Neptune Insurance Holdings Inc (NP) 2008 Q4 法說會逐字稿

At this time I would like to welcome everyone to the fourth quarter and full year 2008 Neenah Paper, Inc.'s earnings conference call. 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 that 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 provided by applicable security laws Neenah Paper undertakes no obligation to update or publicly revise any of the forward-looking statements during the course of this presentation. That Includes 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 is the most directly comparable GAAP measures would be posted on the Company's website at www.neenahpaper.com.

At this time I would like to turn the call over to our host, Mr. Bill McCarthy, Vice President of Financial Analysis and Investor Relations. Sir, please go ahead.

Thank you. Good morning. And thank you for joining Neenah Paper's 2008 fourth quarter earnings call. With me today are Sean Erwin our Chief Executive Officer and Bonnie Lind our Chief Financial Officer. I will briefly recap consolidated results and then Sean and Bonnie will discuss fourth quarter financial performance, business conditions and actions we are taking and our 2009 outlook.

Consolidated net sales for the fourth quarter were $147 million in 2008 and $193 million in 2007. Both Fine Paper and Technical Products saw steep declines in end use market demand that was exacerbated by inventory destocking in customers. Operating earnings similarly dropped as we responded to the lower volumes with significantly reduced operating schedules in order to minimize spending and optimize cash flows and inventory levels. Fourth quarter results in Technical Products included a $55 million charge for impairment of goodwill and other intangible assets. This charge is largely non-tax deductible and approximately the same on a pre and post tax basis. While our outlook on future earnings from our German business hasn't changed significantly, accounting rules for impairment testing require future cash flow projections be discounted back at rates and valuations that reflect current unfavorable market conditions and higher cost per capital.

Excluding the goodwill charge and a $4 million adjustment to current year tax expense we reported a loss from continuing operations of $9.1 million, or $0.62 per share in the quarter. This compared with earnings of $1.4 million, or $0.09 a share last year. Discontinued operations had a fourth quarter loss of $700,000 in 2008 and $24 million in 2007. The 2007 loss resulted from a non-cash charge for final settlement of our Ontario pension plan. Despite these losses and a difficult economic conditions we generated free cash flow of more than $6 million in the quarter which was used to pay down debt.

I would like to now turn things over to Sean.

Thank you, Bill, and good morning, everyone.

Our last earnings call was November 6 in 2008. To say that things have changed since then is stating the obvious. In that call we said orders were looking soft and that we would adjust operating schedules in the fourth quarter. We also said that we expected pulp and other raw materials to begin to decline. If turns out actual market softness and input cost declines have both been much more dramatic. The actions that we said we would take in response to the economic situation were executed by our teams. Our actions and responses have resulted in us improving free cash flow in the quarter and paying down our debt. I remain confident in our ability to weather these current conditions. Our liquidity position remains acceptable and our teams are doing the right things taking further actions to cut costs significantly while continuing to work closely with our customers to provide the service, support and products they need. Let me share some comments on each of our businesses.

In Fine Paper, demand for uncoated free sheets fell 14% in the fourth quarter and 8% for the full year. The decline in printing and writing paper markets over the past few months have been correctly called unprecedented and compares to historical annual declines averaging around 2%. Premium writing text and cover may have fallen even more as key end use markets such as the financial sector, automotive and real estate have been at the epicenter of the economic downturn. Consequently, the industry continues to consolidate both in terms of competitors and capacity which is painful but necessary. Ultimately only the strongest firms will succeed and Neenah Paper has the power brands coupled with the go-to-market knowledge and operating capabilities that support customers in our markets consolidating with Neenah.

We're using the expanded data and tools now available to us to bring new information and perspectives to customers to help them better manage the supply chain. In a declining market we believe this will emerge as a major competitive advantage. In addition, we currently offer the industry's only guarantees for both print performance and service while staying focused on core channels we are also delivering growth in areas such as digital printing, eco friendly papers, luxury packaging and exports to selective international markets. At the same time we are aggressively managing spending reducing SG&A to align with top line performance and achieving cost reductions at our manufacturing sites. We're also actively managing machine schedules and recognize that current volume levels have resulted in inefficiencies in excess capacity. We will continue to take the steps necessary to adjust our manufacturing footprint to optimize our cost structure.

We also successfully reduced working capital in Fine Paper and see further opportunities in this area during 2009. So while business conditions remain poor, we are doing the right things to deliver cash flows while maintaining our leading competitive position. A recent example of the strength of our Fine Paper franchise is the choice of CLASSIC CREST as the paper for the presidential inaugural invitations. This selection generated a lot of industry buzz and keeps the market focused on Neenah. Turning to Technical Products, sales also experienced a sharp decline in end use demand with inventory destocking as our industrial customers took significant downtime. The volume declines occurred across most categories as many of our products support the construction and automotive industries.

Certain areas like medical packaging are holding up very well and our sales teams are working more closely than ever with all of our customers during these times to jointly identify potential new opportunities and help manage through the economic conditions that our customers are also experiencing. These relationships remain a key part of our success and have led to recently launched new products in heat transfer and furniture veneer backer. We also continue to expand our capabilities in filtration through ongoing R&D efforts. When the auto industry, particularly in Europe, emerges from the current recession with a new and more sophisticated engine and car platform, we will be ready with the advanced filtration media to meet those needs. Like our Fine Paper team, the technical products team has also been highly focused on cash management and cost reduction.

At our mills in the US and Germany, we have reduced head count and operating schedules in response to the lower volume cutting labor and premium costs. Savings from lower waste at our Munising, Mill was approximately $3 million in 2008. We also consistently reduced inventories of Munising in the second half of the year hoping to generate cash and taking advantage of falling raw material prices more quickly. In both Technical Products and Fine Paper, input costs started to decline during the fourth quarter but were still up on a year-to-year basis. Price reductions accelerated into 2009 and we expect to realize significant benefits this year especially since we are no longer integrated with Pulp Manufacturing. At the same time our selling prices have remained stable. While there is some selective weakening and contractual pricing arrangement, the relationship between selling prices and input costs are largely coming back into balance after several years where rapid input cost increases out paced our selling price realizations.

While business focus remains on share growth and top line preservation we also began taking actions last year to reduce spending and maximize cash flows. We instituted company wide hiring and salary freezes and as I have mentioned we have also reduced head count which is now down almost 10% from a year ago and provides annual savings of $15 million, some of which started in 2008 as part of our Fox Integration activities. Our teams are implementing many other initiatives throughout the organization to cut spending and have identified and committed to total reductions in cash spending and operations of more than $10 million in addition to the significant reductions we would expect in capital spending. So while volumes will remain under pressure in the short term, the actions we are taking to generate cash coupled with the significant improvements in input costs that is now underway will support Neenah Paper's financial position. At the same time we are continuing to strengthen our competitive position by working closely with customers and investing in the products, brands and technologies that are important to both of us now and in the future.

I will talk more about our outlook later in the call. Next, Bonnie will cover our fourth quarter results. Bonnie?

Thank you, Sean.

I will lead off with a few general comments then go through segment results and then wrap up with corporate finance topics. The primary reasons for the decline in profits in the fourth quarter were significantly lower volumes and unabsorbed costs related to significantly reduced operating schedules. Combined these two had an impact of almost $20 million in the quarter. In addition, input costs in the fourth quarter were higher than last year by $6 million but prices have started to drop and we will benefit from this in 2009. List prices per ton for northern softwood pulp were $780 in the fourth quarter and our estimated average $680 in the first quarter of 2009. Prices for latex and energy also have fallen substantially. While more of our German contracts had fixed prices including a portion of their pulp purchases, overall at the Company we expect to see a very substantial benefit from lower input prices in 2009.

Finally, Bill already noted the Technical Products $55 million goodwill impairment charge, so I won't go into much more detail other than to reiterate that it is non-cash and it is largely non tax deductible. The impairment is a result of discounting future cash flows with substantially higher cost of debt in equity that are reflective of current financial and market conditions rather than a shift in our long-term expectations of cash flows from our German operations. The write-off represented slightly more than half of our reported goodwill. Moving onto the segment results, Fine Paper net sales were $72 million in the fourth quarter versus $95 million last year. The decline in sales reflected an uncoated free sheet market that experienced its steepest quarterly decline ever. End uses such as advertising and corporate identity documents particularly for the financial, housing and automotive industries were hard hit and customer inventories also declined to reflect lower demand levels.

With continued consolidation and rationalization in the market, selling prices have remained reasonably stable and we continue to support our brand and work closely with customers. Operating income was $1million compared with $12 million a year ago. In addition to lower volumes reasons for the decline included 3 million for higher input costs and 4 million of costs for downtime. In response to the lower volumes, we recently announced an indefinite shutdown at the end of this month of one of the paper machines at our Neenah Mill. This reduces our annual capacity by about 10%, or 18,000-tons and represents a 40 person headcount reduction. Now as Sean mentioned, we will continue to assess our manufacturing footprint and will take appropriate actions to ensure an efficient cost structure.

Our Fine Paper team is executing a number of other initiatives to cut costs and improve efficiencies. One example is in managing our supply chain. In addition to lower fuel costs, scheduling and shipping efficiencies have contributed to a year-over-year 18% reduction in distribution costs per pound shipped. At the same time we are able to improve customer service levels. In addition to these benefits we significantly reduced inventory and freed up in total 12 million in cash from working capital. And the team is targeting further reductions as we continue to use our technology and our systems more effectively. The actions we are taking coupled with declining input costs will help deliver the important cash flows that Fine Paper historically has contributed despite today's extremely challenging environment.

Moving to Technical Products. Quarterly net sales were $74 million, compared with $98 million in 2007 . The steep decline in the fourth quarter compared to a 7% growth rate through September. Consequently, full year sales were essentially flat although we did deliver solid growth in filtration, component materials, and wall covering. Paint sales were lower in 2008 primarily due to reduced exports from Germany as a result of a strong Euro for most of the year. In the fourth quarter the Euro weakened falling about 7% versus the dollar. While less favorable currency translation reduced Technical Product sales by about 4%, this was offset by higher selling prices as an improved sales mix as we filled relatively more higher value filtration, graphics and identification products.

Once global market demand begins to recover the weaker Euro should improve our ability to export paint products from Germany. Excluding the impairment charge, the segment generated an operating loss of 6 million in the latest quarter versus income of 2.6 million last year. Added cost per downtime was $6 million and the biggest reason for the year-on-year decline. Most of these costs occurred late in the quarter and were especially notable in Germany where many customers closed for much of December and into January. We also had over $1 million of one-time costs for write-offs of obsolete fixed costs in Germany. Raw material and energy costs were up 3 million but were offset by higher selling prices. Like in Fine Paper, costs for raw materials including pulp and latex have started to decrease and we will benefit from this in 2009.

We have implemented a number of actions to reduce costs in both Germany and the US including decreases in headcount, changes in operating schedules and practices to reduce premium time and other spending reductions. We will also benefit from government programs in Germany that support a majority of employee wages during layoffs. It is more difficult to quickly reduce labor costs in Germany but these programs provide good longer term support. An allocated corporate and other expense was 4.4 million in the quarter, versus 8.3 million in 2007. The 2007 number included 5 million for litigation settlement cost in 2007 related to Terrace Bay retirees. In 2009 we expect quarterly unallocated expense of approximately 3.5 million.

Next I will review some financial items. Starting with taxes, with the non deductible goodwill impairment charge the fourth quarter tax rate was abnormally low. There was also a 3.9 million adjustment in the quarter primarily to reflect a limitation on utilization of tax benefits associated with the Fox River acquisition. We continue to estimate a consolidated effective rate of around 25% as being reflective of normal conditions for us. From a cash standpoint, we will pay taxes only in Germany as we can apply existing operating losses from pulp against North American income. As of December, we had available operating losses in the US of more than $100 million that could be applied towards future pretax income. Most of these NOLs have a 20 year life. In addition we expect to receive a cash tax refund of about 11 million in the second quarter.

Looking at interest and debt let me turn next to our liquidity position and our capital structure. At year end our debt was 365 million and remaining borrowing capacity on our revolving credit facility was around 50 million. This compared to debt of 374 million at the end of September. We paid down debt from available free cash flow and existing cash balances. We are continuing to manage our cash flows closely and have no major financing needs in the near term. Our US revolving credit facility is not due for refinancing until November, 2010 and our bonds are due in 2014. In November we renewed an annual $15 million Euro revolving credit line in Germany which will be up for renewal again in November, 2009. With only one financial covenant, a fixed charge coverage ratio which only comes into effect if remaining borrowing availability falls below 25 million. The interest rate on our US revolving borrowings was 3.6 million for the fourth quarter and consolidated net interest expense was 6.4 million similar to last year as lower rates were offset by higher debt levels.

Let's take a look quickly at pension and our capital spending expectations. With declines in equity and bond markets in 2008 our pension plan assets also decreased. This additional liability reduced stockholders equity in the fourth quarter by around 17 million and will require increased expense and contribution levels going forward. In 2008, we contributed 7 million to our pension plans and in 2009 we expect to contribute 11 million. Pension expense will similarly increase by approximately 4 million in '09. Our OpEd expense exceeds cash payments and therefore we expect combined pension and OpEd, that expense will be in line with the cash payments for these items. With the sale of our pulp mills, we no longer have any funding obligations related to Canadian pension plans and our German pension plans do not require advanced funding.

Cash payments associated with the German plan have been between $1 million and $2 million per year. Capital spending was $30 million in 2008 , with 6 million spent in the fourth quarter. We have a well maintained asset base and a large strategic investments in German capacity and our US/Europe infrastructure and various other capability improvements are now complete. In 2009, we expect to spend no more than 15 million, a level that represents a sustainable maintenance mode. Depreciation and amortization expense will be in the range of 35 million to 40 million. So overall our balance sheet remains manageable. Debt levels are above our target range but our teams are focused on reducing cost and generating cash. We are managing working capital very closely, comfortable with the quality of our receivables, and we see potential to make further progress in reducing inventory levels with our approved systems and resources.

So to recap, in the fourth quarter we saw severe volume declines and without much benefit from lower input costs or from the cost reduction initiatives that we have under way. We have focused on cash generation and as a result of lower spending and reductions in working capital, we were able to generate about $6 million of free cash flow and pay down debt by 9 million despite our 8 million semi annual bond interest payment. We are pleased to have completed a quarter with lower debt than we started with and with sufficient liquidity.

I will now turn things back over to

Thanks, Bonnie.

I will wrap up with just a few items. Let me start off on safety. We are extremely proud of our teams at the mills for their performance this past year. We reduced our reportable incident rate from 2.0 to 1.8 and we have had significant improvement in a number of facilities like our Ripon, California mill which has now gone well over a year without any injuries. Safety performance for Neenah is well above industry standards and our teams continue to improve on this despite having to deal with reduced operating schedules and the uncertainties of today's economy. We have listed a number of items in our press release about our 2009 outlook and Bonnie covered some of these already including capital spending, pension and taxes. We have also talked about the very significant declines in input costs that are now occurring including pulp, our largest raw material which is already $250 per ton off last year's peak price.

While the amount of input cost savings is volume dependent, we should recover a large part of the $25 million of input cost increases that occurred during 2008. Balancing this will be weak markets and volumes especially in the first half of the year coupled with the cost of downtime. While we can't predict any - - with any accuracy what will happen with volumes, I'm confident that what we are doing to reduce spending and maximize cash flow will deliver important benefits and we intend to continue to use our available cash flow to pay down debt. We also plan to continue to pay our quarterly dividend of $0.10 per share which obviously provides an attractive yield at today's stock price.

We have accomplished a lot in the past year completing the Fox integration and transforming Neenah into a pure, premium and specialty paper company with the sale of the Pictou Pulp Mill last June. In fact, if we still had our pulp mills I'm sure we would be having a very different type of call today. Our remaining timberlands represent an important non core asset and we are continuing with [efforts] to unlock their value and still believe a sale is probable. I hope you have sensed our teams are very focused and are up to the challenges of the current environment. We are taking appropriate actions to address costs and cash flow in the short-term while continuing to execute strategies that make us a leader in the markets we serve. These strategies and actions are intended to generate future value for our customers and our shareholders and our teams remain committed to this joint success.

Thank you for your continued interest and investment in Neenah Paper. And I would now like to open up the call to any questions that you may have.

(Operator Instructions). Your first question comes from the line of Mark Weintraub with Buckingham Research.

Good morning, Mark.

Good morning. First if we could just get a little bit more color on the input costs situation and where things look today relative to where they were in the fourth quarter. I think you indicated that in pulp, the list price was about $100 per ton lower than in the fourth quarter - -

That would be an average quarter to quarter.

Okay. So can we just take your approximate pulp consumption, I imagine it was 55,000 tons or so a quarter in this environment?

Yes - -

A little lower?

Lower. I would go a little lower. - - it will be significant. We do have a couple pulps, Mark, more of the specialty pulps, mercerized pulps that are used in filtration that the pricing doesn't necessarily follow reseed because it is a specialty pulp. That is maybe 12,000 to 15,000 tons of the total. The rest should follow the market.

12,000 to 15,000 tons of the total annual or quarterly?

Annual.

Okay, order of magnitude, if we took 40,000 and times it by 100 we should get approximately the quarterly benefit, is that fair?

That's a fair math. You follow this probably as well as I do. - - there has been quite a bit of movement since late last year. With current prices, list prices at least down in the low 600's, 630 or so. Keep in mind our Fine Paper business uses more hardwood than softwood - - but the hardwood prices have tracked at the same time.

Okay. And then if we think about latex, energy and any other big movers. What parameters would you - - can you lay out to help us analyze the magnitude of benefit you can get as we look at first quarter to start with, versus where it was in the fourth quarter?

Latex I think we said with our second quarter call last year, we were getting in some cases two price increases a month. I think it was at the beginning of May and end of May. So that went up dramatically and it is coming down pretty quickly. I would expect quarter-to-quarter you should see 25% to 35% reduction. Keep in mind in total I think our latex is second behind fiber in total corporate raw material costs. We spend just under $40 million a year on latex.

Okay. So about $2.5 million benefit in latex? 1QV4Q?

I have the calculator and I am never challenge your calculations. You know that.

And then is energy going to be also a fairly significant mover?

Yes, more so in North America than Germany. In Germany there is more annual contracts. Munising, keep in mind the major fuel source at Munising is coal. We produce our own electricity and coal prices are negotiated earlier in the year. We only get delivery through the early fall. So we won't see significant declines in US Technical Products until later this year but those will be significant. Full year I believe our energy price cost us $8 million in '08 versus '07.

I guess what I'm just trying to figure out is in the fourth quarter you lost $16 million pretax and you lay out for us some of the operating cost improvements you are hoping to get. We have talked about some of the input cost improvements. I guess I still don't - - unless you're going to be taking less downtime - - meaningfully less downtime, which I didn't get the sense from the presentation you just gave. It would seem that you are still from an earnings basis going to struggle to get to break even in the near term. A, would you say that is true, and B, does that - - that seems to not foot though with your statement that you don't expect to pay cash taxes on your North American profits. Because obviously, you've got to be making profits for that statement to be meaningful.

The first quarter isn't going to be the fourth quarter. I mean there was a lot of shock in the fourth quarter especially later in it as the situations we are experiencing spread to Europe. As I mentioned - - I think as Bonnie mentioned in her comments - - downtime when you take it in Germany, early on it is very difficult to shed costs. You in effect get into a gardening leave approach where you continue to pay the wages even though the operations are down. As Bonnie highlighted, there is government support for that that has now kicked in. So we see the benefits much more so in the first quarter than we would have in the fourth. We are - - I'm not going to say that the volumes, Mark, are kicking back quickly.

But we have worked very closely with a lot of customers. We are seeing a few bright spots. We are prepared for low volumes. We have made the necessary changes in the mill to reduce our cost structures in the mill. And between our cost savings and our raw material input savings and the changes that we have made, we are pretty comfortable that we won't see a repeat of the fourth quarter. The programs that we implemented - - I mentioned them briefly in the comments. We finalized our budgets in early December. At that time we were predicting raw material input cost decreases but we knew volumes would be threatened. It was because of the uncertainty looking forward and the difficulty in predicting that we went ahead and implemented the further programs that we summarized. Some of the comments, where we froze salary, head count, implemented other savings that we think really is the insurance that we needed to deliver performance in 2009.

And I appreciate, Sean, that given all you've discussed, first quarter is not going to be like fourth quarter. I guess I was just trying to sense whether or not you think you have taken enough measures that you can now be profitable in this type of environment. And clearly, you can be free cash positive given the things you are doing. But can you actually be profitable from a P&L basis. Or will additional measures need to be taken to achieve that and/or help from market forces?

As you know going back a few years, we don't give guidance. We have actually said more on this call in terms of some of the outlook and details, Mark, I think you would agree than in the past. This is a unique time for many people in manufacturing industries. We are not going to sit here and feel good and sit on our hands saying we are generating cash. We are happy not to be profitable. That's not what this is about. So we will do whatever we can to deliver results for the corporation. I'm not going to give you guidance on it. But we are not sitting here waiting for the markets to improve.

Fair enough. I appreciate that. Obviously, what happened in the fourth quarter was probably a bigger surprise than we have seen in prior periods. So to the extent that any help to understand how much of it is under control now versus how much of it is a new plateau level is much beneficial.

That's a fair comment.

The other question - - I just wanted to follow-up on - - you mentioned briefly, Bonnie, on the fixed charge covenant. Could you just go into a little bit more detail of what they are and under what circumstances we have to be thinking about them?

The fixed charge coverage ratio, that's on our ADL. And like we said, that was really an availability trigger. We don't have any real covenants the kind of things where you have to maintain so much EBITDA or anything like that. We do have availability triggers at various levels that would restrict our ability to do certain things. So, for example, we had really over $50 million of availability at the end of the year. And if we were to have less than 35 for 60 consecutive days, that would restrict our ability to pay dividends. If we have the - - the next thing that would affect us is availability would have to drop to below 25 before we would be in a testing position to where we would have to test that fixed charged coverage ratio.

Okay. And just to clarify, two things on that. One, when you talk about the availability, is that just a function of unused capacity or are there - - is that a calculation as to figure out what the availability is dependent on a bunch of different variables?

It is not hard, Mark. It is based on your borrowing base. And primarily our borrowing base is in accounts receivable - - it is a working capital line as well as we get some extra capacity from fixed assets. We look at what those numbers are at the end of every month and then compare that to what we have drawn on our ADL and the difference is what you have available to draw.

Okay. I'm not going to get into it here. Is there somewhere where I can see what the various tests are below the 25 million? Is that public?

It is in our K.

It is in your K. Okay. Thank you.

It is only the one test but you will see it in there.

Your next question comes from the line of Aaron Rigalls with Oppenheimer.

Yes, thanks. Good morning. I guess to pick up a little bit where Mark left off. I guess trying to understand the downtime a little better and sort of how you managed your production to demand levels. Can you give us a sense, do you think that you were overly aggressively in terms of trying to stem some of your production. And how did that relate to what you actually saw from your customers, I guess as a start. And then if you can give us a sense of what you have been doing in the first quarter and how that would compare to the fourth quarter in terms of downtime.

Yes, we did move pretty quick. I think one of the reasons that we were able to is our ability to manage the information and make decisions with the - - since we have implemented the Oracle ERP system. It has given our teams enhanced capabilities in understanding each mill and each machine and the best way to optimize the manufacturing footprint. So we did move quick in the fourth quarter to take the downtime as necessary. Because we do have the available capacity when demand picks up to produce the inventory at that time quickly.

So we move quickly I think in line with demand though as the fourth quarter sales numbers reflect, it was some significant declines as our customers destocked. We did a lot of things, obviously - - you heard Bonnie talk about it - - in terms of to build up cash and to make sure that liquidity was maintained in the fourth quarter. I think we are all smart enough to know our customers and in many cases their customers did the same thing. So this is behavior that has moved throughout the entire supply chain. So there has been a lot of destocking that has taken place that will obviously have to be replenished, in many cases even before there is significant recovery in the economy.

That's helpful. And I actually wanted to touch on that in a second. Can you tell us at least through the first couple months of the first quarter how the mills have run in terms of downtime. Is it comparable to what we saw in Q4?

We are still taking quite a bit as I mentioned in Germany the costs will be quite a bit less. The automotive industry in Germany and then our filtration customers, their downtime was for - - really from early-to-mid December carried into January. So we carried into January also. It is safe to say that the operating rates are higher. But we are not in a position to predict annual operating rates at this point. We hope and we expect them to be better but we will be responsive to the market.

Is it fair to ballpark if you basically absorbed $10 million in downtime cost impact Q4, maybe it is going to be 5 kind of range, give or take?

I'm sorry. I am not going to give you that.

Fair enough. I figured I would throw it out there.

We do think in terms of the input costs. Those you can put into a calculator. Those are real because those are market prices. Downtime we will take as necessary and we are not going to take anymore than necessary.

That's fair. Can you comment then - - talking about the volumes a little bit and the customer destocking. Is there a way to sort of quantify the volume declines and maybe break that into at least what you think is customer destocking as compared to overall just general demand?

Yes, we've talked to customers - - we have always been close but the relationships are much closer than ever. I think if you look at published industry data in North America, the printing and writing markets. You're not seeing a significant recovery. I think both January in total printing and writing was more than 20. February, I think the preliminary numbers are 20. So it's continuing. One of the benefits though that actually we are seeing is having a branded product when it is specified, we are still selling our leading branded products. And so we are seeing some improvements in mix and those are also - - tend to be the higher priced products. So even though the volumes may still be suffering, we are seeing some improvements, realizing improvements due to the products that we are selling.

That's fair. There is no way to say if your volumes were down, 24% and 25% in Q4 that half of that you think is destocking maybe on the technical products? Can you just give us a little more color to understand how you think it is going to be going forward?

And it really depends, markets that you get into. I think even within Technical Products we are seeing different behavior and different product categories, and candidly in different regions of the world. It hit first in North America. We've seen Europe came on later. We are seeing some changes in customer behavior depending on who their customers are. Some are very, very close to the automotive industry and if you shut let's say 40% of their capacity. Other ones it is much smaller.

So we are making sure that one, we don't lose share in this and two, we are getting through our organization and our sales and marketing folks in particular. - - I think what is happening right now - - it happened in the fourth quarter and in this quarter, customers are going to remember this, good or bad, for the next ten years or so. And we are going out of our way to strengthen these relationships to support them. As Bonnie mentioned, the quality of our receivables is very good. We have premiere customers. Our days sales outstanding, we have been reducing it and our customers have been great. They have issues but we are working with them and I think this is just going to strengthen relationships. So I can't tell you when the recessions going to end but I will tell you when it does, we are going to be in stronger shape than when we went into this with good liquidity throughout it.

Thanks. Good luck.

Our next question comes from the line of Job [Sibileti] with Goldman Sachs.

Hi, Job.

Morning. Just to pull some of this together, on the input cost side of things, you are talking about sort of market prices for pulp and things like that. But of course with some of our companies it takes a while for some of that to flow through their inventory and their cost of sales. I was just sort of wondering, are we really going to see significant impact? Should we expect to see significant impact in the first quarter from lower input costs for pulp and chemicals and things. Or is there going to be a big lag?

Excellent question. The answer is, yes. You didn't see a lot of it in the fourth quarter. You get - - I have been around long enough and have been surprised enough over the years that prices go down. Pulp prices, for instance dropped and I get giddy about the impact. And then you find out that quarter the accountants say, okay you've got to revalue your inventory down now. And so your pulp is going down and your costs are going up. We have been through that. We have lived through that in a quarter and we offset most of that with LIFO adjustments. So we really didn't see dramatic impacts in the fourth quarter. But it's going to begin to happen this quarter. As I mentioned in some of the comments, the Technical Products team in the US did a very good job of driving down working capital dramatically, so they see even quicker impacts because they flushed it throughout right away.

Okay. And then on the volume side, it doesn't really sound like there is any reason or - - you haven't seen any kind of pressure on volumes subsiding at all it sounds like as you have gotten into '09. I know the published numbers we are not seeing any better news month to month. It sounds like it is pretty tough going. There is no real signs of - - major signs of optimism there, right, at the moment?

As I mentioned either to a question or in the comments that I'm not going to disagree with you, Job, but also our teams are not sitting on their hands. They are not sitting there saying, okay, let's just ride this thing out and take advantage of some lower input costs. They are very aggressive in working with customers and in programs and plans both from product and processes and information to win in this market. I couldn't be happier with what I see the teams coming up with. So we are not sitting still.

Right. And then just to clarify in your release, it says that downtime costs in the first half of '09 are expected to be higher than in '08. Does this mean higher than in the first half of '08 or higher than what you just experienced?

Yes, I think through - - actually through - - if I look at an analysis the change numbers through the first six months of '08. If you take a fixed cost absorption number, it was actually positive. We really - - the fourth quarter, I mean is when we really bit the bullet with downtime.

So we might see some improvement from that type of unabsorption level?

So keep in mind we are also talking about capacity and headcounts. So as we reduce capacity and take out the costs the cost of the downtime declines also. In overall downtime and just business conditions I don't think anyone is saying that the first six months '09 is going to be better than '08. Right. Right. Actually I'm looking forward to the fourth quarter because I'm willing to bet that the fourth quarter will be a (expletive) of a lot better. But I'm not going to make that prediction on the first six months.

So what - - switching gears - - what is going on with the sale of timberlands. I mean, where does that stand, what's your - - what kind of timing should we be thinking about? Also, given all the changes in the economy and the environment, what do you expect to use the proceeds for?

Well in the short run, let me answer that in reverse order, the immediate plan would be we just pay down debt, in the short run. We know there are other opportunities obviously that we are always looking at. But immediately we would may down debt. Remember we announced about a year ago that we are moving forward on Pictou. We said at that time we're going to do two separate transactions, the mill and the timberlands. Because as we evaluated it we felt that was the best way to capture real value for shareholders rather than baring the timberlands into mill sale. And mill sales just completed about eight months ago. It was hard to do the trees without doing the mill because the tree buyers want to see who their customer is to be available to evaluate that.

We completed that. We are working on the trees. Obviously, late in the year with what was going on both in the equity and credit markets. Some of the potential strategic buyers of the timberland slowed things down and - - but it is still an attractive market. This is a mill, when you think about what a tree buyer wants, this has a predictable cash flow with a long-term stumpage agreement to a pulp mill that has as its major customer on a ticker pay basis a tissue user that is a pretty stable demand. And so it is an attractive cash flow situation. And we are confident that a successful sale will take place, as Bonnie highlighted in the past, the tax benefit of this to our shareholders is going to be huge because there won't be taxes on it. And so we're pushing forward. And if you are interested, give me a call.

So it is an '09 event most likely.

The 10-K will say. To have assets held for resale, the accounting requirements is that a sale is probable within the next 12 months and we have reviewed the situation with our auditors and they agree with our assessment.

Okay. Bonnie, so the bank revolver is a $210 million facility. Say you've got about 50 available for drawing. What is your outstanding on that as of the end of December? I mean what have you drawn on that?

101 was drawn.

All right. And then just to clarify on the pension you say in the release that your cash contribution will go from 7 million to 11 million this year. And your pension expense will go up similarly. What was the expense in '08 just - -

For just the defined benefit pension plan itself, Job, the expense was 3 million and it will go to 6. We are talking about a few other things. So just for the US and that's where the contributions that we were talking to you about. But if you look at pension at OpEx, that whole related topic, we had expense of 11 million in 2008 and we expect it to be 4 million higher in 2009. And then we had contributions of 12 for everything - - I could say contributions and payment. So that's why when you look at the whole universe, pension, OpEx, like the German pay-as-yo- go type of thing. All in and what we expense and what we contribute or pay will be about the same.

Okay. So total payments of about 12 this year and that includes everything globally?

Right.

Okay. Yes, that's helpful. And the last thing I had was just one little clarification. When you talked in your release about your Technical Products business and you said there was some one-time write-offs, I didn't know if that was of any significance?

No. It was just some obsolete assets in the mills in Germany in the quarter.

Okay. Thanks a lot.

Thank you, Job.

Your next question comes from the line of Jonathan [Lipter] with Sidoti.

Hi, Jonathan.

Good morning. Talking about the timberland again, I know in the past you've said that you would consider an auction. Are you any closer to that or do you think you will sell it just regularly?

- - one way or the other, I mean - - we are very active in things right now. As soon as we have - - we are not going to announce anything until we have a definitive sales agreement - - purchase agreement that is financed. If we find an engagement letter in an auction, that is not something that we disclose. So there - - we know all the options and we are pursuing what we think will get the most value for shareholders and with some certainty. We want to move forward. (Pause) Did I lose you? Hello?

Yes. Earlier you had mentioned there were some relative bright spots. Can you talk about which industries you saw that in or which areas? Recent?

Relative is a good word. As I mentioned in the comments, we are not seeing declines in our medical packaging business and as a matter of fact, order entry looks good. Interesting I was in Germany last week - - to give you a little antidotal information - - that you may find interesting - - are the backlog that we had in security papers in Germany was (expletive) near at record levels. And we started talking - - it is not a huge piece of business in Germany, but what they have done in Germany is to support the auto industry is a car that is nine years old or older, you can turn it into the government to be crushed. And they will give you a coupon for 2500 Euros off of a new car. And with the feeling being the new cars are both more efficient and environmentally from an emission standpoint. And the manufacturers are, depending on the value of the car you're buying, may match that.

And so new car registrations in Germany shot up in February and we supply a durable paper. So we are seeing - - in so many words a German stimulus program that we are beginning to benefit from. As we talked about Technical Products, remember in the prepared comments we said that in areas like filtration, we had a very good year. And through the first three quarters of last year, we were up 7% and then with the fourth quarter, it ended flat for the year - - essentially flat for the year. So I think when we get through the shock of some of the downtime that was taken by our customers, we would expect to see some benefits going forward. We have a good position with our customers.

Have you seen any price pressures at all? Some of your customers coming back for lower prices?

Our price increases lagged, the infra cost increases and in some cases prices just went up in January of this year due to contractual things done late in the year. I would expect some pressure. We have good relationships with the customers. They understood what had happened to us last year. As I mentioned in the comments, we have some contractual ones. So I would expect some pressure, but I think it is also one of the benefits of having specialty products as well as branded products. They don't necessarily behave like a commodity.

Okay. Just looking at the SG&A line, why was that up about $3 million sequentially? I know it was down year-over-year but - -

SG&A third quarter to fourth quarter.

Yes. SG&A typically has been running in a range of about $19 million a quarter. When I looked at it, it was up $1 million. So let me see what you are looking at.

We announced, Bonnie, in the third quarter we did take some adjustments to vacation policy to benefit the quarter a little bit. Not $3 million a quarter.

Yes.

I tell you what, we may come back to that.

I was looking at average.

Yes. We will come back to you on that question. We don't have the full analysis on that.

That's what it was, John, it's timing. I'm looking at SG&A, the third quarter did reflect certain things like the change in vacation policy as well as other spending reductions that were - - a lot of it was timing related. But when you look at it, Q4 like a 20 million for that quarter, the 2008 run rate is 19.

Right.

And then our expectation is 19. So I would say the Q3 was more of an anomaly and that Q4 is looking more like where we expect it to be on a run rate.

Okay. And then lastly, when does it not make sense I guess anymore to pay the dividends? Is that constantly reviewed? I mean - -

We discussed that as part of the strategy both internally and with the board. Obviously, there is a high yield on it right now, very high yield. We think it is a fair dividend so our opinion is more reflective of a low stock price than a high dividend. We are prepared to continue to pay it which we think it is a reasonable return to the shareholders. And hopefully, the yield will decline and the stock price is going to increase. But we don't - - if we believe that long-term we're a $5.00 Company - - it probably is too high of a dividend. But that is not our belief.

Thank you.

Your final question comes from the line of Jean Goldberg with Wachovia Securities.

Good morning, Jean.

Hi. How are you doing? I actually just had a question about that dividend as well. I was wondering if maybe it should be cut but you happened to answer that. But also with the timberlands, how much do you think because of this economic crisis, or whatever they call it now adays. Do you think the actual value has devalued? What do you think it was worth then and what do you think it is worth now?

We think - - we have never gone public with those valuations. I think you can - - there is plenty of market data out there. We think that if significant value to our shareholders to proceed on that. Our projections - - we are getting stumpage payments on the use of the woodlands, the timberlands by the pulp mill. It is based on a market rate and long-term that's $5 million to $7 million a year. And we think selling the timberlands would be worth more to shareholders than that earnings stream.

So you are not necessarily going to sell - - you want a favorable price. You are not going to want to just give it away?

This is true. I think that shareholders will be pleased when we complete the transaction. If you do go back and look at what we sold the first half for in 2006, I am not going to predict that we are going to match or beat that number. Valuations have come down. Plus as we disclosed at the time there were some timber agreements along with that fiber supply agreement, that really increased the selling price of that timberland. This will be more of a plain vanilla transaction because we already have the stumpage agreement with the pulp mill and that was established when we sold that. And the new owner would be accepted and would want to accept that contract which is a market driven contract.

Fair enough. Thank you very much.

Thank you.

At this time there are no further questions.

Well, thank you for joining us. Good questions. We expect to discuss the first quarter earnings on - - in early May and we look forward to reviewing our progress with you at time.