Neptune Insurance Holdings Inc (NP) 2011 Q4 法說會逐字稿

Good morning, my name is Shira and I will be your conference operator today. At this time, I would like to welcome everyone to the Neenah Paper fourth quarter and full-year 2011 earnings conference call. (Operator Instructions). Mr. Bill McCarthy, Vice President Financial Analysis and Investor Relations, you may begin.

Okay, thank you. Good morning, everyone and welcome to Neenah Paper's fourth quarter earnings call. With me today are John O'Donnell, our Chief Executive Officer and Bonnie Lind, our Chief Financial Officer. We released earnings yesterday afternoon and, as usual, I'll recap a few items before turning things over to John and Bonnie to cover results in detail.

Throughout the call, we'll refer to adjusted earnings, which exclude pretax costs of $2.4 million or $0.09 a share, for the bond call in the first quarter of 2011, and a pretax gain of $3.4 million or $0.13 per share, from the sale of the Ripon Mill in the fourth quarter of 2010. Adjusted earnings is a non-GAAP measure, and this was reconciled to GAAP in our press release. Turning to financial headlines, consolidated net sales of $166 million in the fourth quarter were up 3%, with growth in both business segments as a result of higher selling prices, an improved mix of higher value technical products and increased volume in fine paper.

Adjusted operating income rose 14% and margins expanded, as we were able to manage costs carefully during what is seasonably a slow quarter. Earnings per share of $0.47, increased almost 60% compared with adjusted earnings of $0.30 per share last year. In addition to reflecting the growth in operating income, earnings benefited from reduced interest expense due to significantly lower debt levels. Finally, let me remind everyone, that this call wouldn't be as much fun if it didn't include at least a few forward-looking statements subject to risks and uncertainties, more fully described in our SEC filings and explained in the Safe Harbor disclaimer found in our Investor Relations section of our website. With that, I'll turn things over to our Chief Executive Officer, John O'Donnell.

Thank you, Bill. Good morning, everyone. As I hope you have seen from the numbers, our businesses performed well in 2011 and closed the year on a very positive note. Before getting into fourth quarter results, I would like to discuss progress against four objectives that support our strategy to grow in specialty markets, where we have performance advantages and can achieve leading positions.

First in technical products, we expect to increase the size of this business. We will do this by gaining share and supporting global customers as they expand in developing markets outside of Europe and North America, by introducing new products for existing markets and by entering into adjacent markets. In 2011, we made good progress on this objective and technical products top-line grew 10%. Increasing sales and export geographies represented more than one-fourth of our technical product sales growth in 2011.

Filtration exports grew by 15% and we also saw good results for sales of wall covering to China, abrasive vacuum paper sold in South America and medical packaging grades in Europe. Recently we set up a regional sales office in China to facilitate future growth in that country. Innovation in joint-customer development work has also contributed to sales growth. Higher value meltblown filtration grades increased 8%, and we also benefited from the commercial successes of a new label product for Avery, and growing sales of high performance specialty tape. We continue to explore market adjacency, and are now qualified in selling filtration media to support the rapidly growing individual copy capsule market in Europe. Finally, we invested in a new research center and state of the art testing equipment in Germany. We're very pleased with the capabilities this provides to work with customers on their future product development efforts.

Turning to fine paper, we expect this business to deliver very attractive returns, while continuing to find growth opportunities to offset a challenging market. In 2011, we grew our top line for the second consecutive year and actually expanded our operating margins, despite input cost pressures. Our leadership position in premium fine papers has never been stronger. We're investing behind our brands and in tools and capabilities that help our customers optimize their business. In the second half of 2011, we updated colors and introduced new textures for our flagship classic brands, providing customers with even more reasons to choose this premium brand.

Additionally, we're growing in targeted complimentary markets, which include luxury packaging and premium labels. In 2011, our sales in these markets grew by more than 20%. As you may recall, we were the first to launch a folding carton for luxury packaging applications, made from 100% post-consumer waste. This addition to our portfolio became a significant point of difference for premium consumer brands that desire a luxury package, that can communicate a high quality image in an environmentally friendly manner. Our digital solutions continue to replace traditional print technology products, growing over 20% in 2011. We offer a full line of digital products to ensure that, regardless of the print technology in use, the opportunity to use the highest quality product in the marketplace is available and functions beautifully.

In 2011, we also provided customers the ability to conveniently purchase branded envelopes directly from us, in combination with their paper purchases. This change in our go-to-market approach, was very well received by our customers and results quickly surpassed even our expectations. While targeted growth categories represent less than 25% of our fine paper sales, they're key to our future as we work to expand into areas that provide a stronger platform for growth than our traditional markets. We're very encouraged by the performance and the results in 2011, and we're excited about additional opportunities we see in these areas.

A third objective is to expand operating margins. Excluding one-time items, consolidated operating margins grew 60 basis points in 2011, from 7.9% to 8.5%. Margins improved in all business areas. This reflected manufacturing cost improvements, gains in mix and pricing that overcame more than $20 million of input cost increases, and benefits of SG&A scale efficiencies, that as we control these costs while sales increased.

Finally, we will continue to be disciplined in our financial management. Bonnie will talk more about this later, but in 2011, we significantly reduced debt, increased dividends for the second consecutive year and finalized terms to purchase Wausau's premium brands. This latter opportunity became a reality as a result of our strong leadership position in fine paper, and the disciplined approach of our team in negotiating a transaction with attractive financial returns and significant value, for both our shareholders and our customers. So, our teams executed well against these key objectives in 2011. This, in turn, translated into very good financial performance for the year. Next, I'll cover results for the fourth quarter.

Starting with technical products. Sales of $94 million were up 2%, and benefited from a higher value mix and increased selling prices. Demand reflected a normal year-end inventory management by customers and some caution in the market, as a result of continued economic uncertainty in Europe. Revenues grew modestly for most product lines, including transportation, filtration, abrasives, backing and specialty grades, such as, labels and wall covering. Sales were also helped by improved selling prices and a higher value mix.

Operating income of $7.9 million, was significantly ahead of last year's $4.4 million. Profits improved as a result of the higher value sales mix, as well as an effective cost management effort at our facilities. Input costs, while beginning to moderate, were still up by more than $2 million versus prior year, and were largely offset by higher year-on-year selling prices.

Turning to fine paper, sales in the fourth quarter were $71 million, up 5% versus last year, due to higher selling prices and improved volume that offset a lower price mix. We continued to deliver a consistent top line, despite challenging market conditions. We have done this by, first, increasing our market share as customers rationalize and consolidate their product positions behind the clear category leader, and, second, by relentlessly pursuing new growth markets and revenue opportunities. In the fourth quarter, we benefited from performance of our classic brand, which has outperformed the market since its recent product refresh. In addition, luxury packaging and labels grew nicely as we gained traction with the launch of new heavier weight folding carton products and our environment brand, and introduced new specialty finishes and weights for premium label applications.

Volumes in the fourth quarter also included a few large orders sold to our direct customers. After adjusting for last year's gain on the sale of the Ripon Mill, profits of just under $10 million in the quarter were in line with last year. Benefits from higher volumes and selling prices and improved manufacturing efficiencies, were mostly offset by a lower value mix and higher input costs. Like in technical products, input costs began to moderate, but were still up slightly year-on-year. In summary, I'm pleased with the performance of both businesses in the quarter, and we're well positioned going into 2012. I'll talk more about our outlook and the Wausau transaction at the end of the call, but will now turn things over to Bonnie to review corporate and financial items. Bonnie.

Thank you, John. In addition to the performance of our businesses that John already covered, I'm also very pleased with the actions we have taken in our corporate areas this year to drive value. Let me start with interest expense. Earnings this year significantly benefited from the debt that we paid down in 2011. Year-end debt of $186 million, was almost $60 million lower than December 2010. This translated into a 27% reduction in interest expense for the quarter, and a 25% reduction for the full year. Specifically, net interest expense of $3.5 million in the fourth quarter, was $1.3 million below last year.

Consolidated selling, general and administrative expense of $18.1 million in the fourth quarter, was in line with last year, and unallocated corporate expense of $4 million, was also relatively unchanged. For the full year, SG&A was $68 million, which is down from $69 million 2010, as we continue to carefully manage spending in this area. In 2011, SG&A as a percent of sales, decreased by almost 75 basis points. I would note, that as we continue to grow, our SG&A and corporate costs are scalable and will not increase proportionately to sales growth. For example, with the Wausau transaction, SG&A is expected to increase only $3 million on the $100 million plus of added sales, with two-thirds of this increase for direct advertising and promotion to support our brands. Consequently, this will further improve our overall SG&A efficiency.

Our effective tax rate was 24% in the quarter, and 21% in the fourth quarter of last year. In both years, the quarter included changes to reflect the full year mix of income and then taxes between segments. Our 2011 tax rate of 29%, compared to a rate of 28% in 2010. At year end, we had net operating losses of approximately $80 million, and continued to use these to offset cash tax payments on income due in North America. In 2011, we used $20 million of our NOLs.

Next, I will cover cash flow and balance sheet items. Cash from operations in the fourth quarter of $18 million, compared to $12 million last year. The $6 million increase in cash resulted from higher earnings and improvements in working capital. Capital spending of $4.2 million was below last year's $6.5 million. For the full year, capital spending of $23 million was right in the middle of the $20 million to $25 million range we previously communicated. Cash generated in the fourth quarter was used to pay dividends and reduce net debt by $13 million.

Turning to long-term employee benefit plans, pension and OPEB expense was $10 million in 2010 and 2011, with corresponding cash payments and contributions of $18 million in each year. With historically low interest rates and discount rates, expense will increase in 2012, and I'll talk about that just a little later.

In addition, non-current employee benefit liabilities on our balance sheet, increased by $30 million in December due to the discount rate changes with a corresponding reduction of $19 million to stockholders equity and an $11 million addition to deferred tax assets. All that said, our defined benefit plans were almost 90% funded on a PBO basis at year-end, and overall, our plans continue to be prudently managed and in very good shape.

We used our cash flows to delever further in 2011 and our balance sheet is sound. Net debt to EBITDA was 1.8 times. We have no significant short-term liquidity or refinancing requirements, and our debt instruments have attractive terms and rates. At year end, borrowing capacity on our North American revolving credit facility was $80 million. While we borrowed against this in January, to finance the Wausau brand purchase, we continue to have ample liquidity. We have the financial flexibility to explore additional opportunities for growth, but we remain disciplined and committed to deploying cash in ways that meet our return requirements and create value for our shareholders.

Return on invested capital remains a key performance measure. 2011, this increased by over 100 basis points, as we grew profits and controlled investments and assets. Returns are approaching desirable double-digit levels, and the Wausau transaction will clearly be accretive to this, although 2012 will include the impact of integration costs.

Let me close with some comments on 2012 financial items, before turning things back over to you, John. Our effective tax rate is expected to be consistent with this year's 29% rate. Pension expense will increase $3 million, negatively impacting EBIT in our U.S. businesses. Cash requirements for pension and OPEB plans, however, will remain unchanged at $18 million, which is approximately $5 million higher than expense. We will pay annual dividends of $0.48 per share, which is up 9% up from 2011.

We expect capital spending to be in line with our ongoing target of $25 million. This includes $10 million for maintenance CapEx, with the balance for projects that deliver value through growth or cost savings. Spending in 2012 includes capability enhancements, to allow us to efficiently internalize the Wausau brands. However, by reprioritizing other projects, we expect to maintain total capital spendings at our target level.

There are two other items related to the Wausau transaction, that I would like to discuss. First, we expect integration costs of approximately $10 million. More than half of these costs will be in the first quarter. Second, we may require additional working capital of $5 million to $10 million in the first half to get the levels needed to maintain our high customer service expectations and support the additional revenue.

Finally, we will book an estimated settlement charge of $4 million in the first quarter, for retirement benefits related to the CEO transition last year. In addition, from a cash perspective, our cash flow statement will show a $7 million reduction in cash from operations in the first quarter of 2012, with a corresponding offset in investing activities. We plan to report both the integration costs and the settlement charge as non-recurring items in 2012 on the income statement. All other accounting and reporting aspects related to the Wausau transaction, will be discussed when we report first quarter results in May. With that, I will turn things back to you, John.

Thank you, Bonnie. As always, I'll start with safety. Keeping employees safe remains the top priority, with a goal to be in the top quartile for our industry. Many things went well in 2011, however, safety performance was not up to our expectations. While our performance was still better than industry average, we hold ourselves to a higher standard. Hourly and salaried employees, across the facilities, continue to focus on ways to improve this performance and ensure that our employees continue to work safely. Next, I'll share some additional thoughts on 2012.

On the economic front, while not necessarily robust, recent news in the U.S. has been better than expected, while the situation in Europe remains dynamic. Approximately a quarter of Neenah's sales are in the eurozone, with the largest portion in Germany, a country that has continued to weather the economy environment fairly well. While there may be some caution in customer orders at the start of the year, we've been encouraged by reports from customers and industry experts and believe our growth plans for 2012 remain on track.

While the weaker euro is projected in 2012, with costs and revenues for most of our European businesses denominated in EURs, we have limited transactional exposure from the currency changes. However, we do expect translation headwinds. In the first quarter, with the EUR currently just above $1.30, this would reduce quarterly sales by more than $5 million.

Turning to input costs, the majority of costs crested in the third quarter, and while still up year-on-year in the fourth quarter, began to decline. With lags in some of our commodity pulp contracts, we expect to see more significant decreases in the first half of the year, but the costs are projected to rise in the second half. Net price declines of around $70 per ton, are projected for the first quarter compared to fourth quarter levels. About 60% of the 220,000 tons of fiber we consume this year, will be subject to those price changes. The remaining 40% of fiber consumption includes pulps used in Germany, including specialty pulp, for which prices are increasing significantly, as well as cotton and other fibers used in the United States.

Costs for various chemicals and other materials will also be up year-on-year. Latex, an important material that many of our technical product grades, is currently projected to be flat for the year, but up comparatively in the first half. Our businesses have demonstrated pricing power, and over time, are able to offset the impacts of higher input costs. However, when input costs fall, certain technical products customers have contracts with price adjustors that result in price decreases. In fine paper, prices for a portion of our non-branded products could become more competitive. So in aggregate, while we expect to benefit from lower input costs in 2012, there are a number of moving parts. Ultimately, as a performance based and branded business, we expect to deliver on our financial return and growth plans, even as we manage movements in input costs.

Next, I would like to discuss a recent purchase of certain brands and assets from Wausau. While I have told people that I would not have anticipated my first acquisition as CEO to be in fine paper, I have also said, Neenah would opportunistically drive consolidation in the market if there was a compelling opportunity, and we certainly view this as extremely attractive. As a reminder, on January 31, we paid $21 million and acquired ownership of the Astrobrights, Astroparche and Royal brands, exclusive and perpetual rights to the Exact brand for Brights and for Index Tag and Bristol papers, one month of finished goods inventory and converting equipment required to package unique retail grades.

Rarely is there an opportunity to do a transaction that allows you to do a transaction, that allows you to gain a bigger share of a bigger pie. To put this simply, we were able to purchase, at a very good price, over $100 million of sales that increased the size of the markets in which we compete, increased our share in the core market, and last but not least, allows us to fill our asset base with minimal added costs. Astrobrights allowed us to enter a new category, Brights, with the leading brand in that segment. The addition of Royal and Astroparche increased our share leadership in writing text and cover, to well over 50%. As I said, in total, we now have a bigger share of a bigger market.

Many of the brands we acquired from Wausau also have strong positions in the retail channel with customers such as, Staples, Office Max, Office Depot and Michaels. While some of us have had extensive experience in this channel, it's new to Neenah, and one we believe can provide future growth opportunities for other products. The large majority of acquired sales, however, are through our existing channels. The reaction from all customers has been very positive, and we also appreciate the strong support of the team at Wausau in helping to ensure an effective transition.

We are confident and on track with the manufacturing integration plans. We have begun to make many of these grades and will ramp up to full capacity over the next six to twelve months. To assist in that transition, we entered into a supply agreement with Wausau, where we will purchase a portion of our volume requirements from them during this period. Because we'll be able to produce and sell these grades with minimal additional fixed costs, we expect that, exclusive of one-time costs in 2012, these brands will generate significant incremental profit and will certainly not be dilutive to fine paper margins. Astrobrights, Astroparche, Royal and Exact brands represent the large majority of acquired sales, and will be reported as part of our fine paper segment. Index Tag and Bristol papers will be reported as part of the corporate segment, since it is a significantly different category then premium fine papers.

In conclusion, we were very pleased with how our businesses performed in 2011 and we're optimistic about 2012. The Wausau transaction represents a source of significant new value. The integration has progressed nicely in these early days, and our teams are focused on excellence in executing our plans for the remainder of the year to deliver that value. We're also building on the momentum in our existing businesses. We're implementing our strategies effectively, delivering attractive financial returns and increasing value for our shareholders. At the same time, as a Company, we're well positioned to pursue additional opportunities that are a good strategic fit, meet our disciplined financial return requirements and create meaningful shareholder value. Thank you for your interest in Neenah. At this point, we'll open the call up to questions.

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

Hi, Mark.

Thank you, good morning. On the Wausau acquisition, if we could just re-summarize. First of all, the financial outlays to acquire the brands, I think you talked about $21 million in cash. There's $10 million of integration, and how much of that -- is that all cash or is some of that non-cash?

Yes, at least a third of it is non-cash.

Okay, so should I say $6 million of cash, $6 million or $7 million of cash?

Yes, that's pretty good.

Then you mentioned a $4 million CEO-related cost. I assume that's cash.

$7 million of it is cash, Mark. So what the $4 million is, is a settlement charge that runs through the P&L and then the cash payment is $7 million that would go through the cash flow statement.

So I'm kind of at $35 million --

It's not related to Wausau though.

Okay, what was that related to?

That's just related to Sean's retirement. He can get a certain portion of his pension as a lump sum and the rest of it as an annuity, so that's the lump sum portion.

Okay, I'm sorry. I totally misunderstood that. Then lastly, I think you suggested some $5 million to $10 million of essentially working capital build to get the Wausau business, to be able to perform at the types of levels that you would expect it to. Did I hear that right?

That's correct, and then we do have CapEx that isn't exactly incremental, because it's still going to be re-prioritized and we're going to maintain our same $25 million spent.

Okay, then, and I realize this is maybe not an easy question to answer at this point. You tell us basically, there are roughly $100 million in sales. Is there any way to give us a sense of parameters, and what type of EBITDA margins you might be able to achieve on the incremental sales?

We did give you somewhat of a parameter when we said it would not be dilutive to margins.

That's pretty -- not a lot of parameter there.

Mark.

Let me ask it a little bit differently. When we look at the EBITDA margins on your existing business, is it feasible that the Wausau business, over time, could get to those types of margins, or because it's somewhat more commodity oriented or what have you, would that be a stretch?

I think you were right on your very first statement, that this is probably hard to answer right now. I would tell you that -- just as a reminder, these are not as premium as these brands that we purchased. While they're premium brands and we call them premium brands, and they are in the premium category, they're not equivalent to our classic brands, from that standpoint. The other part is, just as a reminder, there's a lot of complexity. We're three weeks, 21 days into this, and while we're extremely confident we can produce and have most of these products in our overall system, there's 22,000 SKUs that we're going to be bringing in. There's a lot of complexity. I would suggest to that is, remember these brands are premium brands, they're important ones, but they aren't probably at the same level as our historical classic brands.

Okay. Lastly, I look at the list of components and the outlook, the Wausau, the one-time integration, the economic uncertainty in Europe, et cetera. When Bill was describing outlook, he said it was going to be fun, and I look at these, and I don't necessarily -- I guess I'm kind of -- is that primarily the hopefulness on the Wausau being contributive?

Yeah, I think we're trying to be as transparent as we can, and balanced from that standpoint. We're very excited about the Wausau opportunity that we have. I think the more you look at it, the more excitement builds, but that's not without -- I mean, there's a reason they call this work, all right? It's not without the challenges that we have in other parts of the business. Yes, I think Bill's reference in the first part on fun really is talking about, we've delivered what we said we would do, we continue to deliver and continue to drive value, and we're extremely optimistic about 2012, even with these other headwinds, if you will.

Okay. Thanks, guys.

You bet, Mark.

Your next question comes from the line of Gregory Macosko.

Hi. Thank you.

Hi, Greg

Just to follow up, relative to Wausau, I would assume then that the margin targets et cetera, really wouldn't fully kick in until 2012, because you're saying you're going to be buying from Wausau, and the paper, the raw materials, et cetera. Is the idea to integrate all of that over the next year and a half?

I think we optimistically view, six to twelve months that we can have all of this volume into our overall system, but you're correct in regards to the timing of the value.

So it will be a progressive margin improvement over the next six to twelve months, is really what we're talking about here.

Yes, that's what we'd expect.

I missed some of the first part of the call and forgive me. Just talk about Europe and Germany. You mentioned it's on track for your expectations I guess, and you're saying the orders are coming through okay?

I think what I said was, that we believe that the growth plans that we have in 2012 are still on track in that regard. I think our expectations for those markets may very well have been tempered as we build our overall growth plans in the upcoming coming year, but we're on track and feel okay about it. Again, I referenced of the countries to have manufacturing facilities in, I feel very good that our facilities are in Germany and that group continues to deliver against the overall plans.

Okay, and then, in terms of Europe, can you give me a feeling or a sense of -- first off, that business is primarily the technical side, the tech papers, right?

Yes, it's predominantly in our technical products business, that's correct.

How does it break down across the spectrum in Europe?

I think the size that we have, roughly one quarter of our sales in the eurozone, so to give you an overall flavor.

Oh, so the rest is international elsewhere?

Yes. Roughly a quarter of overall Neenah sales in the eurozone, okay? Yes, the rest is, we talked a little bit about the growth in China, South America and the U.S. obviously.

All right, thank you.

You're welcome, Gregory.

(Operator Instructions). Your next question comes from the line of Stuart Benway.

Hi, Stuart.

I guess some more on the Wausau acquisitions. Where will you be making those brands? Would that be at Whiting or Appleton?

Yes, we have three facilities that support our writing, text and cover. Our traditional fine paper business is at Whiting -- they're all Wisconsin, Whiting, Appleton and Neenah. The addition of these brands will go where they're most optimally produced. All of the facilities will be impacted as it fills up our footprint, our install footprint.

Is the fact that the brands that you're acquiring, the plant is also located in Wisconsin not too far away, does that give you any advantage or not necessarily?

Obviously, as we said, we're transitioning, the closer that we are to Wausau as we make these transitions, can only help from that standpoint. We have been able to -- a number of people have accepted roles within Neenah, and we're delighted about that, and obviously that makes the transition easier for them.

What is the capacity utilization at the plants that will be getting these new brands currently?

Our expectation is they will be fully utilized from that standpoint. We have been probably in the close to 70% or so, in high 60s to the 70s, and they will be fully utilized with these.

I believe that Wausau had $200 million in sales in that paper business. Were there some brands that you chose not acquire?

That's a very good point. Absolutely. As we've said, our place to win, if you will, is clearly in the premium segment, colors and textures. So the brands that we acquired represent less than half of the overall Wausau product, but clearly fit nicely with our strategy and how the market perceives our role going forward as a consolidator.

Can you talk a little bit about the advantage that you see getting you more into the retail? Would that get you some of your brands into retail?

Yeah, that would be the hope and the desire from that standpoint. Clearly it's a new channel for us, so that just represents upside in that regards. For us, what we have seen historically in the last maybe ten years, is that as products transition from our traditional merchant channel, many of them have moved to the retail channel. So it enables us to retain the overall sale by participating in that channel where we haven't historically.

Moving to parts of your business that are on-going, you say that a more profitable mix helps results in the technical products business. Was that mostly due to the higher sales of filtration?

We have got a variety of products in the technical products business that have nice margins from that standpoint, but filtration is clearly one of the better margin items and also had a very good quarter. Labels is another growth area for us, and we had a nice quarter in our label business there.

Is there something that's -- that you're deemphasizing that had lower margins, categories?

We're always looking for our marginal business and finding opportunities through innovation, and working with customers to continue to enhance our margins. I said of the four strategic areas at the beginning, improving our operating margins was clearly a focus for us. I think they've done a nice job of making progress on that. We are conscience of the fact that we have assets installed and we continue to want to utilize those assets with contributing businesses. While we have a process of continuing to take business like, I would say like vac-bag, and it runs on our filtration equipment, so as we grow our transportation filtration we're able to offset lower margin business like vac-bag. Just as an example.

I guess the opposite happened in the quarter on the fine paper side, with the mix hurting margins a little bit. Can you give us more detail on that?

I was so excited about the discussion on fine paper that it grew 5%, and then you picked out the mix part. I think what we highlighted in that, again, clearly it's a strong branded business, and in the quarter, we had some large pieces of business that we sell on a direct basis. I use Hallmark, would probably be a great one that comes top of mind. While it's not something that I would say is an ongoing issue, it was more of a timing issue associated with the quarter. Did I say that it grew 5%?

I think you did.

I wanted to make sure.

So maybe part of that growth was what you said came from more direct sales of envelopes. Could you give us more details on what's involved in that effort?

Just as a reminder, in this past year, a lot of our envelopes are sold by the brand. Since we built the brand and invested in the brand, our customers have found value. If we can amalgamate our envelopes with our products and ship them to them, that enables greater turns, greater access into marketplaces and so on. For us, it was a new revenue stream that provided a significant supply chain service to our customers. Again, as I said, it surpassed even our expectations. We were viewing it as just an add-on, and clearly the customers valued it significantly in the year.

Wouldn't that be a higher margin business, I would think?

Yes, it's a much higher margin business and we began that in, really, right at the end of last year. We'll start wrapping year-over-year comparisons as we begin in the first quarter.

Okay, thank you.

You bet.

Your next question comes from the line of Larry Stavitski.

Hi. Good morning, guys.

Good morning.

I just wanted to get some color on some of the opportunities you have in filtration, transportation filtration outside of the Euro zone, outside of Germany. You mentioned South America and China, specifically. Could you give us a little bit of color on that, the dynamics of those markets and what is driving growth in those areas?

Sure. Again, I think the secret on transportation filtration is really to capture the projects with the OEMs. Work on that one-year, two-year horizon of getting product spec'd, Then we follow and many times, following a customer with a filter solution into markets that they're continuing to grow. Many times, the filter manufacturers are pulling up demand for our products into those markets that you reference. Obviously, those are all developing markets. For us, we don't have an asset installed in those markets from that standpoint. Most of the volume that we're talking about, growth there is being exported. While we can see exported into that market, our customers, we know, are also producing filters and exporting into those markets, as well. I think the key message is, we see the largest growth opportunities there, than the more mature markets. Through very good customer relationships and technology advantages, we're able to enjoy in that growth.

Okay, and not to belabor the point, but can you give us any outlook on what you see specifically in Europe, for maybe, the first half of 2012 from a demand perspective?

I tried to hem and haw around that a moment ago, from that standpoint. What I said was, I think key words of optimistic and committed to the existed plans, from that standpoint. When I went through the transcript, we talked a little bit about the fact that I would expect the caution from customers and orders earlier in that quarter. If, in fact, the demand doesn't diminish and they find that their inventories get too low, then orders will pick up, from that standpoint. I really can't see and predict that. All I can give you is my anecdotal conversations that I've had with some of our larger customers and with others in the marketplace, that I'm not doom and gloom.

Okay, fair enough, and I know you touched on the input costs going into 2012, with pulp moderating and latex staying flat. Can you give us a little more color on where you are with energy prices and some of those other chemicals?

Well, what we tried to do is, we tried to cover the largest input costs. Clearly fiber is the largest in latex, and then it goes down from there fairly significant. I don't believe that from an energy standpoint, that there's any really significant impact overall. Energy is kind of mixed, coal is okay. It represents a small component of the overall input costs, but it won't be, at least from where I sit today and what I'm viewing going forward, it won't be a meaningful negative or positive impact to our overall results.

Okay, fair enough. I know you're very excited, and we all are, of the 5% growth in fine paper, but what's the percentage of uncoated freesheet that you guys have now?

I should qualify that excited, because anybody in the industry that has been in decline for so long doesn't get that opportunity very often.

Right. Right.

I think one of the things that's most important to remember, that in uncoated freesheet, which is really half of overall printing and writing, so in that business, we only represent 2.5% to 3% of that overall market. You can view that as small or you can view that as great growth opportunity. I would say very different from that, is that we tend not to follow as much, the typical uncoated freesheet trends. We really prosper where image is important. It's hard to digitally substitute image.

Okay, great. Thanks, guys.

Thank you.

I will now turn the conference back over to John O'Donnell, who will give final remarks.

Once again, thank you for your interest and participation today. We look forward to the opportunity to talk with you again in our next call in May. Thanks very much.

Thank you for your participation in today's conference, you may now disconnect.