Neptune Insurance Holdings Inc (NP) 2007 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Neenah Paper first-quarter '07 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 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 the forward-looking statements that you may hear today. In addition, the Company may make certain statements during the course of its presentation that include references to non-GAAP financial measures as defined by SEC regulations. As required by those regulations, if that were to happen, a reconciliation of these measures to what management believes are the most directly comparable GAAP measures will be posted on the Company's Web site at www.neenah.com.

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

Thank you, and good morning, everyone. With me today are Sean Erwin, our Chief Executive Officer, and Bonnie Lind, our Chief Financial Officer. I will briefly review consolidated results, and then turn things over to Sean and Bonnie to discuss some detailed performance for the quarter.

As I hope you can see from our results, we are quite a different company than we were a year ago, both in scale and in business composition. For continuing operations, net sales in the first quarter were USD225 million, up 70% versus last year, while operating income increased by almost three times from USD10 million to USD28 million, and net income was up fivefold from USD3 million to USD15 million.

First-quarter earnings were USD1.01 per diluted common share based on approximately 15 million shares outstanding. This compared to earnings of USD0.23 per share in the first quarter of 2006.

In addition to the improved performance from our Pictou pulp operations and domestic Technical Products business, our results included acquisitions of Neenah Germany, purchased in October 2006, and one month of Fox River following its March 1 date of purchase. These results are included in existing segments. And as we continue to integrate to take advantage of synergies, we will make less and less distinction between our new and existing businesses.

Terrace Bay pulp operations, which were divested in August 2006, are separately classified as discontinued operations. Losses from discontinued operations were USD500,000 for the first quarter of 2007, primarily for pension obligations of former Terrace Bay employees. And this compared to a loss of USD2.5 million in the first quarter of 2006.

Let me now turn things over to Sean.

Thanks, Bill, and good morning. I'll discuss progress of integration activities related to our acquisition, and then have Bonnie review our financial performance. I would first like to comment on safety, which is also an important part of our integration process.

On a rolling 12-month basis, our mills ended the first quarter with a combined reportable incident rate of 1.2, down from 1.5 at year-end. To put this in some perspective, National Safety Council reports indicate average incident rates are between 4 and 5 for our industry, so the results are truly outstanding.

We're excited to see a culture of working safely continue to grow and expand throughout our Company. In Germany, the teams have embraced Neenah's approach to safety. And we look for similar progress and success at the newly acquired Fox River mills which have had incident rates closer to industry averages.

As I have said before, we believe safety performance is reflective of many things, and business success starts with a safe working environment.

Bill briefly summarized our results, and Bonnie will go into the details. But I did want to say I'm very pleased with the strong consolidated performance for Neenah Paper in the first quarter. And I believe that it validates the strategic initiatives that we have completed over the past year, and also reflects solid execution in our business unit.

Of course, we're expected to meet business commitments and deliver results. And I'm excited by what has been happening in Technical Products in the last six months following the German acquisition, and by the first quarter results that the team has delivered.

As mentioned in our last call, we reorganized this segment into five global product groups -- filtration, tape, component materials, graphics and identification, and wallcovering -- and have named global leaders for each of these groups. This has allowed us to move forward quickly to serve our customers with one face, to work with vendors from a position of scale that opens up new opportunities, and for employees to come together to identify ways to reduce cost through changes in sourcing and manufacturing and process.

One example is in abrasives, where we're changing sourcing of grades between North America and Europe in order to service customers better and also to lower costs and optimize product mix on our asset. Our teams are meeting at least monthly to review progress and look for more opportunities. While we did not tout a synergy number at the time of purchase, we're seeing this acquisition paying back both in hard synergies and in less tangible benefit.

The newly expanded team in Fine Paper has also been working extremely hard, and has done a solid job with the integration of Fox River. Our plan is to retain the strongest brands, customers, assets and people from both businesses, and integrate them within our successful branded Fine Paper business model, while taking advantage of scale and consolidation opportunities from the acquisition.

Within a week after closing, we implemented a new combined sales organization that allowed us to leverage our strengths, eliminate redundancies, and focus on providing the best service and best products to our customers. We have put a common sales incentive plan in place which is focused on our key brands in order to reinforce this.

In addition, we're evaluating distribution of both businesses to ensure we have the most effective channels and coverage. We have spent a great deal of time in the field and on the phone with our customers, letting them know of our expanded array of premium brands now available to meet their needs, and customer reaction has been very favorable.

A second area we addressed was consolidation of back-office activities. The Fox River executive team left in March. And during the month, we held discussions with all other administrative employees about planned organizational changes.

As a result of combining our sales and administrative organizations, we expect to eliminate approximately 60 positions. This will generate savings of around USD6 million annually. However, some of these savings can only be realized after we're on a common ERP platform, which would be by early 2008.

We also said we would achieve operational efficiencies by consolidating our manufacturing footprint. And we announced the closure of the Housatonic, Massachusetts mill in early March. Our sales and manufacturing teams have been successfully managing the transition, working with customers whose business will be transferred or discontinued and successfully qualifying transition brands and grades on the remaining assets.

Manufacturing operations at Housatonic will cease this week, and we are on track to deliver the planned savings of approximately USD5 million annually due to the elimination of fixed costs. I would like to thank the employees of the mill and their community for their involvement and effort during what I know has been a very difficult time for them.

Related to the closure, in April, we sold the rising Art Paper brand name to Legion Paper, the largest distributor of this business. These grades were made at Housatonic, and we had no future plans to compete in this market, so the sale helped pay for some of these severance and closure costs. In addition, we have been contacted by a number of parties interested in the purchase of the mill, and expect to complete our decision on disposition of these assets later this year. The site will likely be sold to developers, and will not continue as a paper manufacturing plant.

While we moved quickly and accomplished a lot already, there is still much ahead. We're in discussions with the union at the Appleton mill whose contract expires shortly, and we are continuing to analyze our manufacturing and distribution footprint. Additional changes will be communicated at an appropriate time. We're also progressing with plans to consolidate customer service and administrative teams later this year.

As we said in March, in part, due to initial cost to implement our business plan and new footprint, we did not expect the acquisition to add to Fine Paper earnings in 2007. We are seeing what we expected, and remain very pleased with the prospects for the combined businesses. The teams are executing the business integration according to our plan, and we continue to expect financial returns from the acquisition to be very attractive to shareholders and accretive to earnings by next year.

Next, Bonnie will cover the financial results for the quarter. Bonnie?

Good morning. Before going into the details, on a macrolevel, I would like to highlight the changes in our consolidated results that we saw in the first quarter.

Net sales are up almost USD100 million. Earnings from operations are up USD18 million. And net income increased to USD12 million. Overall, our businesses are performing, and we are very pleased to share these results with you.

Now, I will drill down into each of our segments, starting with Fine Paper. Net sales were USD72 million in the first quarter versus prior year levels of USD58 million. The principal reason for the increase was that 2007 included one month of sales for Fox River. In addition, sales reflected a less favorable mix, both within our existing business and due to the addition of Fox River.

Selling prices on our existing business were up year-on-year. The less favorable mix resulted from lower volumes in our heritage-branded business, primarily due to weakness in the overall uncoated freesheet market, which declined 6% year-on-year.

We also experienced and worked through some initial uncertainty in the market following the Fox River purchase, as well as Oracle startup issues following our March 1 go-live date for the manufacturing, shipping and invoice modules. These items both likely had some impact on first-quarter volume.

Operating income of USD12.3 million compared with USD15.6 million a year ago. The decline was caused by significantly higher pulp and freight costs which, combined, reduced year-on-year profitability by almost USD2 million, as well as a less favorable sales mix that I mentioned previously, and the impact of Fox's lower margin business.

Results for the quarter also reflected costs related to Oracle training and Fox River integration. These items were only partly offset by higher selling prices and improved manufacturing efficiencies.

In April, we implemented an additional modest price increase on selected brands and products to help offset these input cost increases.

Turning to Technical Products, quarterly net sales were USD101 million, up from USD33 dollars in 2006. Although the largest impact resulted from the addition in Neenah Germany, sales in our domestic business also increased due to higher volumes and prices and a better mix. The mix reflected increased sales of decorative components, image transfer, and other higher value products where, as we have said in past calls, we have been focusing our research efforts.

Turning to Germany, on a stand-alone basis, our business was also up year-on-year. In fact, virtually all of our global product group delivered topline growth. We are managing as one Technical Products Company with our customers, and this is delivering benefits.

Operating income similarly reflects the new platform that Sean described earlier. For the first quarter, income exceeded USD10 dollars compared to USD2 million in the first quarter of last year.

In addition to favorable topline performance I already mentioned, mill operations both in Munising and in Germany were solid. And we are finding ways to optimize cost between these two businesses.

Finally, our pulp segment had a great quarter. Net sales were USD52 million compared with USD43 million in the same quarter last year. Shipments of pulp increased 11% to over 65,000 tons. And market prices for softwood were up approximately 20%, averaging just under USD800 per metric ton. Only partly offsetting these impacts were lower sales of byproduct, primarily timber sold to sawmills. Most of our sales are in higher-value softwood. And Pictou is essentially sold out for the year with contracted tonnage.

Operating income for pulp was USD8 million compared with a loss of USD4 million in the first quarter of last year. Approximately USD7 million of the increase was due to selling prices. Another important contributor to improved profitability was operations at the Pictou mail.

First quarter results reflected record productivity levels and other efficiencies, which helped to offset increased prices for wood following the timberland sale. Reduced losses on pulp hedges and the gain on the timberland sale also contributed to improved year-on-year results.

The Canadian dollar averaged USD0.85 in the first quarter versus USD0.865 a year ago. A positive impact from a weaker Canadian dollar was largely offset by reduced gains from currency hedges. In accordance with our hedging strategy, we had about CAD45 million hedged into first quarter, representing about 75% of our exposure. These hedges were at an average rate of USD0.84, and generated a gain of approximately USD600,000 in the quarter.

We continue to systematically add to and replace our currency hedges. As of March 31, we had CAD77 million of hedges outstanding at an average rate of approximately USD0.86. Fair value of the currency hedges was reflected as an asset on our balance sheet of USD400,000.

Looking at a few other financial items, and starting with SG&A. SG&A expense for the first quarter was USD18 million, which is up from USD15 million last year. The increase primarily related to additional direct expenses associated with our acquisition.

SG&A will likely be somewhat higher for the remainder of the year to reflect full quarterly amounts for Fox River. However, as a percent of sales, we expect it to track around 8 to 9%, which is down from the 10% that we had last year. And we will see this as we deliver synergies and benefits from our economies of scale.

Unallocated corporate expenses in the first quarter decreased approximately USD1 million versus last year due to higher spending in 2006 for our remaining transition service payments to Kimberly-Clark, as well as lower spending in the first quarter of 2007, but that was mostly due to timing of expenses.

Quarterly net interest expense increased from USD4.4 million last year to USD6 million in 2007. This was due to higher borrowings against our asset-based revolving credit facilities.

As of March 31, we borrowed USD117 million against this facility to fund our recent acquisitions. These had an average interest rate of approximately 7.5%. Since we only had one month of incremental borrowings for Fox River, in the first quarter of this year, interest expense in future quarters will increase by about USD600,000.

Our effective tax rate was 30% in the first quarter versus 38% last year. The lower rate in 2007 results from the mix of income between jurisdictions as well as changes in structure that we implemented in connection with the German acquisition. We believe the first quarter rate will be indicative of our average rate for the year.

Turning to cash flows and liquidity, cash from operations was essentially breakeven in the first quarter, as a USD24 million increase in working capital in the quarter offset our higher net income. The primary change in working capital was higher accounts receivable for Germany and pulp which, combined, were up USD19 million.

Customer terms and consolidated days sales outstanding did not change. The increase was principally due to higher net sales in the first quarter versus the fourth quarter of last year.

Inventory levels also increase USD5 million in the quarter. We expect some of this increased working capital to reverse in future quarters, and also following the Pictou annual down this month.

Other items impacting cash flow in the quarter were depreciation and amortization of USD11 million capital spending of USD6 million, and pension funding of around USD2 million.

Overall, we continue to have strong cash generation capabilities as a Company, and now have opportunities to decrease working capital levels going forward using Oracle as the tool to do this.

In 2007, we also incurred cash costs for liability associate with the exit and closure of certain operations associated with Fox River acquisition. Because these restructuring costs are related to an acquisition, they have been recorded as a liability on our balance sheet, and will not impact earnings.

As of March 31, we had a balance of USD8 million for these costs. And these costs include costs for the shutdown of the Housatonic mill, severance, [pronounced] sales and administrative headcount reductions, and other liabilities assumed with the acquisition. We do expect most of USD8 million for the restructurings be paid in 2007.

Given the many changes in Neenah Paper, I want to clarify a few things. Annual depreciation and amortization, including Fox River and Germany, is expected to be approximately USD45 million, with around USD30 million in our paper businesses, USD10 million in pulp, and USD5 million for unallocated corporate. In addition, we expect to incur approximately USD7 million per year for largely non-cash stock-based compensation expense. So in total, depreciation, amortization and other non-cash costs are over USD50 million per year, excluding amortized gains on the timberland sale.

Our capital spending for 2007 is still projected to be 50 to USD55 million excluding onetime strategic investments in Germany and for Fox River. The projects in Germany are proceeding on track, and they will provide the needed expansion of capacity for filtration and wall covering that we've discussed previously.

Looking at our current business mix, including Fox River and Germany, overall, routine, sustaining-type capital spending is likely to be in the range of 30 to USD35 million per year. And that includes 5 to USD10 million related to pulp.

In all, our cash flow capabilities credit metrics remain strong. We have adequate flexibility and adequate borrowing capacity. As I told you in March, we're a very different company than we were a year ago. And we are able now to operate from a more profitable and less volatile base than what we had in the past.

Now Sean, I'd like to turn it back over to you.

Thanks, Bonnie. Let me start out with a few comments on the remainder of the year. In Fine Paper, we will continue to move forward with the integration of Fox River, and will incur some cost this year to transition grades and combine the organizations. We're on track or ahead with the integration activities, and our overall outlook is unchanged. We expect minimal earnings benefit this year, but substantial value creation going forward.

The key as we now move forward is to take advantage of our scale and leverage our sales force and product portfolio. Our teams are focused on doing this.

With the integration moving forward and on track, Bill O'Connor, President of our Fine Paper segment, has retired in accordance with his plans. Bill was a strong proponent of our Fine Paper business and in bringing the acquisition to fruition. I will take over all responsibility for Fine Paper as we move forward with the remaining integration activities this year, and Bill's deputies will report directly to me.

Turning to Technical Products, this segment should also continue to benefit from its increased scale and business integration following a seasonally strong first quarter.

This week, Pictou is halfway through its planned 10-day annual maintenance shutdown. As we have said, the cost impact of an annual down is around USD7 million, depending on the length and scope. The down will correspondingly reduce second-quarter pulp segment earnings from first quarter levels.

While the Canadian dollar has strengthened, and this will negatively impact our cost, the pulp market and prices appear to remain fairly robust. And as a net seller of pulp by about 70,000 tons annually, we will continue to benefit as a corporation from today's higher prices.

So in summary, to wrap up, let me restate our key priorities for this year. First, we will integrate Fox River quickly and effectively into our premium Fine Paper business to deliver benefits ahead of plan, while at the same time ensuring we stay focused on maintaining and enhancing the strength of our very attractive core branded business.

Second, we will continue to build a stronger and more profitable Technical Products business that is centered around our five global product groups and that leverages the scale and know-how that the combined operations bring. And third, we will continue to create value from our pulp and timberland asset, including ongoing productivity improvements and cost reductions at Pictou.

In the first quarter, our team showed good progress in these areas. Fine Paper integration activities are ahead of plan. Technical Products had a very strong start to the year. And Pictou delivered an all-time record first quarter in terms of productivity.

We asked a lot of our people in the first quarter. Enormous effort is required to complete an acquisition and successfully integrate it. Add to this the startup of the Oracle in both of our domestic paper businesses, which by itself is a large undertaking, and you can appreciate the significant amount of activity required during the quarter. Once again, though, our team showed they're up to the challenge. And I would like to thank them and recognize them for their efforts.

We are continuing to do the things that we said we would to deliver value to our investors. I hope many of you have received and had a chance to look at and read our annual report. Not only is it a showcase for our Fine Paper and how premium paper can make for effective communications, but it also recaps many of the changes in Neenah Paper in the past year.

Approximately 80% of our revenues now are coming from paper, and our product mix is more profitable and diversified than in the past. And we believe that there remain significant opportunities to generate value as we continue to grow as a Company. I would like to thank those shareholders who have continued to support us, and have shown confidence in us with their investments, and would like to now open up the call to questions. Thank you.

(OPERATOR INSTRUCTIONS) Joe Stivaletti, Goldman Sachs.

Just a few things on overall integration cost [that] in cash this year. You talked about, I believe, buying about USD8 million related to Fox River that would (technical difficulty) heavily in 2007. But overall, what's a good number for us to be using in terms of cash costs that aren't going to be reflected on your income statement?

Yes, Joe, the USD8 million was restructuring costs. In addition to that, we would have integration costs, but they would be reflected in the P&L. So the USD8 million right now -- we put that on our balance sheet. That is our best guess for what our cash costs will be related to the restructuring.

The integration, though, is really the cost to transition brands between manufacturing sites. We would think that that would be a few million dollars in total. We add that in the plan. But we think that the benefits we'll also realize this year -- there should not be a negative net impact on the results. We should cover it this year.

Where are those types of costs? Are you going to break those out, or are they just going to be in SG&A?

Actually, for the most part, they're going to be in operating cost -- cost of goods sold, because the trials -- let's say as you transfer a grade from Housatonic to one of our mills or a different Fox River mill, you have to qualify it on the machines so as you get the color right and the texture, and so on and so forth. So you have some higher waste and yield losses up front. And we factored those into our business plan.

Okay. Looking at the pulp business, can you just -- just in terms of looking at the second quarter, you talked about the cost of your downtime. But could you give us a little bit of guidance on the impact that this price cap on your pulp (technical difficulty) (multiple speakers) might have?

As we mentioned, we do have a cap on prices in the contract with Kimberly-Clark. Keep in mind that applies only to shipments to Kimberly-Clark in North America.

The impact on the first quarter was a little less than USD0.5 million. So it is not a huge impact. We went into the down -- and you're right; there are about USD7 million of cost for a down. And we went into the down with a good inventory position. We should be able to service all of our customers during the second quarter, so -- and the mill has just performed like a champ prior to the down and, I would assume, coming out of the down. So really, the impact on the quarter would be the cost of the down.

So -- and then on the C dollar, obviously, we all know it has strengthened a lot. You talked about having hedges that are at a slightly strong C dollar versus the first quarter. But I wasn't clear how much you really hedged for the second quarter. So give us some guidance there on --

Our strategy is -- we do it in layers every month; very systematic. As a month hits, we should be about 75% hedged overall. And I think Bonnie in her comments gave you some of the values coming out of the first quarter. So you should be able to roll that.

Yes, we always ramp-up on our hedging. So we're always hedged 75% in the current quarter. So we're not hedged up 75% yet for the second quarter, but would expect to be. Right now, we're a little over 60% hedged.

So as you think about it, if the C dollar sort of sat where it is now, I'm what would be (technical difficulty) on an after hedge (technical difficulty) from finding?

[We fit] every penny in the C dollar on an annual basis -- is worth about USD2.5 million. The hedge rates that we have for about the 60% is USD0.85. so 60% at about USD0.85, and then USD2.5 million annualized for every other penny. I think you can calculate it.

Okay, yes. And just two other numbers questions -- one, in your queue, you mentioned USD8 million of pension contributions this year. How does that relate to what you're going to expense (technical difficulty)

Yes, Joe, everything has not shaken out yet with our acquisition. But for the first quarter, our expense was about USD1 million higher than what we contributed. So at this point in time, I would consider that that would continue. But as we finalize all of our pension numbers with Fox River, I will give you an update on that in the next call.

Okay, and then the last thing on -- can you -- cutting through all these changes and whatnot, could you give us a rough feel for what your cash tax bill for the full year should be like? Or is it going to remain pretty small because of carryforwards and whatnot, or --?

I don't think at this point I am ready to give a projection on where cash taxes will be. I am pretty comfortable telling you that taxes will be 30%, due to the structure that we've got in place, as well as what we're projecting our mix of income will be by jurisdiction.

Okay -- but you still have though some pretty hefty carryforwards in (technical difficulty)

That's correct.

Mark Weintraub, Buckingham.

Strong showing in the technical products business, in particular, it seemed. Trying to understand how much of that was seasonal; how much of that was FiberMark, or what had been FiberMark; how much of it was your legacy business. Can you walk through a little bit?

Sure. Tech Products -- the German business is similar to the U.S. business, and from a market standpoint, the first quarter is normally one of the strongest ones of the year. So you're correct there.

We saw significant improvement in North America, really from all key elements. We had good volume. We had nice sales increases, both in terms of the mix of the products and with some pricing that had been implemented previously.

In past calls, we have talked about the focus on some of the higher-value products. And as you may remember on our recent call, we talked about the impact that that was having on our manufacturing team as they developed and qualified the products. It began to kick this quarter, and we saw the benefits of that with an improved sales mix and results. The cost position of the mill improved. The waste levels came down.

The German business on the other side has done very, very well. The strengths that we saw in the business are continuing. Their key products are doing well in the market, both in terms of volumes and share in some of their markets. The integration team is doing a -- what I would consider an outstanding job creating value for the business, transitioning grades between North America and Europe, combining approaches with customers, and dealing with suppliers from a scale standpoint. So we are on track, and we're very pleased with what we're seeing.

Okay -- I guess, presumably, too, exchange rates help you in that you're selling in euros, and then the profits get translated back?

Right. Their costs are in euros too. So it is unlike a Canadian situation, where the revenue and the costs are different currencies. We benefited from that during the quarter. And a lot of the work we did upfront on working on the plan for Germany, we built in about USD1.25 on our rate. So we're benefiting from that.

Besides that, is there any way where you say things are playing out meaningfully -- you certainly discussed where things were getting better. But relative to your expectations, is there anywhere where things have been particularly stronger than you may have anticipated?

The teams have done a very good job working with customers, global customers, and utilizing the larger platform, aligning the products with the customers, improving the service. And we, as I mentioned in some of the comments, Mark, we did not tout hard synergies at the time of the acquisition. We're realizing them. But we're also seeing what I would call the soft synergies, in that we have some scale in this business that we didn't have before. And there are some benefits for some of the larger global customers.

And then I guess on the -- just following up a little bit on the Canadian dollar, making sure that I understand how if it were to stay at current levels -- so right now, you are 60% hedged at USD0.85. First of all, including your hedging, what was the average rate for you in the first quarter?

Was it USD0.85? I think we said that, USD0.85 or USD0.86 --

Okay, and while you're looking that up --

We're digging through a chart right now.

Perfect. I guess what I'm just trying to understand --

It is USD0.85, Mark.

It is USD0.85. Okay. And so in the second quarter, you are 60% at USD0.85, and 40% will be basically at market. And then in the third and fourth quarters, do you have much hedging in place there, or are we basically at market -- obviously, you'll be putting positions in place, but --

(multiple speakers) in place, but it just ramps down so that I'd have 75 in the first quarter, and like 60 in the next quarter; close to 45 in the quarter after that, and then 25%, so that, again, we do hedging on a systemic basis. And we're always hedging up for the closest quarter.

Got it. And so about 45 and 25 would also be at roughly USD0.85, or --?

No, because again, we layered them in over (multiple speakers) by every -- and so they've gone up as the Canadian dollar has gone up, so --

They would be reflected more of current rates.

Understood. I guess it's just -- a big move in the Canadian dollar can have a pretty big impact on -- if every CAD0.01 is USD2.5 million, so -- I don't mean getting caught in the weeds, but it's --

I know -- less than a year ago, but still a big impact.

Right. And then lastly, I just want to make sure I understand correctly. When you talk about the fine papers and that you -- minimal earnings -- you don't expect it to add to earnings in 2007, you said at one point, was that relative to accretion or relative to absolute EBIT?

That's relative to absolute EBIT for 2007. In 2008, we said it would be accretive. But what we have said is we have USD5 million that we would expect for the fixed cost savings from Housatonic that starts (multiple speakers) yes, that is annualized. And then we have USD6 million -- that's your SG&A -- savings from the duplicate corporate -- or elimination of duplicate corporate overhead.

But we also have the integration costs. And I don't want to underplay them; I don't want to overplay them either. But those will be in the millions.

So that is where we get to -- we see savings. We had some base level -- [but low] -- of profitability. And when you add all of those things and subtract all of those things, we're looking at '07 [SOX] impact EBIT of being close to zero.

Okay, great. And then just last, you also said how very different you look today as to what you looked a year ago. Do we basically -- what we see is what we will probably look like a year from now, or might that change too?

(laughter) Good try, Mark.

Do you have any --

Any other questions?

Well, I can give you the answer I've always given you on that, which is we will continue to evaluate the businesses we're in, and tried to create value for shareholders.

Mark Wilde, Deutsche Bank.

A couple questions -- one, just up in Nova Scotia, do you notice any difference running without half of the timberland up there?

Yes. We did experience some increase in wood cost during in the first quarter. A challenge that we gave the team with this strategy is, let's find ways to counter that. And they've done a superb job.

We started with this really in 2005 by separating the financial results in the mill from the woodlands operation, because for [four] years, they did everything with wood at cost. And they are now evaluating themselves and operating as -- how much value do they create from the wood that is delivered to the mill, and we treat at market prices from a mill standpoint? And I could not be happier with the progress that the mill team has made. It reflected in their results for the first quarter.

So does it change your thinking at all about the remaining land up there?

We will continue to evaluate all of our opportunities. And I think we have a pretty good idea as to where the values are in the business. And as Bill and others have said in our strategy, it's our job to capture that value for shareholders.

Okay. Second question, over in Germany, is there a point where the rising euro really starts to damage the business just competitively for the German operations?

Good question. I think -- they operate in the upper tier in terms up performance in most of their products, especially in filtration. They offer features that are at the very top end of the market. Most of their customers, especially in filtration, are in the European markets. In terms of tape and other products, that is much more of a global product. And the business segment leaders, such as tape, have done a superb job of figuring out how do you best serve the market and generate earnings. So he controls to a large extent the tape that we're now producing in the U.S. with an objective of -- let's make money for shareholders.

Okay. And the last question that I had, this 6% decline that we've seen in sort of the aggregate uncoated freesheet shipments in the first quarter. Can you talk about what kind of volume or shipments you think have taken place in the markets that you're in in the uncoated freesheet category? Are they more, are they less -- how do you see yourself versus that real big aggregate industry number?

I don't think that a 6% number -- and that's really [AFMPA] type data. I don't think that's a decline that we would accept that we would annualized. I think as I look at market data, Mark, it was in particular a very good first quarter of last year. And so you are seeing some of this as year-on-year change.

We have built some plans around saying that the market will continue to decline at a 1 to 2% rate. Our strategy is we will gain share in a consolidating market with the strength of our brands. And we are still building business programs within Fine Paper and setting expectations for our teams and the compensation plans for the teams that they achieve reasonable growth in our key brands in a market that will slowly, but continue to consolidate.

Okay, fair enough. I do want to say, Sean -- I think that that annual does a very effective job of communicating the different types of products that you guys are in. It was really quite striking to me.

I was a little worried at first about the cover. I thought it was a bit edgy. (laughter) It reminded me of life at the Fillmore West. I was in a hotel room, and I heard on --

That hot pink, huh?

I loved it!

And the (multiple speakers), but I heard on CNN that in design right now that this mod look is very hot. So the one thing I'm not is a marketer. So be it. But I'm glad you like the look of it.

Well, I hope people take a look at it, because I do think it is quite effective.

Thank you.

Joe Stivaletti, Goldman Sachs.

Joe, if I can interrupt for one second -- Mark, I think Deutsche Bank's annual report, by the way, should be on that paper next year. But we will talk to you as the year progresses, okay? (laughter) I'm sorry, Joe, go ahead -- Goldman's also, by the way, Joe. (laughter)

Yes, well, I'm not the right guy to talk to on that. (laughter) But I was just wanting to check with -- on the balance sheet side of things, you have now have 117 drawn on your revolver. And I wondered -- do you have any thoughts on wanting to do anything more permanent with that debt in terms of financing? Or are you sort of going to just run [from] this way for now?

We spent a lot of time evaluating which was the right way to go on that, Joe. We have a very active long-term cash flow forecast that takes us through the next several years by month with all of the elements. And we looked at where we thought we would be in a cash position based on our future plans and strategies. And we thought that it made more sense to go with this financing, the slug of this financing rather than more permanent financing that had, very candidly, a much higher issuance cost.

Yes, and the only thing I would add to that is, we really see -- and I tried to make this point in my part -- is that we generate a lot of cash in this business. And so our expectation is that we will be paying down debt for the next year or so. And we wanted it to be prepayable, easy flexible and, of course, cheap. I don't think you will see us doing any long-term permanent financing unless we needed more debt.

Mark Weintraub, Buckingham.

Just real quick -- do you at this point have much visibility on how successful your efforts to push up the Fine Paper prices might be, given, I guess, a lot of mixed indications from the market overall?

As we said, ours was not a dramatic increase. There were a couple of grades we did not go up. But it was -- the marketing team looked all the way through the portfolio. And our announcement took place in end of March, early April and we have implemented it.

And Mark, in our products, on the branded products in particular, you don't tend to see the volatility in prices that you do in the more commodity end. Our list prices, once implemented, tend to hold.

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

Thank you again for your time and questions. We're excited about our start to the year and where Neenah Paper is headed. And we look forward to sharing our progress with you at our next call. So I would like to thank you.

Thank you. That does conclude today's Neenah Paper first-quarter '07 earnings conference call. You may now disconnect.