Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Glenn Davies - IR, Corporate Finance Group

George H. Glatfelter, II - Chairman and Chief Executive Officer

John P. Jacunski - Senior Vice President and Chief Financial Officer

Dante C. Parrini - Executive Vice President and Chief Operating Officer

Analysts

Mark Wilde - Deutsche Bank

PH Glatfelter Co. (GLT) Q4 2008 Earnings Call February 12, 2009 11:00 AM ET

Operator

Good morning. My name is Emily and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Earnings Release 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). Thank you.

Mr. Glenn Davies, you may begin your conference.

Glenn Davies

Thank you, Emily. Good morning, and welcome to the Glatfelter's fourth quarter conference call. My name is Glenn Davies, I am with the company's Corporate Finance Group. Also here this morning is George Glatfelter, our Chairman and Chief Executive Officer; Dante Parrini, Executive Vice President and Chief Operating Officer; as well as John Jacunski, our Senior Vice President and CFO.

As we do each quarter, during this morning's presentation, each of these individuals will provide prepared remarks, after which we will open the call for any questions you may have.

Before we begin our presentation, I want to remind you that when we use the term adjusted earnings, it is a non-GAAP financial measure, as it excludes from our GAAP based results, certain items that we do not consider to be part of our core business operation. In our earnings release, a reconciliation of adjusted earnings to our GAAP based results is provided together with a discussion of why we use adjusted earnings.

In addition, any statements made today concerning our expectations about future trends or business performance may constitute forward-looking statements. Please refer to our 2007 annual report filed with the SEC for important factors that could cause our results to differ materially from any of these forward-looking statements.

Finally, during today's presentation, we will refer to a slide presentation that is available through our webcast provider. You may want to refer to these slides to assist in understanding of our results this quarter.

Although, we understand there has been a slight technical problem with our webcast provider in viewing the slides. We suggest that you may want to log off and log back on to view the slides more accurately. If you are unable to view the slides during the call they also will be available on our IR site immediately following the call. We certainly apologize for any inconvenience this may have caused.

Thank you. And I will now turn the call over to George.

George H. Glatfelter, II

Thank you, Glenn. And good morning, everyone, and welcome.

Earlier this morning we released our business results for the fourth quarter and full year of 2008. Although the Everest economic conditions in the second half of the year certainly had an impact on our business I've got to say that 2008 was a very successful year for Glatfelter.

During the year we generated record net sales of $1.3 billion while successfully executing the key focus points for our business. For the fifth straight year we increased adjusted earnings per share resulting in a compounded annual growth rate of 33% over the period. Also the earnings accretion target of our Chillicothe acquisition was achieved. That's an important milestone for our company as well as for our shareholders.

For the fourth quarter of 2008 we reported net sales of $298 million and net income of $13.4 million or $0.29 per share. On an adjusted earnings basis fourth quarter earnings were $0.30 per share compared with $0.29 per share in the fourth quarter of 2007.

Considering the difficult economic environment, facing most all companies that I know as I believe that our results served to validate the soundness of our business model. I think that we've adjusted well to the rapidly changing business environment by maximizing the benefits of a diverse product portfolio, taking advantage of the flexibility of our operating platforms, bringing new products to market swiftly and rely on the talents of a seasoned management team with a proven track record of delivering results.

Throughout the year we have remained focused on managing those factors within our control with good result. Our commitment to cost reduction, which has been embedded in the culture of the company over the past several years, continued to have material impact on financial results.

In addition, during the year we supported a forward view of our business by expanding our global footprint, investing in targeted areas of growth and continuing to drive innovation by achieving record sales revenue of $690 million from our new product development efforts.

As we continue to operate in these uncertain economic times we've taken steps that we believe will sustain the financial strength of our business and enhance our value proposition to customers. We continue to believe that the current economic situation while certainly challenging also offers unique opportunity to leverage our strengths and emerge from the downturn as a better company.

At this point, I'd like to turn the call over to John Jacunski to provide a more in-depth discussion of the fourth quarter financial results. John?

John P. Jacunski

Thank you, George.

As George stated for the fourth quarter of 2008 we recorded adjusted earnings of $13.5 million or $0.30 per share compared to $13.2 million and $0.29 per share a year ago.

As shown on slide four, the primary changes in earnings and comparison were higher operating income from Specialty Papers business unit increased earnings per share by $0.01. Lower operating income from Composite Fibers decreased earnings per share by $0.04. Lower net interest expense increased earnings per share by $0.01 and a favorable effect of tax rate increased earnings per share by $0.04.

Looking at the performance of each of our business units this quarter compared to the same quarter of 2007, Specialty Papers operating income improved by $700,000 or 4% for the quarter.

As shown on slide eight, higher selling prices benefited this business unit's results together with productivity improvements and cost reduction initiatives aggregating $12.7 million.

However, these benefits were partially offset by higher raw material and energy cost totaling $5.3 million and an unfavorable mix effect of $4.3 million. This unit's total shipping volumes were essentially unchanged in a quarterly comparison. We also had some production downtime due to slowing demand as well as operational problems that each adversely impacted our results.

Operating income for Composite Fibers business unit declined by $2.2 million in comparison to the fourth quarter of 2007. As shown on slide 12, this was largely due to market related downtime in the metallized market segment together with operational problems on one of this unit's paper machines.

The average impact of higher input costs primarily related to energy and fiber was offset by higher average selling prices and an improved mix. This unit's results also continue to benefit from strong shipments in the food and beverage market segment.

During the quarter our effective tax rate was 12.5%. This rate was driven by the recognition of research and development credits for all of 2008 related to legislation passed in the fourth quarter and changes in the jurisdictions in which taxable income is generated.

Glatfelter has several defined benefit pension plans, which have been significantly over funded and have contributed non-cash net pension income to our quarterly results. As a result of the decline in the global equity and debt markets during 2008, the value of our pension plans declined by approximately 29% or $178 million since the end of 2007.

This together with other factors had a significant adverse impact on our year-end pension valuation. As a result, we recorded a charge directly to equity of $148 million after-tax. Despite, the asset declines in 2008, we do not expect to be required to make contributions to the plans during 2009.

Now, a few comments on our outlook for the first quarter compared to the fourth quarter of 2008. For Specialty Papers we expect slightly lower shipping volumes and selling prices to be flat to slightly lower. While we will benefit somewhat from the impact of lower energy and pulp prices, we expect overall, that our input cost will rise by approximately $4 million or $0.06 per share.

This is due to the expiration of contracts related to coal and caustic that fix our prices during 2008 in a rapidly escalating price environment. In addition, we expect continuing benefits from our ongoing cost reduction initiatives during the first quarter.

In Composite Fibers, we expect shipping volume, selling prices and input costs to be largely in line with the fourth quarter of 2008.

We expect to recognize pension income for all of 2009... I am sorry, pension expense for all of 2009 of approximately $6 million compared to pension income in 2008 of $16 million. On a year-over-year basis, this is expected to adversely impact the comparison by approximately $0.30 per share.

Finally, we expect our tax rate for 2009 to be approximately 30%.

Looking now at capital expenditures, for 2008 capital expenditures totaled $52.4 million compared to depreciation expense of $60.6 million. Given the current economic environment we have deferred virtually all discretionary capital expenditures for 2009.

As a result, we estimate capital expenditures for 2009 will approximate $35 million.

In this morning's release we announced that we will be the delaying until 2010 the previously announced $38 million investment to upgrade one of Composite Fibers' paper machines. When completed, the upgrade will provide additional capacity to serve the food and beverage market.

Due to slowing demand for more economically sensitive projects such as Composite Laminates and the flexibility of our operating platform we believe that we can meet the growing needs of our customers for food and beverage and technical specialty products from existing capacity otherwise used for markets with slower demand.

Turning now to our balance sheet as of year-end 2008 excluding the collateralized debt instruments related to prior timberland sales, our net debt was $210.4 million, which is $39 million lower than at the end of 2007.

Overall, our balance sheet remains strong and we have significant available liquidity. At the end of the 2008 we had $181 million of borrowing capacity available under our revolving credit agreement which does not mature until April 2011.

Although we do not have immediate intentions to make additional use of this facility, we believe this agreement and the banks that are party to it provide us with ready access to the funds should we need it.

This concludes my comments on our financial results. Dante will now provide comments about our business unit performance.

Dante C. Parrini

Thank you, John and good morning.

Let's start with Specialty Papers. As you heard earlier, we had a solid quarter with operating income increasing 4%. Net sales for Specialty Papers increased 2.4% and selling prices were higher across all market segments.

Total volume shipped by Specialty Papers were essentially unchanged in the comparison. We had strong volume growth in envelope of 8% and engineered products grew at 4%. Carbonless was up 9% which is in line with our expectations for attrition in this market segment.

However, the mix between carbonless sheets and rolls was unfavorable in the comparison as smaller transaction oriented customers experienced a considerable slowdown during the fourth quarter of 2008.

Book publishing papers were also off nearly 9%, although this does compare favorably with the broader North American printing and writing paper markets which were down nearly 20% in the fourth quarter.

This quarter again demonstrated the flexibility in our operating platform as well as the strength of our new product development efforts in Specialty Papers.

Despite, slowing demand in the book market and the expected decline in carbonless, we were able to maintain our overall shipments by intensifying efforts toward market segments in customers with more near-term opportunities. With the current challenging economic environment, this aspect of our business should continue to service us well.

Parts continue to be a concern for the Specialty Papers business unit. Although pricing for some commodities such as oil, pulp and corn have declined other input costs such as cost of coal and chemicals continue to put pressure on our results.

As we said previously price increases for certain inputs had been limited during 2008 due to previously negotiated supply agreements.

For example, caustic prices increased about 128% during 2008 but we saw only a fraction of this increase. In 2009, supply contracts for caustic coal and certain other chemicals have been renewed at market prices. Therefore, we expect to incur significantly higher year-over-year prices. While these price increases may be offset in part by lower prices and other inputs we do not expect to be able to offset the full amount of these increases.

Let's turn to North American mill operations. As John mentioned in his comments, during the last half of December we experienced operational problems at our Spring Grove mill related to complications arising from a plant maintenance outage that interrupted pulp and paper production.

In addition, we took some limited market related downtime in the quarter due to the declines in carbonless and book publishing as we focused on matching production capacity with demand. Otherwise, the Spring Grove and Chillicothe mills ran well during the quarter.

Our initiatives in Chillicothe to improve asset utilization and productivity has significantly improved the financial results of this business unit. I'd like to share some specific details about 2008 performance.

Productivity, measured in tons produced per day, increased by 4%. Mill production yield increased by 4.7%, inventory levels were down 14% for the year and staffing levels were reduced by 11.5% and are down 16% since we acquired Chillicothe in 2006. We're very pleased that the Chillicothe team was able to deliver its accretion targets in such a challenging business environment. And as Spring Grove continues to improve in initiatives, generated over $9 million of financial benefit during 2008.

Looking into the first quarter of 2009, we expect continued weakness in carbonless and book consistent with fourth quarter. However, we expect to mitigate much of this impact by continuing to execute continuous in previous initiatives focused on further cost reductions and productivity improvements, further accelerating new product development activities, improving product performance and service and leveraging opportunities within the engineered products and envelope segments.

The combination of productivity improvements we have achieved in the overall weak market conditions will necessitate the need to take limited market related downtime during the first quarter, which is consistent with our efforts to match production levels with demand.

Now, let's turn to Composite Fibers. Net sales increased nearly 7% compared to the fourth quarter of 2007. This was due to the acquisition of Caerphilly in November 2007 and approved product pricing in most segments, offset somewhat by the unfavorable effect of foreign currency translation in the quarterly comparison. Overall, volumes for this business unit increased nearly 10%.

Food and beverage shipments were at an all time high and increased 6% compared to a year ago and technical specialties increased over 4%. In a more economically sensitive Composite Laminates product line shipments were off over 20% reflecting continuing weakness in the housing and related markets.

Finally, metallized shipments were up 71%, reflecting the additional volume from the Caerphilly acquisition, although below our expectations. Slowing demand in this segment related to seasonality and the impact of the economic downturn which resulted in unplanned downtime during the quarter and continues into 2009.

With the exception of the operating problems experienced on a paper machine at the Lydney, U.K. mill and the market related metallized downtime, Composite Fibers facilities ran well during the quarter.

From an outlook perspective, the combination of contracting economies, fluctuating currencies and tight credit markets in the developing markets of Eastern Europe and Asia could slow the growth rate of this business unit in the near-term.

We expect demand to be mixed over the short-term. Food and beverage demand for the first quarter of 2009 is expected to grow although at a slower pace than 2008 and technical specialties should remain relatively stable.

Composite Laminates and metallized are both experiencing weak demand that will most likely result in some level of market related downtime which will be needed to match production capacity with demand. Overall, we expect first quarter shipments to be in line with the fourth quarter of 2008.

This concludes my remarks. I'll turn it back to you, George.

George H. Glatfelter, II

Okay. Thank you, Dante.

Our fourth quarter's results concluded a very strong year for Glatfelter, based on a number of points discussed here today and in this morning's release. To me, this year's performance can be attributed in large part to the successful execution of the business strategy of our company. And I believe that the results show that our strategy is working.

However, as we move into 2009, the current global economic conditions present uncertainty and challenges for our business as well as the entire industry. Now, more than ever, I believe it's imperative that we align the resources of our organization with clearly defined business priorities.

We don't tend to change our business strategy; it's working well. But we will heighten our tactical focus on improving cash flow and maintaining low levels of debt, thereby preserving the strength of our balance sheet.

Fact is this industry like many others doesn't get any easier, that's why our efforts in cost reductions having been embedded in the culture of our business would be an important aspect to what we do in 2009. We're also committed to aggressively managing cash flows by minimizing discretionary spending not only for capital projects but in every aspect of our business.

Over the years, we have consistently demonstrated that strong execution is based on strong planning. And I believe we've developed solid plans to address these areas in 2009. We know how to develop new products and bring them to market quickly. This capability when coupled with the flexibility of the business unit operating platforms should be a real plus in dealing with market shifts and uncertainties.

Our product lines are very diverse. We will exploit this diversity to deflect the impact of potential weaknesses in selected market segments.

In light of the economic environment, our primary objective is to preserve the strength of the company during the downturn while positioning ourselves to take timely advantage of opportunities for strategic and commercial growth as the economic condition stabilize. I believe these opportunities will present themselves and I expect Glatfelter to be prepared to pursue them.

That concludes our prepared remarks for today's call. I would again like to thank you for your interest and open the line to address your questions. Emily?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Mark Wilde, Deutsche Bank.

Mark Wilde - Deutsche Bank

Good morning, George, John, Dante.

George H. Glatfelter, II

How are you, Mark?

Mark Wilde - Deutsche Bank

Good. First question Dante, can you give us just a little bit more color on what some of those, the operating difficulties were it sounded like some it was tied to maintenance shutout at Spring Grove, are you clipping to those Spring Grove outages that has taken place in the second quarter of the year?

Dante Parrini

Sure, I can give you some more details. We have a small outage that happens every year in December in Spring Grove, that's related to the pulp mill and usually a couple of days. And this year it happened to be extremely cold weather and as you know when you take the back of the mill down during very cold temperatures, it increases the chances of start-up difficulties.

And that's what happened with one of our larger stock chests that because of the freeze bar cycle caused some tiles to come lose, so we had to keep that down and repair, which curtailed some pulp and paper production.

Mark Wilde - Deutsche Bank

Okay.

Dante Parrini

And the one machine in the U.K. was experiencing some issues with a wire that we use on one specialty grade and it just so happened that both of the wires that we had were giving us problems and we had to work very closely with our technical crew and our vendor to come up with the solution and that's now behind us.

Mark Wilde - Deutsche Bank

Okay. And then Dante, can you also just give us may be a little color about why the metallized volume would be weak right now, I tend to think there is a lot of food and beverage, which I think would be relatively stable?

Dante Parrini

Sure, the softness that we're experiencing in our metallized business is largely related to the wet glue beverage bottle labels and the largest application is for beer bottles and also is applied to things like sparkling water and other drinks.

And what happens is clearly as discretionary income is tight and the economy is weaker. I think there is a tendency for people to avoid pubs and perhaps buy more beer and drink at home. But we have also seen a downgrading of the quality of beer and our label products typically are sold to the higher end brands and the lower end brands use a different type of labeling material.

So the seasonality is typically experienced in the winter cold months combined with the economic challenges has created slower than typical market for that business.

Mark Wilde - Deutsche Bank

Okay. And then just turning to kind of the overall market for the North American business I wonder Dante you and George may both want to share some thoughts with us, sort of, how much of this is you think cyclical and how much is structural in terms of some of the volumes decline we're seeing?

And then whether this is going to force you to, to look at your capacity base again over the next couple of years either that may be rationalized some of your own capacity, but I wondered if you could potentially just buy book of business from a distressed layer to may be keep yourself fully loaded?

George H. Glatfelter, II

Okay Mark, this is George I'll start off of that and probably Dante and I will tag to you on that question I think it's good question. And I guess I'll start of by saying that, there is so much uncertainty in the markets that we see today here in North America and globally that I can't in good faith give you an answer as to whether we're seeing a structural change or just the results of the economy. I can tell you that there has been no defined example of structural change at this point that I see. I think that when you look at how we approach these markets.

We've talked a number of times during the call about the diversity of the product base that's true across the span of the company, its also true within the individual business units. So we do have a lot of opportunity to manage the mix to adjust to the kind of change whether it's structural or whether it's just economically driven that we're seeing today and that's been a big part of what we've done in 2008. And I think it will continue to be a big part of what we do going forward. Now, the only reason that, that works, is there are actually a couple of reasons.

The first is, that our operating platforms in each business unit are very flexibility Dante mentioned this, I think I referred to it as well. So we have been able with relative ease to shift products from one operating platform to another within both business units to take advantage of market swings or just to improve efficiencies and that will be a big part of our approach going forward.

The other thing that I think is really important for this strategy to work is something that we talk about all the time; it's the new product development engine. And so to be able to manage the mix, to be able to deal with the uncertainties in whatever way they're projected in our markets, having a stable of new products in queue is really important.

And I think probably even more important is to be able to convert that potential to a quick scale up and actual market presence which we've shown that we have the capability to do. So those are things that I think are very important to understand, when you look at Glatfelter in the context of the current economic environment.

I guess the one the other thing that I'd offer in answer to this question to give you broader context is actually the financial strength of the business. That's characteristic of Glatfelter as you've known over the years. But, in times like this it becomes really important, particularly in competitive situations where Glatfelter's financial strength is distinctive.

Our customers don't need problems right now in their supply chain. And as the economic situation evolved through 2008 and as it's currently present, we're finding that a lot of customers value the deep relationships they have with Glatfelter and value the financial stability because the last thing they need at this point, as they approach this or they encounter these economic challenges to have problems in their supply chain.

Now, the last part of your question has to do with buying a book of business and repositioning the company and you referenced that specifically in North America. Sure, if that's the best alternative, that's something that we could consider, provided it makes strong financial and strategic sense. I've also given you, I hope, a perspective of the capabilities in the company that can complement that particular strategy.

Dante is there anything I missed or anything if you could add?

Dante Parrini

Well, just very quickly I agree with you, George that it's uncertain as to how we answer the question. But regardless of the outcome we believe that we've the right business model to adapt to any market changes. And you said it in a number of reasons why; I would just also add that we built a reputation as a customer focused paper specialist and we have a very experienced team of commercial and technical experts that have been able to transition needs into viable products very quickly.

And I think our performance in the fourth quarter of '08 supports that since our core markets of book and carbonless were each down 9%. Yet on a year-over-year basis our volumes were flat and that demonstrates our ability to leverage the number of capabilities that you outlined.

Mark Wilde - Deutsche Bank

And George, I am going to say a word now you are not going to like here, but I just want... I want to get your thoughts on that, and that is Kindle?

George H. Glatfelter, II

Kindle. Well, you know some one told me Mark, long time ago something that I thought was pretty instructive with respect to the e-book and I think it also reflects on the Kindle.

If all we ever had to read for electronic devices and somebody invented a book it would be the greatest thing known to man. So I liked that comment which is why I want to share with you. The Kindle is the latest technology in electronic transmission of data and I think its going to have growing acceptance over a long period of time. I don't see it, frankly, as a disrupter in our market because I believe that most people buy the kind of premium books that we produce based on a usage pattern.

I think most of them like to use a book in a number of ways that they couldn't use a Kindle. I think that most of them like to put the book on a shelf when they're finished and feel comfortable about a library; its tough to do that with the Kindle. And my gut tells me that I don't believe a lot of that's going to change soon. I don't think it's going to change in perhaps the next generation dramatically. But when and if I ever have grandkids; might be a different story. It's indicative of substitute product in a mature market so it's not surprising to us.

And I think it speaks to the approach that we take to this market and all of our other markets. We manage them by lifecycle. We talked about that before and this is a mature market. We're managing it in a way we think to maximize the value to the shareholders over the long-term, the Kindle is just one example and I am sure it's here to stay.

Mark Wilde - Deutsche Bank

Okay. Just two questions to wrap up with John Jacunski, one, John is it possible that you could take that CapEx number even a bit lower than the 35 million that you've laid out for us? And then secondly, if you can just talk about sort of how you are monitoring credit issues with your customers in the various businesses that would be helpful as well.

John Jacunski

Okay, I assume you referring to 2009?

Mark Wilde - Deutsche Bank

Yes, exactly.

John Jacunski

It could go a bit lower perhaps as I said we've eliminated virtually all discretionary capital projects that we had in '09, we do have a few in there, that are very high return projects. That still make sense for us to do in this environment. But that's only a few million dollars. So it might slightly lower, it could be slightly lower if we eliminated those projects but it's not a significant amount.

Mark Wilde - Deutsche Bank

So you would say then probably for the company this can figure now like a number of $30 million or $32 million its probably, maintenance CapEx there?

John Jacunski

Yes, it's fair. It can vary; I think we said before $25 million to $30 million.

Mark Wilde - Deutsche Bank

Okay.

John Jacunski

Because, different situations arise that require attention from a maintenance perspective but, in that $30 million range, is the right number.

Mark Wilde - Deutsche Bank

Okay.

John Jacunski

With respect to customer credit, we monitor this very closely on an ongoing basis. Obviously, given what's transpired in the broader economy and issues with currencies, we certainly have a more significant interest. We stay close to our customers and as of this point, we have not seen any significant issues, but its certainly something we need to watch very closely as we go forward.

Mark Wilde - Deutsche Bank

Have you guys gotten hit at all by any of the... I believe that some bankruptcies in sort of the printing and publishing arena?

John Jacunski

No, we haven't.

Mark Wilde - Deutsche Bank

Okay. All right. Thanks John. I'll turn it over.

Operator

Your next question comes from the line of Robert Karl of CSEM Inc.(ph).

Unidentified Analyst

Hi George, John. And great year there and avidly looking forward to be managing this difficult, seeing how you manage in the difficult environment in 2009? My specific question is on inventory, could we get... can I get a little color on inventory levels at the end of the fourth quarter, compared to third quarter 2008?

George H. Glatfelter, II

Good morning, Bob. This George and John is the guy that can answer that question, I think the best so I'll turn it over to him.

Unidentified Analyst

Okay, thanks.

John Jacunski

I think inventories compared to... you said the third quarter?

Unidentified Analyst

Yes.

John Jacunski

Inventories churn rised a little bit for the end of the year. Although, we do not see any dramatic increases our third quarter is generally our strongest quarter so we will reduce inventories to quite low levels in North America. So in the fourth quarter we did not build a substantial amount of inventories, it would be a slight build and that would be off.

Unidentified Analyst

Okay. Thanks.

John Jacunski

Sure.

Operator

(Operator Instructions). Your next question comes from the line of Stewart Benway (ph) of Standard & Poor's.

Unidentified Analyst

Hi, can you tell me where you categorize the pension expense?

George H. Glatfelter, II

Go ahead, John.

John Jacunski

You're talking about on the P&L its both in cost of sales and in SG&A but the majority of it would be in cost of sales.

Unidentified Analyst

Okay. And how do you expect that expense to breakdown on a quarterly basis this year?

John Jacunski

We expect to have about $6 million in total of pension expense in 2009 and it will be straight on it. So million and a half or so per quarter.

Unidentified Analyst

Okay. Thank you. And just a quick question may be I couldn't quite understand on metallized products you say on slide 14 that shipments increased significantly due to the acquisition but demand has slowed and in the press release you say that sales were down I think of metallized products what I am missing there?

John Jacunski

Sales of metallized products were up year-over-year driven by the acquisition made. So we had one month of revenue from that acquisition in the fourth quarter of '07 we had pretty much of revenue in 2008. However, it is below our expectations and the 2008 volume is below our expectations and it necessitated us taking some downtime to match our production with the demand in the market.

Unidentified Analyst

Okay. And also on... well not specifically but I mean the envelope's volume was up 8% you said in the quarter, which seemed strong to me what I thought was a fairly weak market, is that your specialized envelopes that you produce there or what's accounts for that?

George H. Glatfelter, II

Stewart (ph), let me turn that to Dante.

Dante Parrini

Hi, Stewart (ph). Yes, we've been asked this question on previous calls and I would summarize the explanation as follows. We have a certain service proposition that fits the needs of this market. And in terms of profit availability and rapid supply, especially in an environment where these customers are looking for ways to reduce their own working capital and need to respond much more quickly to unforeseen opportunities.

We've also been able to utilize the Chillicothe, Ohio mill which enables us to expand our reach and provide the same level of unprecedented service in the market. And we're finding that customers are very motivated in this environment to align themselves with suppliers that are a best fit during these times of uncertainty.

So I believe it's a combination of all those aspects that has allowed us to continue to do well in this segment.

Unidentified Analyst

And the envelopes you provide are basic types of envelopes or is it more business oriented or--?

Dante Parrini

We do not provide finished envelopes, so we sell the stock of paper to a variety of converters that would fashion this paper into a variety of types of envelopes.

Unidentified Analyst

Okay, thank you. And one last one, you say that you have opportunities in, especially, papers may be that's what you are just referring to, but would customers, I mean... what can you do in this environment to improve yourselves versus other I guess competitors?

George H. Glatfelter, II

Stewart, I'll tackle that one, this is George. And the envelope market is really great example for the question you asked, because when you look at the product that's produced, products are not that distinctive competitor A, competitor B, competitor C, what it makes it work for Glatfelter is first of all, we can manufacture that product very efficiently across two operating platforms. So I reflect back on the flexibility question that we talked about earlier.

And secondly, even though this is a product that sort of walks and talks and acts like a commodity, we approach those markets from a highly specialized perspective, beginning with relationships with specific customers, following through to a service programs that are the best in the industry. And really selectively targeting, where we can bring those attributes best to bear within the markets geographically, and from the size of customers, et cetera.

But the take away here, is we're a paper specialist, so that's what you I think have to understand at the core of Glatfelter. And even though, the product in some cases like envelope may not be distinctive competitively. The way we go to market is clearly distinctive. And I think some of the comments that I made and some of the comments that Dante made serve to describe that. It's very important and it is distinctive with respect to how we go to market.

Unidentified Analyst

Okay, thank you.

George H. Glatfelter, II

Sure.

Operator

Your next question is a follow-up question from the line of Mark Wilde of Deutsche Bank.

Mark Wilde - Deutsche Bank

On the input costs, you mentioned that things like costs are going to up for you on a year-over-year basis we know that those markets have remained relatively strong but do you get any benefit if those markets were to roll over or to see some weakening as we go through the year, are you locked at a price for all of '09 now?

Dante Parrini

Mark, it's Dante. For certain materials the answer vary so for caustic as an example if the prices rolled and we will see a benefit it could be a slight lag but we'll see a benefit. For other materials like coal, those contracts typically have a fixed price for any given year with this variability in the total cost it has to do with transportation costs.

Mark Wilde - Deutsche Bank

Okay. And would you say caustic I think is probably the area where you have the biggest opportunity?

Dante Parrini

I would hope so yes.

Mark Wilde - Deutsche Bank

Yes, okay, all right. Any thoughts on wood cost as well Dante?

Dante Parrini

No, I'd tell you that we are expecting them to be pretty flat year-over-year.

Mark Wilde - Deutsche Bank

Okay. All right and then the other question I have Dante, when we look at the volume in North America was actually up just a kind of smudge (ph) year-on-year yet you were still taking downtime, how would you have a think about sort of what your real capacity is in the business?

Dante Parrini

Well, in North America we shipped about 750,000 tons of volume and as you observed accurately, all of the work that we have done on improving productivity has improved the aggregate of our complete capacity. So there is an opportunity for upside you could call it perhaps 25,000 tons or so it's very difficult to estimate because as you can appreciate mix will have a significant impact on total volume produced. But nonetheless, we've created a more efficient operating platform and if and when markets turn that should position us favorably to participate in that up swing.

Mark Wilde - Deutsche Bank

Yes, and if you think about it from your position is the opportunity more volume or is it getting your... improving your mix?

Dante Parrini

Well, clearly we're focused on improving margins and making as much profit as we can. And so mix plays a critical role there. A lot of this is speculative which is very difficult to speak with any great level of confidence. But I will say that this market environment I believe will also create opportunities for those that are willing and able to move quickly and have the flexible assets and the capability to produce a variety of Specialty Papers very quickly.

As you can appreciate there are number of companies out in this space that are being severely disadvantaged because of the downturn and perhaps their financial situation. And customers are paying much more attention to how they align themselves with their suppliers and we think we stack up well in that regard.

Mark Wilde - Deutsche Bank

Okay. Sounds good while listening. Good luck in the first quarter.

Dante Parrini

Thank you.

Operator

(Operator Instructions). At this time there are no further questions. This does conclude today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: PH Glatfelter Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts