Potlatchdeltic Corp (PCH) 2003 Q4 法說會逐字稿

Welcome to the quarter four 2003 Potlatch conference call. (OPERATOR INSTRUCTIONS). As a reminder ladies and gentlemen, this conference is being recorded. I would now like to turn the presentation over to your host for today's call, Mr. Gerald Zuehlke, Chief Financial Officer. Sir, please go ahead.

Before we begin, I remind you this call may contain forward-looking statements within the meaning of the U.S. Securities laws. These statements include statements about the Company's future business prospects and anticipated performance in upcoming quarters. These statements are not guarantees of future performance and the Company undertakes no duty to update them. Although these statements reflect management's expectations today, they're subject to a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in this call. For a discussion of certain factors that may cause actual results to differ from the results anticipated, please refer to Potlatch's recent filings with the SEC. I would now like to turn the time over to Pen Siegel, who will discuss the fourth-quarter results and provide an overview of our markets.

Thanks, Gerry. You have all presumably seen the news release so I won't go through the overall results for the quarter and year. Although we will clearly answer questions about them. What I will do is run through each of the business segments and highlight anything that happened during the quarter, as well as any obvious trends underway near the end of the quarter.

We have four business segments that report, resource, wood products, pulp and paperboard and tissue. I will start with resource. Resource earnings in the quarter were down $3 million to 17.3 million, largely as the result of the absence of a sale last year of surplus land at our hybrid poplar farm in Boardman, Oregon. We also had lower log pricing in Idaho, which was a reflection of weaker lumber markets earlier in the year. Although that log pricing began to turn up during the quarter. That lower log pricing was more than offset by higher sales of surplus property in each of our Arkansas Idaho and Minnesota. So without the sale of the surplus land in 2002, the quarter would have been a positive.

In wood products, we had a very strong quarter with earnings of 55 million in the quarter compared to a $17.6 million loss the prior year. This was driven primarily by very strong structural panel markets. Oriented strand board pricing, as most of you know, began increasing in the spring of last year and increased through October and then held steady until near the end of November, after which point in time, it dropped sharply. But having said that, fourth-quarter pricing was quite good and demand for the product was very good. And later in the second half, that also pulled plywood pricing with it. We have no southern pine plywood, but we have one plywood mill in northern Idaho, which is primarily a specialty industrial plywood mill. And we ran extra shifts at that mill to produce structural panels to sell into what was a very strong market.

Lumber pricing, as well, was better in the fourth quarter than earlier in 2003. I will get to a change in those markets now. The market price dropped very sharply, over 50 percent in a two to three week period at the end of November and into early December, stabilized for a couple of weeks at a level which is perhaps $70, 1000 higher than a year ago. And as of the turn of the year, when people came in, a number of the distributors and users came in to add to inventories, again heading up again in the last two or three weeks, heading a very sharply. Our oriented strand board order backlogs today -- as of Friday, we were selling into the first week in March. We have elected to push backlogs out, rather than hold backlogs shorter and try to capitalize on potentially higher pricing on short-term sales, because of the time of the year; it is winter. Those markets, though, are quite good.

Lumber markets for us are good and have been improving over the last few weeks. That's the only change from fourth quarter. Moving into pulp and paperboard, pulp and paperboard, we had an operating loss of 1.3 million, quite a bit lower than last year's loss of almost 10 in the fourth quarter. And the reduction in loss was more than all taken -- was really taken up entirely by improvements in productivity, as opposed to markets. There were some improvements in market pulp prices, but paperboard prices, on average, were lower. And the productivity gains are in our Lewiston, Idaho mill, which continues to make good progress. As we look at those markets near the end of the year, given the mix of products we make, we have, normally, a seasonally weak period from mid-November to mid-February. This year is no exception. So we are running well, but this is a somewhat weaker demand period for the products we make, primarily holding carton and cup. There has been no change particularly in the upside in that market and we don't see one at present, although the market is not deteriorating. We would anticipate, as we get into 2004, if economic forecasts that are generally in the marketplace prove to be correct, we would look for improving demand for our paperboard segment, as well as continued improvement in our Lewiston, Idaho pulp and paperboard mill.

Moving to consumer products, we reported a small operating loss of a little less than $1 million in the fourth quarter, down from income of 7.6 million in the fourth quarter last year. In that market, we saw fairly substantial deterioration early in 2003, which continued a trend we saw late in 2002. The market appeared to hit bottom, as we -- sometime during the third quarter. We do not yet see an upturn in the market, particularly. We do have some extra expenses in the fourth quarter, which are tied to our new paper machine in Las Vegas, which is a through air-dry paper machine. We have, in essence, all of the crews and associated expenses onboard during the fourth quarter, but we had no production, since that machine was not scheduled to start up until this month. And so our costs are somewhat atypical, a little bit in the third quarter and much more in the fourth quarter. With regard to those markets, our machine started up a little less than three weeks ago. We are running through a normal startup process, which to date is a very good start up of the machine in Las Vegas. I'm sure we have a number of issues to still work through as you will with any paper machine startup. But we are pleased with the startup progress and the product quality coming off that machine. And that machine will be selling good product into the market fairly early in the first quarter. Other than that, Gerry, I will turn it to you for some statistics.

Thanks, Pen. What I will do is give you some shipments and realizations figures first. These will be changes in shipments and realizations, fourth quarter versus the third quarter of '03. I will start with OSB, which was, shipments were down 3.3 percent, fourth quarter versus third. Lumber shipments were down 9.8 percent; plywood shipments were down 16.5 percent; particleboard shipments were down 14.2 percent; paperboard shipments were down 1.6 percent; pulp shipments were down 10.8 percent to outsiders; tissue shipments were down 3.4 percent. And realizations, fourth quarter versus third, OSB realizations were up 18.5 percent; lumber, up, or excuse me, down 1.7 percent; plywood, up 14.1 percent, particleboard up 7.2 percent; paperboard, down 1.7 percent; and pulp, up 3.3 percent; and tissue, up 0.2 of a percent. I would normally give you trends of December versus the quarter. But Pen did a good job of going through some more recent trends over the last few weeks, which are more important than the relationship of December to the fourth quarter, so I won't do that.

I would like to give you a couple of other numbers, cash-flow-type information. You can see in the report that we had 11 million -- a little over 11 million -- of interest expense and 48.2 million for the year. Capital expenditures in the fourth quarter were 17.4 million and 79.7 million for the year. And depreciation depletion and amortization were 27 million during the fourth quarter and 104.9 million for the year. I would let you know that we had $11 million of carryover projects, or spending on carryover projects, for the '04 year that was not spent in '03. And the largest single item in there is the latest (ph) tissue machine. The 11 million coupled with a capital budget for new expenditures in '04 of the mid '50s would get us to a spending number expected for '04 in the mid to high $60 million range. I would also point out that we reduced net debt by 21.8 million in the fourth quarter and 80.7 million for the year, while contributing 19.5 million in the fourth quarter to our pension fund. With those statistics, I would turn it back over to Carol, and we will be happy to take some questions.

(OPERATOR INSTRUCTIONS). Joe Stivaletti, Goldman Sachs.

I was wondering if maybe you could give your comments, in terms of the outlook both in the OSB and the pulp markets, OSB having come roaring back here and also on pulp, just sort of what your view is about whether there's really going to be an ability to put some of these price increases through in the near-term?

I'll take pulp first because it's easiest because I know less. We are an incidental pulp seller. We have a mill in Lewiston, Idaho, which has two paperboard machines and three tissue machines. It also has a small pulp dryer, which we use to balance out the production in the pulp mill. So it is not a market that we are a major player in; we are a fairly small player. We are as of now, becoming smaller because we will supply most of the pulp to our Las Vegas tissue machine out of Lewiston, so there will be less pulp sold to others. Having said that, you all read the same information that we do and probably spend more time looking at it, on the pulp market and pulp inventories, as of producers, and to the extent the information is available as of consumers, we really don't have a strong view one way or the other on pulp pricing. With regard to OSB, the market has remained very strong. And what we saw, as the market dropped sharply in December, because it was winter and because most participants believe prices had to go down in the winter, we had pretty much a halt in new orders coming into the whole industry for structural panels for two or three weeks, which led pricing to drop, led by one or two companies who did not have order backlogs and had to sell product. The problem was that consumption remained very high in the field. And consumption today remains high, although seasonally, weather certainly is going to slow things down or has slowed things down in some places. As we got to the end of the year, Joe, inventories were low to start off with. The lack of orders, as people tried -- buyers tried -- to hold off buying to have prices fall, have inventories taken down even further. And when they came back and, there is still a problem in supplying those markets. I think we will solve that issue. But barring some very unusual weather over the next three or for three months, the oriented strand board market would appear to be headed for a pretty good 2004. And taking with it, Joe, I think, southern pine plywood and Western plywood.

The other question was just on the tissue side. I don't know if you could quantify roughly the cost -- the startup related costs -- in the fourth quarter of the Las Vegas facility. And then also more broadly, just maybe some guidance in terms of 2004 in the tissue area, what your expectations are in terms of any easing of the pressure in that market, and also, the impact that you are looking for out of the new Las Vegas facility as the year moves forward?

With regard to tissue, we have not quantified the pre-startup costs which all were expensed. They were substantial enough to have fourth quarter worse than third quarter. And without their presence, the reversal would have been true. Our fourth quarter would have been somewhat better than the third quarter in tissue. As we look at the year in tissue, it would appear to us that there is a pretty good probability that that market will begin improving later in the year, maybe around midyear or by midyear. Having said that, we had a number of unusual costs in 2003 related to down time in converting lines, primarily, as well as the pre-startup costs at Las Vegas that we do not anticipate will be present in 2004. The new machine produces a product which is priced at the higher end of the tissue market. And we anticipate that machine will make a positive contribution to us this year. So all things being equal, we are looking for a better year in tissue in the absence of market improvement. And if we begin to see market improvement, we would expect that to be somewhat better.

Richard Schneider, UBS Warburg.

Pen, staying on the issue of tissue -- I'm sorry when did you say your first roll, that salable roll was coming off the machine?

It's probably off already, Rich. I was down there the middle or late last week. It appears the products coming off the machine now fully meet all of our quality specs. But we have not completed all the quality testing that we want to do before we roll these products out to our customers. That testing should be done by the end of the month or later this week. We are producing product which we believe fully meets quality, and so it's a good product.

How do you see sort of the ramp up of this machine? Is there going to be adequate demand to take the product off since the market has been fairly competitive and there has been more tissue capacity added in the industry?

It's probably going to be a little slow over the next two months, because the process we will go through -- this is a new product for us that we have not been able to make. And therefore, it's a new product to our customers and private label. The process will be that we will get them samples to run through their own quality labs for testing while we produce product on the machine. And so we will have some inventory buildup of powered (ph) rolls. And all of the packaging is agreed to, in terms of what the packaging looks like at our major customers. So we don't have that as a backlog and we have packaging. But there's probably a four to six week backlog or a delay between the time we give them samples and the time they run all quality tests, and we can begin packaging this material and shipping it to their distribution centers. So by the end of the first quarter, I would expect us to be shipping substantial quantities. And I would hope that in the first quarter, we can run through the powered rolls that we built up over the next four to six weeks. But it may take us until April or possibly even May, to get back to what we consider to be a normal condition in terms of powered rolls supply and finished goods supplied.

But you don't see any of this issue that you had in that timeframe a year ago?

We do not. The issue is, we believe the machine will be sold out. And so we do not anticipate either taking downtime on the machine or taking downtime on converting because we don't have places to put the product.

The startup expenses will continue I guess in the first quarter with all of this going on?

Now they are actually production cost expenses. Before, we classified them in admin, because we did not have any production to put them against. The costs continue, but unlike fourth quarter and some of the third quarter, where we had all the people and people-related burden, expenses, plus extra training expenses, we now have product. So I do not anticipate there will be a big effect on first quarter.

Shifting over to the folding carton area, we have seen some pickup in the corrugated box area, etc. Why do you think we are not seeing improvement in the folding carton area, just from an economic standpoint, yet?

Maybe I left you with the wrong impression. If we to were to look at this period in folding cartons versus the same period 12 months ago, the market is a little better. So we have seen a little pickup. But there seems to always be a lag probably tied to Christmas. By mid-November, anything that's going to be packaged and shipped out to stores has been shipped out of the folding carton plants. So there is a seasonal lag we run through every year and have for years. That's where we are. Demand is a little better than it was a year ago. but not a great deal. I would anticipate, with the dollar having fallen, and clearly U.S. goods being more attractive than many of the foreign goods which were being imported to replace them, there's quite a lag between the time that that happens and the time the economics work that through the supply systems. So it should be happening now. And it's encouraging to see a pickup in the corrugated business, although we are not in that business. But much of what we make is packaged is corrugated. But we have not seen anything sufficient to make us say that the market has really turned in a major way.

And in your exporting to China, that is not helped by the currency situation?

It really isn't affected much because China continues to be tied to the dollar. Our Chinese exports have remained pretty good, and have not -- I don't anticipate a dollar-related effect there, although their maybe one. It should help us, because the U.S. product, even though the Chinese currency is pegged to the dollar, that currency has fallen in relation to the currencies of many European countries and other countries that also ship into China. So it improves the economics of the U.S.

Just one last question, Gerry, could you give us what you are expecting your pension fund contribution to be in 2004? And any idea of pension expenses in 2004 or changes in that category?

I don't know if I have with me, just a second. I have got some people here that can look up and see if we have it with us, as to what the contribution might be next year. It's not much, because we did the max this year. It's probably a couple million, is all, as far as a deductible contribution next year. We had pension income this year of 13 million and change. And that will be a little less next year but not significantly less. We had a very good year, as far as pension performance went this year. I just had somebody show me, it's 1 million 2, is our potential contribution this year for '04. I was saying, we had a very good pension performance this year. The total fund, net of all expenses, did in the mid-20s. And our pension assumption -- our long-term assumption is 9.5. So actuarially, we did very well. Unfortunately, we did have to lower the discount rate because the interest rates across the board are down from last year. So we had to reduce the discount rate by 50 basis points, and that basically ate up all of our positive performance. So we were not able to reverse our entry in equity for underfunded pensions. But had the discount rates stayed the same, we would have been able to totally reverse that entry. So the pension fund is in good shape, relatively.

Mark Willsy (ph), Deutsche Bank.

I just wondered if you could kind of refresh us in the tissue business, about what exactly the new product is going to look like? I think GP is marketing a two-ply that's only half through air-dried. And I wondered if you could compare what you're doing with what we understand they are doing?

I am glad to, Mark. We will be offering both products to different customers, and in some cases, both products to the same customer. What we attempt to do is match our product on the supermarket shelf with our target product, target premium brand. And our target premium brand in this instance is Bounty towels. And we have and we have a product which we believe will match up very well with Bounty. It will be a two-ply through air dried product, as Bounty is. We will also, in some accounts but not all, offer a hybrid towel, which is a combination of one-ply of through air dried towel and one ply of conventional towel, much as our research has indicated Georgia-Pacific is doing. We run lots of tests in the labs, to certain customers who want a product offering equal to Brawny, which is Georgia-Pacific's premium brand, and it will vary, though, by customer. Most customers want a two-ply; some also want a hybrid. And there are undoubtedly some customers who may want just the hybrid and not the two-ply tab. So we are working customer by customer. Most of that volume will go into a two-ply Bounty quite product.

Just to stay on the tissue end, do these high energy costs -- how much of a difference does that make in economics down there at Las Vegas? I assume that that is gas-fired down there?

We use electricity and it's gas-fired. We have looked at putting in a gas-fired turbine generator associated with the plant. And to date, Mark, the economics would tell you that while it is a positive return, it is not a thriller, which another way of saying that the energy costs are not that bad.

Can we step over to SBS (ph) for a minute -- I was kind of curious about the weak pricing in the quarter. And I wondered if you saw that more in some markets than others? Or if you perhaps saw that more at one mill versus the other?

The SBS market is a pretty broad continuum, right. You have things like typically cup and plate are pretty inexpensive. And some of these folding carton grades can be a few hundred dollars a ton more?

I would say there is virtually no change in the market pricing by segment and what happens -- what we do -- I am not sure what others do, Mark, in the fourth quarter is, we will take more plate, dish and tray volume. Because as folding carton volume drops off somewhat seasonally to balance out the machine, that is lower-priced product than the average of folding carton by far. And so what we end up getting is a slight reduction in realization. We did that this year -- the pricing. So on a third to fourth quarter, I don't see pricing changes in each of the product segments. From a fourth quarter to fourth quarter standpoint, the market was weaker a little bit earlier in 2003. So product pricing was dropping somewhat by sector.

Finally, Pen can you just talk a little bit in the OSB business, about what impact you think the strength of the Canadian dollar has, just in terms of market dynamics? I mean, we have an awful lot of the OSB business that's north of the border; obviously, the Canadian dollar up around 76, 77 cents, means that the cost curve looks a lot different than it did when the Canadian dollar was in the low to mid '60s?

My view would be, Mark, that if we have conditions similar to what we had 18 months ago, that the floor on pricing because of the changing dollar relationship is quite a bit higher than what we saw in 2002 and early 2003, because the Canadian cost curve has moved up sharply in relation to the U.S. dollar. Having said that, in current markets, I think it's irrelevant because everyone is running full. One of the difficulties this market has that I am not sure many of us has focused on is that years ago, plywood supply at one time, 20 years ago, had all of the structural panels and even ten years ago, probably three-quarters of it. Plywood is now down to 40 percent or less. And most plywood -- excuse me, of total panel production and much of the plywood which is being made has shifted into various industrial or specialty grades. When markets were strong historically, you had the ability, as we just did at our plywood plant in Idaho to add extra shifts, because plywood is a shift business; it does not run 24 hours a day, seven days a week. OSB, on the other hand, is like a pulp business where you run it continuously, so you don't have the surge capacity. I think what many distributors and consumers probably missed and probably those of us as producers missed, is that when the market tightens, you don't have the ability to catch up and produce extra product the way you used to under plywood. Sorry, that's a long-winded economist kind of answer to a question you did not ask.

Bill Hoffman, UBS.

A couple of quick questions, specifically tissue. I want to get some sense of what we can think about volume wise in '04 versus '03, with the additional 30,000 tons. Do you think you'll be running at pretty close to what you would consider to be normal levels maybe starting in the second quarter? I am curious whether you are going to be taking any -- whether we should just be adding that onto the capacity you had before, I guess about 170,000 tons?

I think the process we will go through first is to get -- be sure we have the production process fine-tuned because we are a long way from that right now. And then as we fine-tune it, gradually at speeds to the machine, as we are in ramp up. So I would guess probably early second quarter, we will not be running at the 30,000 a ton rate, although our startup is ahead of where we had anticipated on curve. It will probably take us longer, maybe until late in the second quarter to hit that kind of a limit. And yes, you should anticipate this as additional volume. We do not the volume reductions on our other three machines in Lewiston, Idaho.

The thought was (indiscernible) that you've got enough customer demand to pretty much soak up all the supply?

It appears so. We clearly have to go by through the customer by customer testing from a product quality standpoint. But yes, Bill, we anticipate that machine will be sold out during the year. Early in the year, we will be building some parent role inventory as we work through that process.

Just general market conditions right now, on the tissue side? I know we are in a little bit of a seasonal lull here. But do you expect to see the pricing pressure that we had in '03 start to abate in tissue, and start to go a little bit more stable here?

The short answer would be we don't forecast externally what we expect in market pressures. That is kind of a consensus forecast, I believe. And we did see the market reach an apparent bottom a few months ago. I think that's a common forecast that I would not argue with, but I also have not spent a lot of time worrying about.

Moving on to the solid wood side, I am just wondering if in your log sales or way back to the forest end of the business, whether you are starting to seeing any pressure on prices there? I know you obviously pay gave (ph) room (ph) for supplies (ph). But just curious whether you are starting to see log prices going up, given the demands for OSB and lumber?

With regard to our log sales, there has been some upward pressure in Minnesota where we operate our OSB and those are -- that's different from what you think of as logs for saw (ph). Sawlogs (ph) are plywood logs. So there has been some pressure. It does not seem to have gotten any worse. Winter is actually a very good time to build inventories. And so one of our targets is to build more wood inventories to ease the pressure -- potential pressure you can run into when you are in a breakup period up in the spring and people cannot move wood. Occasionally you get some very strange wood pricing. And we are doing the same thing in the South, with regard for pulpwood type items. And I think of OSB as a pulpwood type would. For sawlogs, log prices were weak last year in 2003, along with lumber pricing. I tend to think of lumber and plywood as opposed to OSB because we don't make OSB in the South. And I am not sure that given -- as you are looking at good quality logs for solid wood -- I'm not sure OSB is a competitor for that material. I think it is not. Having said that, as lumber picked up during the year and plywood was dragged up or followed OSB, log pricing began to improve. And we saw -- began to see some of that later in 2003.

Do you think you'll increase your own logging this year because of the higher values you're getting now?

No, we are on a sustained basis. The volumes will vary a little bit by year based on logging plans. And we have some -- we are growing more than we are cutting. So we have the ability to fairly substantially increase some harvest levels. But that is beyond your time horizon. That's probably five or six years down the road before we begin to see that.

Last question, any comments on land sales this year?

We have an active process underway all the time to go through our portfolio and sell those parcels which either don't grow trees very well or have much higher values for other uses. And we actively pursue that as an ongoing part of the business. We also are working on a couple of conservation easements, one in Idaho and one in Minnesota, which we have announced -- and are working on, potentially, some others which are not announced, which may not come to fruition. So that's an active part of the resource business, which is to increase the revenue stream and increase the return on the assets we have employed there.

I mean, should we just be expecting sort of normal course numbers this year, then?

Yes, in any quarter that the amounts go up and down, we do not attempt to time things on a quarterly basis because of income. We attempt to market properties and obtain the best values. And if we market something and don't get the value we believe the property is worth, we take it off the market. And there is no pressure on anybody in our resource organization to produce earnings in any given quarter. If there were any, the person placing that pressure would not be with us any longer.

Robert Fields, MFP (ph) Investors.

In response to the public statements regarding your phased voting structure, I was curious what you're plans were for corresponding to that? I wanted to know if there had been any response or inquiry to the letters sent to the New York Stock Exchange?

We have a shareholder proposal which will be in the proxy. We discuss it at some length in our Board meetings. And we are working on a response for the Board. And we will have a response in the proxy. Until we publish that proxy on, though, we will not comment on exactly what the response is to the requests on time-phased voting. And there was another part to that question. New York Stock Exchange letter --

Exactly.

There was a letter to the New York Exchange. We sent the New York Stock Exchange some basic information on how we got to the voting structure we have. We have a shareholder vote back in 1985. My memory is about 68 percent of the shares voted in favor of this structure. And so it was implemented. We provide that information to the New York Stock Exchange. And to the best of my knowledge, we have heard nothing from the Stock Exchange since that letter was sent in and since we sent them our information. My general counsel and Corporate Secretary are nodding their heads, so it's to the best of more than my knowledge.

(OPERATOR INSTRUCTIONS). Steve Chercover, D. A. Davidson.

First of all, if 2004 is anything like 2003, you guys are going to generate a lot of cash. Do you have any debt that you can retire easily do to -- without any onerous prepayment? And if not, would you consider raising the dividend?

I am not going to touch that one! I am going to pass it to my chief financial officer.

And I was all ready to answer until you added that last bit. We don't have anything -- well, I should not say it that way. We have tax-exempt municipal debt that's very attractive to have on the balance sheet that we could call and pay off at an attractive rate. But we view that as being good debt to have on the balance sheet. The items that we would like to rid ourselves of are not easily done. They are non-calls. And in order to get them in the marketplace, they would be extremely expensive. Others have tried similar issues in the last six months and had not very much success at any reasonable price. So the first thing that we can do is, our subdebt is callable at June of '06 at 1.05 (ph), and that would be the first most attractive piece that we could get.

Before we leave that, if we were to call that in June of '06, and pay the 5 percent penalty or call premium, we have -- against that debt, we've had a floating fixed-rate exchange going, which we canceled once, re-priced it another time. The cash we have taken out of that was basically -- which is being amortized over the life of the debt -- would basically pay the call premium when we reach June of '06, if that's what we elected to do.

Just as a clarification to what Gerry said, with regard to the dividend, we would like to pay a larger dividend. However, number one on our goal is really returning the balance sheet to a position that we feel comfortable with. We made pretty good progress last year even with the tissue machine under construction. We have no major construction projects this year, and anticipate making very good progress this year on a net debt basis. The Board does consider the dividend quarterly and discusses it. But our Board has, to date, been convinced that improving the balance sheet, getting it back to what we believe is the right debt to equity relationship, is quite important, and has been more important than improving the dividend to date. Clearly, I am only one of ten votes. And on that Board, I cannot tell you what the Board may or may not do in the future. But that has been the view of the Board and it is a view that I agree with.

It's quite conceivable then that you might sit with some pretty substantial cash balances, if the cost benefit analysis of retiring debt doesn't pan out.

I think it's more than quite conceivable.

Are there any restrictive covenants that prevent you from raising the dividend, if the Board sees that as a reasonable alternative?

We have some limitations within the current bank agreement, as well as a less onerous one within the subdebt agreement that would limit dividend payouts over time. They become less restrictive, as we make money. And there would be room to pay a slightly higher dividend than we are paying now. But again, that would be a secondary goal for us. Our primary goal has been and continues to be, to strengthen the balance sheet and have a less -- what's the word I am looking for -- less debt on the balance sheet so that we could perform all of our functions better.

Understood, switching gears altogether, I assume that you guys must have done some sort of focus group to determine whether your average consumer can really differentiate between a full through air dried sheet or a hybrid sheet or a normal sheet. Do people really know the difference?

Our tissue, when we switched the business a number of years ago to producing premium products, we ran lots of focus groups and consumer tests. We still run weekly tests in someone's supermarket with our products against the target brands and other brands. And the way we do that is we go into the supermarket, we take product off the shelf, both ours and theirs, put it in plain wrappers and then have consumer testing for whatever the particular attribute is, be it softness or strength or wet strength, or you name it. And we've run lots of those tests, as well. And we find that the consumers are pretty good at differentiating product qualities. The tests we run weekly are really a good crosscheck to us. It's an early warning system, when and if somebody has improved their product and has not announced it, because you pick it up very quickly and then we reverse engineer it back in the laboratory to see what has been done. Consumers do know the difference and they can tell the difference. That does not mean all consumers. But as part of our tests, we run a one-to-five would you buy this product again next time? And that is a very good -- when you run that through lots of consumers -- it gives you very good graded scale of product quality. So sorry, that's a long-winded way of saying yes, consumers do notice differences.

I'm sure they probably can. The final question is, accepting that they can tell the difference, does it drive their purchasing patterns or is it just whichever towel is on the endcap of a shelf or happens to be the cheapest?

That's a yes or no question. Excluding facial tissue, about half of all products sold in the towel and the bathroom tissue markets aren't quite quality-driven. And so with that, 50 percent of the consumers who buy premium products, there is very good definitely a product differentiation and a product preference. With the other half of the market in those two products, which is value and economy, what you find is more the latter, so that all consumers including the premium ones, can be affected by the pricing. But the tests that we've run show that the premium consumers tend to be less affected by that than the value and economy buyers.

(OPERATOR INSTRUCTIONS). That concludes the Q&A portion of your conference for today. I will now turn the conference back over to you, sir, for closing remarks.

Thank you, Carol. We want to thank everybody that joined us for this call, and we would look forward to talking to you next quarter. Thank you, very much.

Thanks.

Ladies and gentlemen, thank you for participation in today's conference. This concludes the presentation, and you may now disconnect.