price increases or cost savings programs.

As a reminder Terrace Bay pulp operations which were divested in August 2006 have been classified separately as discontinued operations in all periods and are not included in the income statement figures I have mentioned.

Finally with the acquisitions of Neenah Germany and Fox River, our segment results and mix in 2007 will of course be much different from 2006.

I would like now to turn things over to Sean.

Thanks, Bill, and good morning everyone. I would like to start off with something that Bill reminded me on that we said in our conference call one year ago. We said that 2006 is likely to be a year where we initiate a number of different actions supporting our strategic priorities, and you can expect our teams to continue to foster a culture of making things happen.

Looking back we did make things happen in 2006, thanks to the outstanding efforts of our team. We took actions aligned with our strategic priorities of transforming into a premium and specialty paper business growing these businesses profitably and delivering attractive returns to our shareholders.

Importantly we also operated safely. In fact, in 2006, the safety performance of our mills again improved as it has every year since spinoff. Only now it is improving from a rate already considered extremely good for our industry. I believe this kind of attitude and success continues to carry over into other aspects of how we operate as a business.

I would like to briefly recap three of the more significant activities from last year that have helped make us a very different company today. First we are able to resolve the significant challenges that the Company faced with Terrace Bay. Following the Woodland strike and subsequent shutdown of the mill in February, our teams moved quickly to enact strict spending controls to optimize results and cash flows. During this period we were able to reach agreement to sell the mill to a local forest products company who is in a better position to operate the mill successfully. The transaction closed in August and the drawdown in working capital allowed us to fund all of the associated payments. Ultimately this was a big win for us, our shareholders and the employees in Ontario.

Second, we sold 510,000 acres of timberlands for approximately $140 million. Our teams recognized the significant value associated with the woodlands and the strong market demand and attractive multiples these assets were commanding. Through the efforts of planning of employees at Pictou and here in Georgia we determined the acreage we should sell and ultimately unlock substantial value we used for other strategic investments.

And third we purchased the German operations from FiberMark last October. This acquisition brought us added scale in the market and a presence in profitable and growing businesses like filtration. In addition it brought us added technology such as nonwovens that can be combined with our existing expertise in saturated and coating to develop new and improved products for customers.

Five months, just about five months after the purchase, we are extremely pleased with how things are evolving. We have organized this segment into five global business groups -- filtration, tape, component materials, graphics and identification and wall covering. Doing this has allowed us to focus on similar technology and end use markets with one face to the customer. We have also made organizational changes to manage the segment more effectively and pool the knowledge and resources of both companies.

There are global business leaders for each of the five product groups and reporting directly to me are Dr. Walter [Haigler] the managing director of our German businesses and Dennis [Runston] who was named to the new position of President of U.S. Technical Products. Dennis was our vice president of supply chain and brings a wealth of business experience to the position.

I am convinced that the new global product groups under the combined leadership of Walter and Dennis will help technical products achieve the goals we have laid out for them.

I would also like to recognize the employees involved in a recent rollout of Oracle to our U.S. mills. We started using Oracle financial modules in January 2006; and now in 2007 we have rolled out the full suite of modules including order processing and operation. The system went live for technical products in January and fine paper started up this month.

Due to the efforts and commitment of our employees at our mills and on the project team, we did not miss a beat with a technical products start up and are right on track with fine paper.

So all in all 2006 was a busy and successful year on the strategic front. And in our paper businesses our market positions remain strong and volumes were maintained; but results did not fully meet our expectations. As pricing actions and cost savings programs we implemented could not offset the continued rapid run-up in pulp and other input costs. Our focus in 2007 is on driving top and bottom line growth in these businesses. With our new business mix we believe we are in a better position than before to do this and to deliver added value by integrating our acquisitions successfully.

I would now like to let Bonnie talk through in a little more detail the business and financial results. Bonnie.

Good morning everyone.

Starting with fine paper net sales of $55 million for the fourth quarter were essentially flat versus the prior year with volumes down less than 1%. For the full year our net sales increased 1%, reflecting higher selling prices that we implemented in the first half of the year and a slightly less favorable mix.

Full year volumes were flat but in line with total uncoated freesheet market. Our focus and strength continues to be sales of high-quality premium branded products. During the year we launched our (technical difficulties) green environmental platform which has been enthusiastically received in the market.

We also updated and expanded certain brands such as CLASSIC COLUMNS and extended our relationship with the Susan G. Komen Foundation. Fox River acquisition of course brings a number of other opportunities that we are pretty excited about and we will talk about later on in the call.

Operating income for fine paper in the fourth quarter was approximately 12 million versus $13 million in 2005 as accelerating pulp prices impacted margins. For the full year operating income was $56 million versus $58 million last year. Rising input costs were again the principal cause although we were able to offset a portion of this through selling price increases and cost savings efforts.

Looking at technical products, fourth quarter net sales were $83 million up from $32 million in the prior year. Excluding Neenah Germany, sales for our existing business grew 5% driven by higher selling prices and improved mix. For the full year, sales for the U.S. business increased 2%, reflecting similar selling price benefits and gains in key products including (indiscernible) braces, labels and specialty grades.

Our German operations as Sean said also performed well in this quarter. This was led by the filtration business which grew at a double-digit rate.

As Sean mentioned integration of our German operations is going very well. Our sales organization moved quickly to ensure one face to our customers with more consistent pricing and positioning. The manufacturing teams are already benchmarking costs to adopt the best and the most efficient processes and our R&D teams have specific objectives to take advantage of the knowledge of both companies in materials and products. We are starting to see the benefits from our integration activities.

Operating income for technical products is $3.4 million in the quarter, up from $2.5 million last year. Profits increased due to the inclusion of Germany but also included onetime costs of approximately $2 million, related to the acquisition primarily in a step up in beginning inventory values that are required under purchase accounting. That resulted in higher cost of sales and lower profits in the quarter.

With the exception of costs related to Sarbanes-Oxley for Germany, integration costs are now largely complete. (technical difficulty) Germany profits for our existing technical products business in the fourth quarter and full year were lower in 2006, reflecting higher manufacturing costs and R&D spending partly offset by increased selling prices and cost savings. In response to the continued rise in pulp and other prices we successfully implemented a selling price increase in the U.S. in January.

Now let's talk about pulp. The Terrace Bay pulp results classified as discontinued operations pulp segment results are now comprised of Pictou mill operations, gains or losses on hedge transactions, and allocated corporate expenses. Net sales for pulp were $40 million in the fourth quarter compared with $50 million last year. Drop in sales was due to a declining shipment from 70,000 tons to 53,000 tons as we built inventory and international in transit shipments also increased.

We entered 2007 in good shape with healthy inventory levels and the Pictou mill is essentially sold out for the year with contracted tonnage.

Market prices for softwood were up more than 20% or roughly $130 a metric ton versus the prior year. This had a 6 million favorable benefit for the quarter. However this benefit was largely offset by losses of 5 million on pulp hedges. For the full year net sales were up 3% on slightly higher volumes as a benefit of higher selling prices were once again largely offset by losses of more than $11 million on pulp price hedges.

Including losses from hedging and allocated corporate expenses, the operating loss for the pulp segment was $3 million in the fourth quarter of 2006. This was $10 million better than the prior year. Both 2005 and 2006 fourth quarter results included impacts from annual maintenance balance, the improved profitability in 2006 resulted from productivity gains at Pictou as well as lower spending during the most recent down. Despite the annual down, Pictou and the loan operations were again profitable this quarter.

The Canadian dollar averaged $0.88 in the fourth quarter of 2006 versus $0.85 a year ago. This reduced quarterly results versus prior year by approximately $5 million. The quarter also included hedging gains currency hedging gains of 2 million and 1.5 million for amortization of the deferred gain on the June sale of the timberlands.

Now we have mentioned this before but we will continue to amortize approximately $1.5 million per quarter through the end of 2007. And then we will be done.

Full year operating losses in 2006 after excluding the gain on the timberland sale were in line with a $9 million loss in 2005. 2006, the impact of the stronger Canadian dollar and losses on the pulp price hedges were largely offset by higher selling prices, improved mill costs and gains on currency hedges.

Next I'll move over to a few corporate financial items. First, let me comment on current hedging plans that are positioned as we go into 2007. We no longer have any pulp price hedges and we do not have any current plans to enter into new pulp price hedges. These were originally purchased while we had Terrace Bay; and we needed to ensure that we could cover our cash cost in the event of a severe drop in pricing. If you recall under our take-or-pay supplier pay agreement in our pulp to fiber agreement we are obligated to ship regardless of market prices.

Now for currency hedging, we can continue to systematically add to and replace our currency hedges. As of the end of the year we had C$93 million hedged at an average rate of $0.85. The value of these currency hedges was reflected as an asset on our balance sheet of $700,000 and approximately 70 million of these hedges will expire in the first half of the year.

Our SG&A expense for the fourth quarter was $17 million up from $13 million last year. The recent quarter included approximately $2.5 million for Germany. For the full year, excluding Germany, non cash cost for stock based compensation expense and ERP amortization costs or SG&A was slightly lower, partly due to the savings we are realizing from being on our own ERP system versus the transition service fees we're paying to Kimberly-Clark.

In 2007, so looking forward non-cash costs will increase about $2.5 million for ERP amortization and another layer of stock based compensation expense. Allocations of corporate expense between segments changed in 2007, with a net effect of approximately $3 million of costs previously charged to the pulp segment being reallocated to the technical products segment.

Net interest expense for the quarter increased $4.4 million last year to 5.1 million this year due to higher borrowings against our asset base revolving credit facility. As previously reported we borrowed $58 million against this facility to help fund the FiberMark Germany purchase.

Our effective tax rate was 18% for the quarter and 37% for the full year. The lower rate for the quarter resulted primarily from the mix of income between segments, and due to changes and structure we implemented in connection with the German acquisition. Based on segment mix and the same structural consideration for 2007, we would expect a rate in the low 30s.

Turning to cash flows and liquidity. Cash from operations was $13 million for the quarter and $66 million for the full year. Full year capital spending was $25 million and our depreciation and amortization was $30 million. In addition we had $6 million of amortization for stock based compensation. Last month in anticipation of the Fox River purchase we upsized our revolving credit facility from $165 million to $180 million and now have approximately $110 million drawn against this for the acquisitions of Germany and Fox River. We also have debt capacity available in Germany through existing facilities and also a government-sponsored financing for qualifying investment and qualifying investments are certain capital strategic projects.

In all, we feel our credit metrics remain strong following the Fox River acquisition and that we have appropriate flexibility and borrowing capacity. Now we are a very different company than what we were a year ago; and we will continue to operate in an appropriately conservative manner but from a more profitable base than what we had at spinoff.

So last item I would like to mention is that we did adopt FAS 158 in December. It required a change in the way companies account for pensions and other postemployment benefits. Consequently we reduced stockholders equity by approximately $55 million to reflect this accounting change.

Now, Sean, I will hand it back to you.

Thanks Bonnie.

Let me start out with a few comments on our markets and certain activities that we will undertake in 2007. As you know the pulp market has remained strong and it now appears that year on year prices for Northern Softwood are likely to average $50 a ton or more higher in 2007 than last year. Market forecasters are still predicting price declines in the second half of the year and year on year comparisons will likely be more significant in the first half.

Our pulp supply agreement with Kimberly-Clark does have a price cap in place for 2007. While the exact number has not been disclosed we have said that at today's high prices the [ceiling] would come into play.

In 2007, no more than 25 to 30% of Pictou's production will be subject to this price cap. And the actual impact of course is dependent on how pulp prices move. Most forecasts are for the uncoated freesheet market to tighten a bit as capacity in the industry is rationalized and in response to the continued rise in pulp prices. This may contribute to a more favorable pricing environment for these markets, including the premium segment.

We have this year's schedule to Pictou annual maintenance down for the second quarter versus the fourth quarter in 2006. As we have previously indicated the cost of this down tends to be around $7 million depending on the length and the scope. We also said in the last call that fiber costs are expected to increase by around $6 million in 2007, due to the sale of timberlands and before any cost savings initiatives.

Following the Fox River purchase, we now expect full year capital spending to be $50 to $55 million versus our prior estimate of $45 million. Fox River will require one-time cost to establish our new manufacturing footprint and implement Oracle, as well as anticipated ongoing maintenance capital of $2 to $3 million per year.

The total continues to include $25 million for major projects to expand filtration and wall covering capacity at our German operation while work began on these in the fourth quarter and they are on track to be completed late this year.

Let me now discuss the Fox River acquisition where I think many of you may have some questions.

We completed the purchase of Fox River on March 1st. Fox River was a privately held company and like us has well-known brands in the premium fine papers market. The Company's roots date back to the late 1800s but Fox also grew over the past 20 years through acquisitions of other paper companies, including Simpson and Gilbert paper.

In addition to its premium branded business, Fox competes with products and other segments that typically have lower price points and margins. We paid $52 million to purchase the company on a debt free basis. We believe this represents a fair price for the existing business but we see the real value coming from our plans to combine the businesses. We will retain the strongest brand customers in mills from both of our businesses and manage them within Neenah's very successful branded fine paper business model.

I'll talk more about our integration plan in a bit. But in general our intent is to be selective and retain the best of the businesses when it comes to brands, assets and market positions.

As part of our due diligence we developed a detailed business integration plan and are excited about the potential this acquisition offers. We will gain scale in the marketplace and be able to offer customers a more complete array of branded fine paper. We can leverage the best in sales channels from both businesses, our relationships with selected paper merchants, and Fox's strong national accounts presence. We expect to improve distribution and service to our customers with our combined operation and footprint.

While the purchase is a great fit from a customer and topline perspective, it also allows us to consolidate to achieve operational efficiencies and deliver bottom-line benefit. Yesterday morning, we announced the first debt in our integration plan with a closure of the Housatonic mill in Massachusetts before the end of the second quarter.

This mill, with an annual capacity of about 15,000 tons, was not profitable due to its small size and cost structure as well as the pricing of many of the grades made there. It made any specialty and art papers as well as writing text and cover grain.

We will selectively choose which products we will keep and make up other lower-cost assets where we have available capacity. Business that is unprofitable will be discontinued. We expect to incur cash charges of up to $3 million for severances and other costs related to the mill closure. Because these are occurring with the purchase and as part of our integration business plans, these costs will not be charged against earnings.

As a result of this we expect to save approximately $5 million per year by eliminating fixed costs and increasing manufacturing efficiency. We will not see all of these savings immediately, due to the cost we will incur to transition the Housatonic grades onto other assets.

We have already begun to execute other parts of the integration plan. From an organizational standpoint, most of Fox River's executive team are leaving or have left this month. Our sales force has already been reorganized and redundant positions eliminated. We are finalizing remaining organizational changes and will be moving quickly to communicate and implement these changes to eliminate uncertainties and allow us to stay focused on our customers and achieving our target.

Because of the initial transition costs expected this year, our plan doesn't reflect the acquisition, adding significantly to fine paper segment earnings in 2007. So it will be additive to EBITDA. However in 2008 and beyond, while we have completed most integration activities and have our new platform in place, we expect the financial returns to be very attractive and accretive to earnings.

We understand that these actions and other future decisions will cause hardships on employees that are directly affected. We will communicate as openly as possible and treat these employees fairly. Paper has not been a growing market and we are confident the moves we're taking today are necessary and will leave us with a combined fine papers business that is stronger and more competitive than either business would have been on its own and in the long run will best serve our shareholders and our employees.

The rationale and approach for Fox River is very different from Neenah Germany and the integration efforts will be more intense. However, if these efforts provide an even greater opportunity to create value for our shareholders. To wrap up I started off the call this morning with a quote from last year about how we expected to make things happen as we transform the Company. Did this and are now much better positioned for the future with our new business mix.

Our focus remains clearly on execution, our plates may be pretty full but our teams have shown they can handle it. Key priorities for us this year will be 1, integrating Fox River quickly and effectively into our premium fine paper business to deliver expected results ahead of plan while at the same time ensuring we stay focused to maintain an enhanced the strength of our very attractive core business.

2, building a stronger and more profitable technical products business both in the U.S. and in Germany that is centered around our five global product groups that leverages the scale and know-how of the German operations brand.

And 3, continuing to create value from our pulp and timberland assets including ongoing progress in productivity and lowering costs at Pictou. By almost any metric you look at, we believe we are now a much stronger company with better prospects for growth. We are doing the things we said we would to deliver value to our investors and believe Neenah Paper has significant opportunities to generate additional value.

I'd like to thank those stakeholders who have continued to support us and have shown confidence in us with your investment especially those that have been with us from the start and believe in the long-term potential for our Company.

Just as we started with some thoughts on safety, let me end with this as well. I continue to believe that success in many areas should start with safety and the pride it generates. We have talked a lot about the transformation in Neenah Paper. In the integration of our new companies this year we look forward to sharing our culture of success, as well as learning from them about their successes as we make progress together in safety and many other areas.

I would like to thank you for your time and would now like to open up to call for any questions you may have.

(OPERATOR INSTRUCTIONS). Joe Stivaletti with Goldman Sachs.

Just was wondering on Fox River, can you share any kind of financial information there in terms -- we know what you paid for it but in terms of (technical difficulty) or anything like that or if it is (technical difficulty)?

Yes. You get to know Fox more as we move along in the quarters. It being a private company we didn't disclose their financial results. We won't, unlike Germany, file a subsequent 8-K on those financial results. They are -- in the premium market they are smaller than us, about half our size in the premium branded. They do have a larger position than we do in the direct business, and not all of which we are going to keep.

Their margins as you can imagine with the purchase price of it and saying that we felt we paid a fair price at $52 million. So if you do some calculations on the ranges that tend to go for EBITDA on transactions, you can draw some conclusions as to the current performance. So the real value we believe in in Fox River may not be the existing business but the value that can be created with the combined business.

And talked about eventual I believe about 5 million of hopeful (technical difficulties) savings as a result of the plant closure (technical difficulties) of Fox River, but look more broadly when we are looking at '07 and you've made so many changes in terms of bringing in the German assets (technical difficulties) at Fox River. Do you have a more broad target in terms of synergy but by integrating Germany and whatnot, that we might be able to layer onto just adding up the [LTM] numbers for the different companies?

As we have talked about in the past we don't give guidance on items like those. We will as soon as we can on each quarter talk about the progress that we are making. We mentioned the $5 million, the hopeful $5 million. That is the fixed cost of that mill. That will go away when we close it next quarter. So those are real savings and then we'll transition some of the production into other mills.

As I mentioned on Germany we are beginning to see some real synergies from that acquisition. And as Bonnie highlighted in her comments, with not being a full first quarter and having step up accounting where we took in effect the profits that we would have had on the inventory at the time of the sales and had to put that back on the balance sheet, it was a different first quarter under Neenah Paper for them.

But we are very pleased with their performance to date and look forward to reviewing their first quarter results with you toward the end of next month.

Yes and then we previously communicated some information on Germany that you can always layer into the LTM so that you would get a pro forma look. That would be better than just plain LTM.

Oh yes, no, I've looked it that. So when you look at the technical products you talked about a huge jump in sales because you added in Germany to that segment but your operating income didn't quite match. You talked about those million. Is there a lot of other noise in that fourth quarter number (MULTIPLE SPEAKERS) products?

As you saw in technical products, even in '05, and as we talked about the end of '04 it tends to be the weakest quarter in that business and the same is true with the German side of it. The automotive industry, especially with most of their customers being in Europe, tends to have a very slow December and they tend to have a stronger earlier part of the year.

So we weren't surprised by the results in the fourth quarter and technical products. And as I said Germany was ahead of plan for us.

Just one more question. You mentioned something about continuing unlocked value with your remaining Pictou, the one pulp mill, and your Timberlands at are you (technical difficulties) possibly include divestiture of any of those assets? Or are you more focused on just unlocking value by running them more profitably?

The Pictou mill is not for sale. We have not announced that the mill was for sale. That being said we continue to evaluate strategic alternatives up there to figure out the best way to create value for our shareholders. So, really, the message hasn't changed in terms of our strategic direction and approach.

Another question? Next question.

Mark Weintraub with Buckingham Research.

On Fox River, do you have a number for DD&A and maybe perhaps link that to what the full year DD&A for you guys will be next year?

We are doing the purchase accounting now and that will take place, that will transpire during the year. You know we are doing -- you have to do the evaluation of the assets and it's depending on what assets we are going to keep and what assets we're not going to keep. And so it is tough for us right now to give you a good starting point of that.

It will be reflected in our Q.

Right. Right. We will disclose that in the Q which will be filed next week.

That's the K.

The K. I'm sorry. So you will get a better feel as we began to take the action over the course of the year.

But order magnitude is 3 to 4 million or something for Fox River? Does that make sense? For DD&A and (MULTIPLE SPEAKERS)?

I had rather not make that comment right now. We paid a fair value for an earnings multiple and on EBITDA. So you can use your experience to kind of back into what you think that would be, then.

And you had mentioned that the Gilbert mill was not profitable. Should we take from (MULTIPLE SPEAKERS) ?

The Housatonic mill wasn't profitable.

I'm sorry. The Housatonic mill wasn't profitable. Should we take from that pointing that out that the other mills are profitable or is that not necessarily a logical follow-on?

No. It's the book of business that they had in the mill in Massachusetts. It was clearly not profitable. They said it was the smallest mill and it was one that we could make a move very very quick on. Subsequent moves would be based on the moves that we are making in combining brand lines in working with the customer base as to the pricing and approaches on certain other products. And we will build our operating plan based on these subsequent actions.

What we want to do is get this done this year. We will move pretty quick and we are not going to evaluate a mill for 10 months and we need to take action on this pretty quickly to create the value.

Now given the -- is it the FiberMark acquisition, the Fox River, getting rid of Terrace Bay? Can you update us where your net pulp position at this juncture is?

Yes. It's a good time to be a net seller of pulp. We are -- the Pictou mill is running well. The Pictou mill is about 265,000, 270,000 tons of pulp and we are a net seller of pulp, still.

Okay, and can you give us order of magnitude in that pulp sale position?

I don't know that we have disclosed that number. If we have, Mark, I will get right back to you would what it is but no. All we've disclosed is we are a net seller at this point.

Fair enough. And then lastly you had mention for SG&A you would be a 2.5 million increase related to ERP. Does the payment to Kimberly-Clark go down this year?

By this year do you mean 2007?

Yes.

No.

Well, yes, we are not using their services at all for computers anymore. That's gone. We have replaced everything with our own platform.

You had done that in 2006?

We had already done that in 2006.

So there is no delta '07 -- '07?

No. That 2.5 million? That's for ERP amortization and stock compensation. Both of them are (MULTIPLE SPEAKERS) but they are for both of them.

And we got through as I said in the comments we got through this startup of the ERP, the full suite now including all the order processing cash management operations. A tremendous number of people spent an awful lot of time developing and implementing this. And we have all heard the horror stories that can happen.

These guys pulled it off and they came up -- I won't say without a hiccup because you always have -- a printer may not work but we kept shipping and we are billing the customers and the cash is coming in. So it works. We feel very pleased with it. We've got a lot of people that need to eventually take a weekend off to relax from that.

On SG&A, because run rates is a little bit confusing right now with all of the other stuff we've got going on with Fox River and with Germany. But we've taken a look at it and we see we have about 9.5% of sales in the fourth quarter; and right now we feel pretty comfortable that that's a safe assumption for 2007. And in fact we should do better.

One last question. Given the Weyerhauser (indiscernible) combination, given what IP is doing, the expectation is there is going to be a fair amount of rationalization in the commodity end of the uncoated freesheet business. Historically, how has that translated to your premium end markets? And in particular pricing in those markets?

We don't have the volatility in pricing and the premium segment that use the -- with the commodity players. The (indiscernible) are the [IPs] but we tend to track upwards where -- when they go up and as we said in the comments, if pulp is going to stay up for a while and the commodity boys move, we will look for an opportunity to improve our position.

Larry Clark with [TCW].

Couple of questions. Can you -- was the EBITDA impact due to the pulp downtime in the fourth quarter in the 7 million range as you had expected?

Last year we ordered magnitude, yes. They did a very good job with the Dow last year. They were able to cut some spending and they came up from the Dow which is also an impact of these starting up the mill. They came up very, very well. So we were on the low side of that in the fourth quarter, which is one of the reasons why pulp results improved.

Did I read correctly that some of your deliveries in pulp got pushed into the first quarter?

Yes. What happens is the Pictou mill sitting right on the coast, their customer base is both in the U.S. and Europe. And European deliveries -- it's all by SeaVan and you don't record the sales until it is through the port in Europe. So we had more pulp in transit at the end of the year but -- and we had wanted to build safety stock inventory in pulp for the winter months so our supply doesn't get interrupted if you have severe weather up in Canada.

And very candidly it was a market, a very strong market that we expected to remain very strong coming into this year. So it is not a bad time to have a little inventory.

Can you give us an idea what the specific EBITDA contribution from Germany was in the quarter prior to the $2 million write up in inventories, so we can kind of look apples to apples in technical papers?

No. We haven't broken out the German separate from the North American business. I'm sorry.

So we don't really have a way of knowing how -- well, we do know it did better than last year for U.S. -- well actually in the quarter your U.S. technical papers tried to tell us it did better or worse last year on an EBITDA basis at this point.

I think as we move along we will give more information on Germany. We will start talking about the impact of currency with the euro strengthening from where it was last year. We'll give you more information but at this time technical products is viewed as a single segment and we report (MULTIPLE SPEAKERS).

Then would you guys define fair value EBITDA multiple fair value to be in the 7 to 8 times range or is it wider than that?

I would say it's wider than that.

On the high side then?

Well when you widen it (MULTIPLE SPEAKERS)

Have 7 to 9 or 6 to 8? There's no reason for you to keep -- like you have to keep us guessing? You guys -- it's somewhat frustrating on our call point to try to figure out what a multiple is for a competitor that you are quite well aware of.

Well based on the purchase price, obviously, it wasn't a hugely profitable business. So you tend not to pay a growth multiple based on that. So draw your own conclusions.

We thought it was a more than fair price for both parties. And I hope and I know our investors are going to hold us accountable for what we do with that investment and create some real value for the shareholders. I'm looking forward to getting on with this thing.

So I'm presuming it's below seven times multiple based on that comment.

Fair enough.

Then the $5 million savings, you expect that transition cost here in 2007 will eat into a majority of that $5 million cost savings. Is that how we should look at it?

No, well, not all of the transition cost. I mean if you take the $5 million we are going to pay upwards of $3 million in total severance and other closure costs from the mill.

Right but aside from that, I thought there were other transition costs that will run to the P&L?

There will be and as you -- you know you are going to incur a little waste and delay on machines as you move the product into other mills. And I hope the operations guys are being conservative in how much that is going to cost but we -- in our business plan. we factored in that you do increase some waste and start up on that. And that's what was built into the business plan that the Board approved.

But kind of order of magnitude it sounds like those types of transition costs through your P&L then it doesn't -- from what I hear you saying now it doesn't sound like that is going to eat into a vast majority of that $5 million savings. It will even do it to a degree but not the majority of it.

Yes, there's a lot of things we are going to do with the integration. But let me framework -- frame this. Remember we don't give guidance but we've also had significant organizational changes in downsizing the salesforce. The executive team. They are moving out of offices. There are going to be some other costs.

So it is hard to take the first bucket that we talked about which is this first mill and apply that generally. We have got a full scorecard and we are going to hold our guys accountable to beat the business plan that they developed.

Yes, we understand you don't give guidance. We just want upfront information so we can hold you to some benchmarks ourselves.

I've got some Board of Directors who are wonderful and never forget a number either. So join the crowd. We know what we have to deliver.

(OPERATOR INSTRUCTIONS). At this time there are no further questions. Are there any closing remarks?

Thank you again for your time and questions. As I said before and as your questions obviously highlight, we have a lot going on in 2007 but I hope you agree that our teams have proven that they are up to the task. We are excited about our ability and prospects to generate value for our shareholders in the year ahead. And we look forward to communicating our progress, beginning with our first quarter call that will be coming up before we know it. So thank you very much. Have a good day.

This concludes today's conference. You may now disconnect.