Neptune Insurance Holdings Inc (NP) 2010 Q1 法說會逐字稿

Good morning. My name is Celeste and I will be your conference operator today.

At this time, I would like to welcome everyone to the first quarter 2010 Neenah Paper 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 the 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 the 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 security laws, Neenah Paper undertakes no obligation to update or publicly revise any of the forward-looking statements that you may hear today. In addition, the Company may make certain statements during the course of this presentation that include references to non-GAAP financial measures as defined by the 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, which will be posted on the Company's website at www.neenah.com.

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

Thank you.

Good morning, and welcome to Neenah Paper's 2010 first quarter earnings call. With me today are Sean Erwin, our Chief Executive Officer, and Bonnie Lind, our Chief Financial Officer. As usual, I'll quickly recap a few items before turning things over to Sean and Bonnie to discuss results in detail.

We are pleased to report earnings per share from continuing operations of $0.48 for the quarter. This compared to a loss of $0.05 per share in the first quarter of last year, when market demand was just starting to recover from a severe decline. Earnings were at the highest level since the first half of 2007, and reflected a strong recovery in volumes across both of our businesses, as well as benefits from the actions we've taken to improve our cost structure. Just in case you didn't notice, we also had earnings of almost $9 per share from discontinued operations, mostly related to the sale over at Timberland that Bonnie will talk about later.

Going forward, we don't expect to have any further reported results from discontinued Canadian pulp operations. Our 10-Q was released yesterday, as was our press release. So hopefully you've had a chance to read through these. And with that, let me turn things over to Sean.

Thank you. Good morning, everyone.

As Bill mentioned, we are very pleased with the results in each of our businesses. To put it simply, it was a good quarter. We are delivering on our key objectives of growing technical products top line, while improving margins in that segment, generating strong Fine Paper and Technical Products cash flows, and improving our return on invested capital. Most importantly, we expect that delivering on these objectives will translate into attractive returns for our shareholders. Let me touch on a few consolidated highlights, and then discuss each of our business segments.

Sales of $167 million were up 25% versus the prior year, and increased nicely in each of our businesses. Both Fine Paper and Technical Products sales also grew sequentially versus the fourth quarter, as we saw benefits from new product launches and revisions, improving markets, and seasonal strength. EBIT topped $16 million in the quarter and compared to $5 million last year. Results reflected the strong volume growth, productivity improvements, including those from our state of the art saturator in Germany, as well as benefits from ongoing cost controls and improved operating schedules and efficiency. While input costs are rising, we have been successfully implementing selling price increases for most of our products to help counter them.

With depreciation and amortization, including the amortization of stock-based compensation of around $9 million, this resulted in approximately $25 million of EBITDA in the quarter. Operating margins and return on invested capital also improved. Consolidated EBIT margins reached 10%, led by gains in Technical Products and continued solid performance in Fine Paper. These higher margins, coupled with asset efficiencies have helped increase return on invested capital.

Cash flow from operations was $14 million. Combined with proceeds from the Timberlands sale, this allowed us to again pay down a substantial amount of debt. Debt net of all cash balances was $223 million, down from $314 million in December, and more than $140 million below a peak of $365 million in the third quarter of 2008. Consequently, our credit metrics are now well within the ranges we targeted, and this resulted in recent upgrades to our credit rating. So overall, we are pleased with the start to the year.

Let me talk next about each of our segments. In Technical Products, sales increased more than 40% from a year ago. Growth was strongest in tape, filtration, and abrasives, and especially in some of our most advanced and innovative transportation filtration products. New business development efforts also remain active, and we realized over $1 million of incremental sales from these new products in the quarter, including initial sales into new filtration end-use markets. Highlighting these efforts are awards we recently received from Avery, naming Neenah Paper as both Supplier of the Year and Innovator of the Year. Avery is an important global customer in both Technical Products and Fine Paper. We are pleased to be recognized for our efforts and continue to work closely with them in developing new label, image transfer, and other products, and then bringing them to market.

Separately, we were also excited to supplement our portfolio of premium tape products, as a supplier to Shurtape for their new Green Frog tape. You may have already seen the commercials on TV for this high-performance tape that utilizes specialized materials and coatings by our customer to produce a tape with an extremely clean and sharp edge for painting. This is another example of the types of innovative products that we produce and work on together with our customers. In summary, both our US and German technical products businesses delivered excellent results in the quarter, including achieving a combined 10% EBIT margin. While margins benefited from a strong seasonal first quarter sales, we are clearly making the progress we committed to, and will continue to take actions to support the margins and growth of this business.

Turning to Fine Paper, volumes grew 13% versus the prior year, and this compared with the reported 4% increase in market demand for uncoated free sheet papers. In addition to growing our core branded business, we achieved substantial increases in some of the new markets we have targeted, especially international sales, but also food and beverage labels, and luxury packaging. Our market position remains strong, supported by our powerful brands, outstanding quality, and industry-leading supply chain capabilities. These factors, along with an industry that remains reasonably balanced in terms of capacity utilization, have allowed us to increase selling prices during this period of rapidly escalating fiber costs.

We increased prices by roughly 3% on the majority of our premium brands in December, and followed this with a similar increase in May. Much of our unbranded business is made to order, and prices for these products also rise with increasing fiber costs. Unbranded business represented approximately a third of our fine paper volume in the quarter. So while our selling prices may not fully capture the rapid run-up in pulp price that is occurring, we are managing this carefully and for the long-term, when pulp prices come off these peaks.

At the end of the call, I'll talk about additional thoughts, as we move forward this year, but at this point, I'll let Bonnie cover financial results for the quarter in more detail. Bonnie?

Thank you, Sean.

In the first quarter, we continued a trend of sequential quarterly improvements in sales, EBIT, and margins. We benefited from an improved cost structure that we are leveraging across higher volumes. At the same time, we've remained focused on cash generation and, with completion of the Timberlands sale, we are in great shape moving forward from a capital structure, and liquidity position.

Let me go through some of the numbers, starting with Technical Products. Quarterly sales were $98 million, up from $69 million last year. The growth was driven by volume gains that were widespread across our product lines. In response to rising input costs, we've been managing our spending carefully, as well as raising selling prices. Because of the specialized nature of many of our products, increases are typically taken on a customer-by-customer basis, and have been taking effect throughout the year.

Operating income of $9.3 million for the quarter was a dramatic turnaround from a break-even first quarter last year, when market demand was still weak and operating schedules were significantly curtailed. The rebound in volumes in the commensurate operating efficiencies were the big drivers of the profit recovery. Input costs also weighed on profits, with just under $2 million of combined impact from higher pulp and latex prices. This was partly offset by benefits of lower energy prices reflected in annual contracts that commenced in the fourth quarter of last year, as well as cost savings and other efficiencies.

Turning to Fine Paper, sales of $70 million increased 7%, from $65 million in the first quarter of last year. A 13% growth in volume was the primary driver of the higher sales. We saw good growth in our core higher-value branded products, and even more substantial growth in (inaudible) business that carries lower prices, but delivers additional profit. As Sean mentioned previously, our teams were also very successful in achieving growth in targeted markets, like international, which was up more than 60% from a year ago.

Operating income of $9.5 million increased 10% compared to $8.6 million last year, and EBIT margins of 14% were also slightly ahead of prior year levels, despite the higher pulp costs. Benefits from increased volumes, cost efficiencies, and higher selling prices, helped offset a $2.6 million increase in pulp costs, as pulp prices were up about $125 year-on-year.

As I mentioned in our last call, some of our contracts now adjust prices more on a lag basis. This is strictly a timing issue and we will see these higher prices come through in the next couple of quarters. Helping to offset this will be the additional selling price increase, as well as savings from cost reduction programs being enacted this year. These include mill restructuring, distribution savings from a third party logistics arrangement, lower natural gas prices, and a new color addition system that will save costs and help us to accurately and quickly dial in the wide range of colors that our customers are looking for. Total, the Fine Paper team has done a great job capturing new volume, implementing a leaner cost structure and maintaining good margins, despite rising pulp costs.

Turning next to corporate items, on a consolidated basis, selling, general, and administrative expense of $16.3 million was flat versus a relatively low prior year period. Unallocated corporate expense, which is part of total SG&A, was $2.4 million for the quarter and $3.1 million last year. Results in 2010 included approximately $600,000 for credits related to litigation and other items. On average, SG&A spending is expected to be approximately flat with last year's level of about $17 million per quarter. Net interest expense was $5.7 million, but included $0.3 million write-off unamortized fees following the repayment of our term loan in March. In 2009, interest expense was $5.7 million. Based on our debt levels following the Timberland sale, interest expense should drop to around $5 million per quarter. This amount includes $300,000 for ongoing, non-cash amortization expense.

Our effective tax rate in the quarter was 32%. After excluding an adjustment for taxes on stock compensation, the rate was 27%. As we've said, our rates can vary significantly based on the overall amount and mix of income between different tax jurisdictions, but we expect to remain in the mid-20s this year. Net operating losses are above $100 million and we continue to use these to shelter taxes due on income in North America and expect minimal cash tax payments, except for Germany, in the near term.

Let me next talk about cash flows and capital structure. Free cash flow was $12 million in the quarter, comprised of cash from operations of $14 million, less capital spending of $2 million. All of our businesses generated significant positive cash flow. Working capital efficiency also improved as a percentage of sales and was approximately 14% for the quarter, as our teams were able to reduce inventory levels, despite the sales growth. In the quarter, we also paid $3 million for a utility contract termination fee that was associated with the 2009 closure of the Ripon Mill, which became due upon sale of the Timberland. In the quarter, we paid $4.5 million for funding of defined benefit pension plans. This is up slightly from last year as a result of timing and funding requirements under the new pension act. Full year contributions are expected to be approximately $14 million. Combined pension and OPB cash payments for the full year are likely to be around $7 million higher than expense. In total, our pension trusts continue to be well funded.

Of course, the biggest cash flow item in the quarter was the sale of our Timberlands, for $78 million in March. Net proceeds of the sale were used to pay down all of our short-term debt in the United States, with the balance of the proceeds going to short-term cash investments. Consequently, we ended March with debt of $247 million and total cash of $24 million. Of the cash balance, $10 million was classified as restricted stock, meaning -- or restricted cash -- meaning that our uses for this cash must comply with terms of our bank agreement, but this amount is expected to be utilized in the second quarter. We recognized an after-tax gain of $46 million on the Timberlands sale, and also reclassified $88 million of other comprehensive income into earnings, which was related to deferred currency gains on our Canadian operations. Since the tax basis of the Timberlands was stepped up at the spin-off, there were no cash taxes on this transaction.

Following another quarter of strong core business earnings and cash flows, and boosted by the Timberlands sale, our capital structure and debt metrics are now clearly within our targeted range. Debt to trailing 12 months EBITDA was three times, and stockholders equity increased by more than $40 million. In addition, at the end of the quarter, we had nothing drawn against our North American revolving credit facility, and we have around $100 million of borrowing availability. In total, these changes supported recent upgrades by both Moody's and Standard & Poor's.

Finally, as Sean mentioned, return on invested capital, or ROIC, is a primary metric we use in evaluating our businesses and financial decisions, and is also a key component of our compensation plan. With the sale of our pulp operations, we increased ROIC to the mid- to upper-single digits. And based on our strong first quarter results, we were over 10%. We will continue to focus on growing our top line, expanding margins, driving working capital efficiencies, and controlling capital expenditures as we move forward to support sustainable improvements in ROIC.

With that, I'll turn things back over to you, Sean.

Thank you, Bonnie.

Let me start with safety. In 2009, we reduced our reportable incident rate by almost 20%, from 1.7 to 1.4. We were pleased with this improvement, and in the first quarter, we improved slightly from this to 1.3. I believe all of the injuries this year were preventible, and our collective job is to eliminate them. We will continue to work towards the world class objective of 1.0, or less, that we set a few years ago.

At the start of this year, global economies and markets began to recover nicely, especially in some of the Technical Products markets. We outpaced the market recovery, with gains in share and continued expansion into new markets and categories in both of our businesses. Our research and development teams continue to stay close to our customers, and are working on new applications and market opportunities for our technologies. While we typically benefit from seasonally higher sales in the first half of the year compared with the second half, we are clearly encouraged by results in the quarter and the continued strength of our order books. However, with an improving global economy, commodity prices, and notably pulp, have been increasing, and then spiked following the Chilean earthquake. As Bonnie mentioned, some of our pulp contracts have lags, and we will therefore see the full impact of these increases in the second and third quarters,with each quarter likely to reflect sequentially higher costs of $75 to $100 per ton. While we may not fully recover -- recapture the spike in pulp prices in the short-term, we will benefit when pulp prices come down, as they eventually will, and we continue to closely manage selling prices and cost reduction initiatives.

While the global economy has been improving, the recent slide in the Euro will reverse the favorable year-on-year impact from currency translation we saw in the first quarter. However, since virtually all of our sales and costs are in Euros, we have minimal transactional currency exposure. From a business standpoint, a weaker Euro will benefit us by reducing some of the pricing pressure on exports from Germany. However, its potential impact on European economic growth is as yet unclear.

As is typical, we will take scheduled maintenance downs at our mills in the second and third quarter, with most of this occurring in the third quarter. However, we don't expect extended down time at our customers this year, as was the case in 2009.

We will remain disciplined in our capital spending, and expect to spend $15 million to $20 million this year. Included in this projection is potential spending for projects for expanded capability and capacity for high end filtration products, and to support more efficient and precise color capability in Fine Paper.

From an organizational standpoint, the recent changes we announced naming John O'Donnell as Chief Operating Officer and Armin Schwinn as Managing Director of Neenah Germany, who is replacing Walter Haegler, who will be retiring, help ensure strong leadership for the future and as a company, we look forward to continuing to build on the momentum we have achieved in recent quarters.

Before we end the call, I wanted to comment very briefly on our annual report. If you ever had any doubt about how premium papers have an impact on communications, I'd encourage you to get a copy of our annual report this year. To quote one of our key customers, nothing could demonstrate better the glory of ink on paper and the wonderful product that Neenah manufactures. In addition to our usual array of fine paper grades, we utilized a hard cover from our technical decor paper. We've received a few questions from individual shareholders on how much this report cost. The fact is, we actually spent less than last year. But we received many, many more comments complimenting the report and how we use it to highlight and sell our papers. Producing and selling premium papers is what we do for a living, and if a picture is worth a thousand words, compare our annual report to a PDF version you can print at work or home. You will see why our paper is a recognized market leader in how combining great design with premium paper gets attention. And that's just what our customers are looking for.

So to wrap up, while there will always be and currently are some short-term challenges with rising input costs, we are confident about the potential of our businesses and we remain on strategy. With the sale of the Timberlands, our transformation into a premium specialty paper company has been successfully completed and has started to see the results. Our focus is now clearly on driving future profitable growth in our core businesses. We believe we have the brand, products, market leadership, technical capabilities, and most importantly, the people to succeed. We would like to thank you for your time and interest this morning, and I would now like to open up the call to any questions you may have.

(Operator Instructions).

Your first question comes from the line of Fred Buonocore with CJS Securities.

Good morning, Fred. Bonnie? Do you want to handle it? We have a technical issue --

Okay.

Well, my first question relates to the outlook and the different sort of data points or directional points you provided in your prepared remarks. As we look forward through to the balance of the year, and Sean, as you mentioned before, your order books are looking like they are improving. Does it look possible that just the strength in order and the recovery in demand, that you're seeing in your end markets, could overcome the typical seasonal impact, so you wouldn't see the kind of typical seasonal drops that you would normally expect to see in your seasonally weaker quarters, or at least have those largely mitigated as we move through the year?

Yes. Good question.

You know, first off, we do not give guidance. We never have. And even with the good quarter, I'm not going to start now. But we are encouraged. The order books, you know, look good and as weve said on past calls, this is now five quarters in a row where we've sequentially built the business.

We're seeing market data, PMI indexes, and others that -- the one I saw this week, the global indexes are up 12 months in a row. So we do feel very good about where volume is going. But the reality is in the markets in which we compete, in the past, they are more seasonal with the first half of the year, especially the first quarter, being a little stronger than the back half of the year, and especially in Europe. You know, where vacations come in August and there isn't a lot of business activity the last half of December. So it's the seasonal patterns exist and, you know, and I hope you're right, that the global economies continue to improve and we don't have a seasonal slowdown this year. You know, I would love to be wrong, but that has been the historical pattern.

Okay. And then my follow-up on, my follow-up relates to the rising commodity costs and impact on your margins going forward.

Again, realizing that you don't provide guidance, so you gave the data points to be able to do the math on this, but broadly speaking, we should expect the impact of rising commodity costs, even with the price increases that you put in place, probably to be heavier, at least in Q2, maybe Q3, than what we saw in Q1, as it relates to impact on profitability.

Yes. Good way to put it. Keep in mind, on quarter to quarter, since prices are still rising, you'll see a layer-up even more so in the third quarter than the -- than in the second quarter. We are taking price where we can, and we've been very successful. As mentioned, we've taken a couple increases of 2% to 3% in Fine Paper since December. Technical Products is really on a customer by customer basis, but we're seeing good action from the business teams in that area. But pulp will, at least for a quarter or two, be an issue.

Our underlying business, we think, is strong and building, and, you know, all things considered, I would much rather be in a situation where I'm dealing with pulp prices, even if it's short-term, with a building business than where we were early last year, where we had very weak volumes and a low pulp price. So we may see some of the pressure that you highlighted, but longer term, we feel pretty good about where we're at.

Okay. That's helpful. I'll get back in line. Thank you.

Your next question comes from the line of Mark Weintraub with Buckingham Research.

Good morning, Mark.

Good morning. Congratulations getting all the Timberlands sales done, and et cetera, et cetera.

The pulp price, the $75 to $100 that you talked about, how much pulp is that affecting on a quarterly basis? Is that about 40,000, 45,000 tons of pulp?

Give or take, that's a pretty good number.

Okay.

And second, on the Fine Paper business, I guess one thing I was trying to figure out is, your sales -- your revenues were up 7%. Your volume was up 13%. So presumably your revenue per ton sold went down about 6% or so. Was that a mix issue? Are you selling more commodity paper now, or were your actual average prices down?

It's strictly a mix issue. And, you know, one man's commodity is another man's dream. From our branded products, Mark, that, as you know, command very high premium in the marketplace, we did sell more opaque-type products, an increase in the quarter to utilize some of the capacity that was available as the market's improving. It does -- it's at a lower price point, but it does give us good contribution and increases profits.

We have not moved price in our branded products. Just the opposite, we've implemented two branded price increases that are sticking.

Do you see, is there more runway for you to further increase opaques and other product areas such as that?

It's not a core strategy of the business. As we've said on past calls, where the business team is headed is into new targeted markets, both geographically and in different product categories. We had -- our team did a great job internationally in the quarter, and I would much rather build the branded business internationally, where we have the strength, than necessarily stepping down into lower value tiers.

And then lastly, you talked about there being some down time, your typical annual downtime in the latter part of the year. Was there any taken in the first quarter? And if so, how much did that cost you? And just order of magnitude, what will downtime costs for the next three quarters in total? If you want to break them down by quarter, that's great. Otherwise, just give us an overall total.

Yes, it's -- there wasn't significant maintenance downtime in the first quarter. Not every machine and every mill ran at full capacity, but it was a much more orderly quarter than the past year. And if you recall, last year we had said downtime due to a lack of demand was, I think, $10 million in the quarter impact on unabsorbed fixed costs. So we're running at a much higher rate of capacity across the board this year.

The downtime that we'll take in the third quarter, some in the second, for instance the Munising Mill took theirs in April. We took a week down in April to coincide with Spring Break there, which is a lower cost alternative for us. Most of the mills will take a week, and, you know, you do have some unabsorbed fixed costs in that week and you'll have higher maintenance spending in that month.

But order of magnitude, these aren't like pulp mill downtimes, where have you an army of maintenance workers coming in. So we'll see an impact, but it's not a material factor.

If you total it all up, $3 million to $5 million, is it order of magnitude?

I would say order of magnitude within that range, but not above it.

Okay. Thank you.

Your next question comes from the line of Ryan Rosenthal with Sidoti and Company.

Good morning, Ryan.

Good morning, everyone.

My first question concerns your technical products business and your opportunity to expand, potentially, into China. I think you may have discussed in the past potentially joint venture there, or another method that you're considering to take advantage of the robust Asian auto market. I would be curious about that.

Yes. I don't think that we've ever specifically identified China as a JV. What we have said in the past, is that we're looking at a growth opportunities in our filtration business, really going in two directions. One is a geographic expansion of our footprint. China is obviously, or Asia, is obviously one market that we would consider. We are seeing our export sales, the high value products into Asia and China, specifically, grow very nicely, including this year. But there are other markets, such as Latin America that we will evaluate opportunities.

The other direction we're going in filtration is expansion into adjacent markets, where away from just transportation, filtration media, into areas such as healthcare filtration, air, blood, where our technologies and core competencies work very well, because it's the same basic technology. So we have lots of growth opportunities in filtration. It's recovering nicely. The team's doing a good job. We're benefiting from the new saturator that we invested in, in Germany, that started up, that gave us a wonderful cost structure also. So we see a lot of good opportunities in filtration.

Great.

And then one final question, on the European market and what you recently have seen there, and if there's anything that's changed in the last month or two, given the turmoil that we've seen. I was curious about your take on that.

We haven't seen, looking even at PMI data that came out last week, the numbers still look very good. But I think we all have a long enough memory to remember September of 2008, and how quickly things can turn.

So, no, we haven't seen anything significant, but we have our ears to the ground and we're monitoring things very carefully. And one of the things we didn't mention on the call, but I was very pleased with, in spite of the growth in the revenue that we saw the first quarter, if you take a peek at our balance sheet, you'll see that the teams actually reduced inventory levels, even with the growth in the business. So the things that we focused on last year, you know, we haven't forgotten. And we learned a lot, and we're continuing to manage it tightly. So if anything does happen in Europe, we're in a heck of a lot better shape than if we let inventories go.

Great. Thank you for your time, Sean.

Thanks.

Your next question comes from the line of (inaudible) with Oppenheimer.

Good morning.

Hi. How are you guys?

Quick question. Your margins were really good this quarter and I think a large driver was that your SG&A as a percent of sales dropped by like, say, 200 basis points. Is that right? Is that the run rate that we should be thinking for your SG&A costs moving forward?

What you're really seeing there, we're hold are our spending flat and revenues increasing, so we get that nice bump.

Okay, so we could probably assume that could be like the run rate, assuming barring some seasonality, right?

The run rate we're expecting to be about 17 a quarter.

Okay.

And then, for your CapEx guidance, I think you guys -- I think the 10-Q filing said about $15 to $20 million, is that right?

Yes.

Okay.

And then also, could you give a little bit more clarity on technical paper price increases? You said that it's kind of like on a case by case basis, but do you think that -- can you give us some type of percent or anything, like a range of what you think the price increases, how it could contribute to the top line in that segment?

As we've said in the past, you know, unlike Fine Paper where it's a branded product, where we announce a price increase, most of these are individual products tailored to the individual customers. We're taking increases depending on the category, and we run it in five different SBUs. I would say our increases are averaging 2% to 6%, we've implemented across the board, which roughly covers, I would say, half of the pulp price increase.

Okay, great. Thank you.

You're welcome.

Your next question comes from the line of Matt Sherwood with Cooper Creek.

Good morning, Matt.

Good morning. Great quarter.

Thank you.

Just had a quick question on the way to understand the timing of the pulp prices. If you look at the first quarter, it looks like the pulp prices year on year were up about $185 a ton on the indices. And you said you only saw $126 a ton impact. How can we reconcile that?

We -- as we said in the comments, the contracts that we have with many of our suppliers, or at least some of them, lag, and it's -- so you've got in that impact. Plus, we use both the mixture of hard wood and soft wood. Fine Paper, for instance, uses much more hard wood than soft wood. And the price increases have not totally been in sync fort he various grades of pulp, and in various markets, regions of the world.

Got you.

And on your Europe business, does that -- you know, if the Euro decreases and pulp costs are generally sort of dollar denominated commodities, does that have an impact beyond translation?

It could. The biggest piece of our German business is down in Bavaria, and that's where they predominantly use a specialized mercerized pulp that is on a contract price basis, where we have annual pricing. So we're not seeing the run-up in that pulp. So it's a mixed bag. The currency obviously where we are buying, northern soft wood for instance, you'd get the double bump. But the majority of our pulp is not commodity pulp in Europe.

And we're mostly -- so net-net, we're mostly hedged, so that if you see like about a $4 million favorable impact as the Euro would strengthen, by the time you get to the bottom line, that's like about $300,000. It all washes out for us.

Okay, great.

And then final question. I know Mark had spoken on the seasonality of downtime, and it looks like you're sort of speaking to a bigger hit in the second quarter, that I think had historically been in the back half, or am I looking at that wrong?

Well, it's -- you're looking at it right. Much more is in the third quarter than in the second. Our team in Technical Products in the US switched a week of downtime from July to April of this year, because it's a lower-cost way of doing it. So -- but we said in the comments second and third, it's dominated by the third. So you're spot-on.

Okay, and that's -- and you had said $3 million to $5 million. That's across the two quarters?

Yes. I didn't say it, but I didn't disagree with Mr. Weintraub.

All right, great. Thanks a lot. Great quarter.

Thank you.

I would now turn the call back over to Sean Erwin for closing remarks.

Well, thank you for joining the call today, and I hope you'll join us again, as we look forward to our next earnings call that I believe is scheduled for August 11. So thank you.

Ladies and gentlemen, this concludes today's first quarter 2010 Neenah Paper earnings conference call. You may now disconnect.