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Verso Paper Corp. (NYSE:VRS)

Q3 2010 Earnings Call Transcript

November 3, 2010 9:00 am ET

Executives

Robert Mundy – SVP and CFO

Mike Jackson – President and CEO

Analysts

Joe Stivaletti – Goldman Sachs

Bill Hoffmann – RBC Capital Markets

Bruce Klein – Credit Suisse

Kevin Cohen – Imperial Capital

Jeff Harlib – Barclays Capital

Tarek Hamid – J.P. Morgan

Richard Kus – Jefferies

Eric Anderson – Hartford Financials

Phillip Wirtz – Odeon Capital

Chip Dillon – Credit Suisse

James Daly – Deutsche Bank

Roger Spitz – Bank of America/Merrill Lynch

Gary Madia – Gleacher & Company

Sandy Burns – Sterne Agee

Raymond Chiarastella – Blue Mountain

Operator

Good day and welcome to the Verso Paper Corporation third quarter 2010 earnings call. Today's call is being recorded. At this time, it is my pleasure to turn the conference over to Mr. Robert Mundy, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Robert Mundy

Thanks, Karla. Good morning, everyone. Thank you for joining Verso Paper's third quarter 2010 earnings conference call. Representing Verso today on this call is President and Chief Executive Officer, Mike Jackson and myself, Robert Mundy, Senior Vice President and Chief Financial Officer.

Before turning the call over to Mike, I'd like to remind everyone that in the course of this call, in order to give you a better understanding of our performance, we will be making certain forward-looking statements. These forward-looking statements are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect, actual results may vary materially from management's expectations. If you would like further information regarding the various risks and uncertainties associated with our business, please refer to our various SEC filings which are posted on our website, versopaper.com, under the Investor Relations tab. Mike.

Mike Jackson

Okay. Thanks, Bob and good day, everyone. If you could go to slide three please, in spite of an unusually strong second quarter for pulp and paper volumes, we were up almost 4% or about 20,000 tons above the second quarter of 2010 and over 7% or 36,000 tons above the third quarter of 2009.

Sales were up almost $32 million or 8% from the second quarter 2010 levels and up over 38 million or about 10% from the third quarter of 2009. EBITDA was over double the second quarter of 2010 at $46 million and slightly below the fourth quarter of 2009.

Moving to slide four, during our second quarter call, we gave some third quarter guidance for certain areas. In all cases, we delivered in those areas for the third quarter. Through September, we've continued to see month-over-month pricing improvement. And we expect that to continue each month throughout the end of the year.

As I mentioned, third quarter volume was up from the second quarter. Year-to-date, Verso's coated freesheet and coated groundwood shipments are up 23%, while the industry shipments are up 19% for coated freesheet and 12% for coated groundwood. As you know, mill operations in the second quarter had their first blip in over 14 quarters, so it was no surprise to see our operations back on track for the third quarter.

Input prices and Bob will get into this with a bit more detail. We're virtually flat versus the second quarter and if you include pulp prices, pulp prices were a little greater than $1 million higher. Finished goods inventory was down 24% versus the second quarter and down 43% on a year-over-year basis.

Couple of highlights during the quarter, Verso was recognized as the Manufacturer of the Year in Maine, which both U.S. (inaudible) have recognized, that was a very nice tribute to our people in the state. And we received the President's Award from SFI for our efforts towards forest management and land certification, which really continues to be an important issue for our customers.

With those comments, I'll hand it back to Bob and then I'll come back later in the presentation. Bob?

Robert Mundy

Thanks Mike. Let me turn to slide five, you can see that coated volumes improved about 16,000 tons versus the third quarter last year and were about 32,000 tons above the previous quarter. We continue to see coated prices increase during the third quarter. And we expect prices to increase as we move through the fourth quarter of 2010.

We had no market downtime during the quarter versus about 26,000 tons during the third quarter of last year. Pulp prices were about flat versus the second quarter and about $230 per ton above last year's third quarter. Higher paper and pulp prices together with stronger volumes during the quarter resulted in revenues being up almost 10% versus last year and about 8% above the second quarter of 2010.

If you turn to slide six, you can see the key changes between our second quarter of 2010, adjusted EBITDA of $23 million versus the $46 million in third quarter of 2010. Higher volume contributed about $2 million of EBITDA while improved pricing contributed $20 million. Improved operations resulted in $7 million of improvement. And overall input prices included pulp were slightly negative quarter-over-quarter.

If you turn to slide seven, this gives you a view of the year-over-year adjusted EBITDA changes for the third quarter 2010 versus third quarter 2009. Stronger volumes, we've talked about had a positive impact of about $4 million and higher prices contributed about $6 million of EBITDA versus last year.

Improved manufacturing operations resulted in $7 million of improvement. Prices for our input materials were $18 million higher than last year. And virtually, all of this is related to softwood pulp prices.

The favorable market downtime bar represents the unabsorbed fixed costs we incurred last year versus zero of this year. Higher distribution costs were the result of higher diesel prices and some changes in certain freight contracts.

If you move on to slide eight, you can see the direction our input prices and distribution costs were moving versus last year and versus the second quarter of 2010. In the chemical area, it's a mixed bag of certain items going up, others flat or some going down slightly. Latex has been up the most this year, due to the tightness in butadiene but things such as starch and caustic should end up lower year-over-year.

Clay prices were fairly stable during the quarter. Wood prices were up slightly versus the second quarter, but continue to stay at a very good level for us. And energy prices were lower than last year and lower than the second quarter of 2010, which is driven by low gas prices and our ability to utilize our flexible energy platform to take advantage of this in our operations.

With that, I'll turn it back to Mike.

Mike Jackson

Okay. Thanks Bob. If you turn to slide nine, we'd like to spend a moment on some market data before I discuss the fourth quarter outlook. The magazine ad market is showing signs of stabilizing. Ad pages posted two consecutive quarters of year-over-year growth and although the magazine circulation was down about 2.3% in the first half of 2010 magazine readership remains solid. Some 93% of adults read magazines and an interesting fact is that of those 96% are under 35.

I think another positive sign is that the new title launches were up 13% in the first half of this year, although the print frequency of those launches was down. The forecast, as can been seen at the bottom of the page, has the advertising climate improving. There are four different firms that have positive forecasts as we move through 2010 and into 2011. The impact of that is that magazines being mailed in 2010 will be almost $345 million and moving up from that number in 2011.

If you move to slide 10, you can see that the catalogers have been increasing circulation and have resumed prospecting as the economy slowly recovers. Catalog circulation was up 2.3% in the first half of 2010. And it's projected to be up by the end of the year to 2.9%.

We had some fairly good news on the postal front. The postal commission denied the postal service request for an extra increase that would have started on January of 2011. In addition, the lack of a postal rate increase in 2010 and the postal service summit seal number two really provided some added incentive for the catalogers to increase mail volume.

Just as a reference point, projected mailings for catalogs in 2010 are about $15.5 billion and that's up from a little less than $15 billion in 2009. I think an additional positive note is that, retailers also are adapting. Based on declining newspaper circulation, they've really increased the usage of direct mail to targeted customers and clearly print still remains the primary driver of sales and store traffic.

On slide 11, we have a view according to PIA that printers expect over – an 8% increase in sales over the next 12 months. This by the way includes all sales and not just print, but again certainly is a positive as we move into 2011.

I think another high point here in terms of demand is on the commercial print side, we see it's forecasting for both number three coated freesheet and number four coated groundwood, a 2% rise for the next four years. So, that's another good news item as we enter into the fourth quarter.

So, with that information as a backdrop, let's go to slide 12 and our outlook for the fourth quarter. We do expect volumes to be slightly lower sequentially as there is norm relative to the seasonality of our business in the fourth quarter. But we expect the year-over-year number to be slightly higher.

In terms of order book activity, we – it remains in good shape. So we feel good going into the fourth quarter. As Bob mentioned, prices will continue to move upward throughout the quarter and really close the gap between our realized versus announced price increases.

We expect another good quarter from our operations. And they've really continued to drive improvements against that R-GAP goal that certainly most of you are aware of. Inventories will be flat for the third quarter. And they, of course, right now continue to be at historically low levels as does the industry.

Input prices from the third quarter to the fourth should remain fairly stable, although like last quarter, we're going to have some items that are up and some are down. Certainly, EBITDA results should be better than this quarter as price again continues to move up on a month-by-month basis.

And lastly, before we go to Q&A, you're certainly aware of our energy products – projects. We have 13 projects going on at the moment, which include our Quinnesec project and the 12 DOE Area 3 projects. All of these are on schedule and really looking forward to seeing the beginning of the benefits as we roll into 2011. So, Karla that's our presentation on the slides and at this time, Bob and I would be happy to answer any questions.

Question-and-Answer Session

Operator

Excellent. (Operator Instructions) And we'll take our first question from Joe Stivaletti with Goldman Sachs.

Joe Stivaletti – Goldman Sachs

Good morning. Two questions, the first one was on the pricing front. I was wondering if you could just review the price increases that you have announced for the fourth quarter relative to anything that was reflected in the third quarter. And also maybe talk about whether there is still any material percentage of your volume being sold under contracts that have some sort of price protection running through the end of the year. I know that was an issue for the industry in the first half of the year and I didn't know if there was much of that still in effect?

Mike Jackson

Yeah, Joe, we – just looking at our two key grades coated freesheet, coated groundwood, we've had three announcements on freesheet in April, June and September. They told about $110 a ton and similar dates for coated groundwood and those increase is total $150 a ton. We do continue to work through some of the – I think you call encumbrances. We're working through those, we worked through those in the third quarter. Every month the price was higher than the previous month and that certainly is something we'll see in the fourth quarter as well as we continue to work through some of that. I think, we've got some positive momentum as we head into the first of the year, the first quarter of 2011.

Joe Stivaletti – Goldman Sachs

Okay. There was just some confusion, I think, because in pulp and paper we'd say it didn't really reflect any movement in price from September to October. But there was a huge range, but you're still confident that that prices are continuing to move upward as those price increases flow through.

Mike Jackson

Yes.

Joe Stivaletti – Goldman Sachs

Okay. The second question I had was just to make sure – well, I'm basically wondering if you could update us on how much – what your net pulp position is like for the most recent quarter or if you want to state it on an annual basis. I know when you look at your segment profitability, the pulp segment was up pretty dramatically. But I assume that that's effectively an offset to higher pulp costs in your paper segment. So, I'm just wondering where – what the volume is that you're selling net market pulp at this point?

Mike Jackson

Our pulp volume is – it's been fairly steady every quarter this quarter. In the mid 60s towards 70 million, I mean 70,000 tons a quarter.

Joe Stivaletti – Goldman Sachs

That's what you're selling or is that you're short of net, I know you're selling some.

Mike Jackson

That's what we're selling. We purchase less than that, probably about 25 or 25,000, 30,000 tons maybe a quarter, something like that.

Joe Stivaletti – Goldman Sachs

Okay. Thank you.

Operator

And now, we'll hear from Bill Hoffmann with RBC Capital Markets.

Bill Hoffmann – RBC Capital Markets

Yeah, good morning.

Mike Jackson

Good morning, Bill.

Bill Hoffmann – RBC Capital Markets

Hey, Mike, I wonder, if you could talk a little bit about some of the commercial printing and the political spending that went here in the really in the third and coming into the fourth quarter, kind of, what your expectations are as we finish the fourth quarter here?

Mike Jackson

Yeah, well Bill, certainly it had an impact, a positive impact but, I have to say that most of that impact would be felt by those that probably sold sheet. Commercial print, particularly those type of ads are normally sheeted product. And so, we don't actually use sheet product; however, there was some spillover. We did have some coated free that went into the political campaign. And I think that's why you saw freesheet was up stronger than groundwood for the quarter.

Bill Hoffmann – RBC Capital Markets

Okay. And then the second thing is just from sort of an order book standpoint. Clearly, you always expect December sales to trail off. Where are you in your backlogs at this point in time and what kind of visibility do you have for this year's December trail off?

Mike Jackson

We have good visibility, Bill. We normally have a pretty good view of 60 days out. Hopefully, we like to get even further out. But, so we have good view. I would say as I mentioned in my opening comments that our backlogs are strong for this time of year. And, we're cautiously optimistic based on some of the data points that I gave you on the advertising side. I mean, those four firms all feel that will have a pickup in 2011. And, so I think that bodes well for next year as we get ready to get into that normally slower period of time. But, I'm not complaining about our backlogs right now.

Bill Hoffmann – RBC Capital Markets

Great. Thanks. And then, just last question on the other sales obviously, you've done a good job sort of filling up the capacity on that side of the equation. Do you expect to continue to have the similar volumes of the packaging and label grades that you have had over the next couple of quarters or do you think the paper, the coated demand might make it more profitable that stretch it back a little bit?

Mike Jackson

Well, we really committed to move in that number one machine off the groundwood. And I think the answer to your question is that we're going to continue to pursue the technical grades, the more technical grades. And you know, you may remember we were running a little bit of printing paper uncoated. We've kind of backed off that a bit and really concentrated on the technical grades that we tenderly think will be better returns for us in the coming months. So, yes – the answer your question yes and we're backing off some of the less traditional paper or the more traditional paper.

Bill Hoffmann – RBC Capital Markets

Okay. And then, finally just as you look into the first half of 2011 could you just talk about your downtime schedules and what your expectations are for planning for that?

Mike Jackson

Yeah, Bill as we look at that right now, we don’t anticipate any as far we can see right now – no nothing from a market standpoint and from a maintenance standpoint, I’ll think it will be anything usual then what we normally would have in the second quarter type stuff as far as maintenance downtime in there a couple of our integrated mills.

Bill Hoffmann – RBC Capital Markets

Okay. Great. Thank you.

Operator

And now, we’ll open the floor out to Bruce Klein with Credit Suisse.

Bruce Klein – Credit Suisse

Hi, good morning. Could you just, I guess, back on the just a question on the contract, can you just remind us a little bit of maybe what percentage of your business you consider sort of to be contract and duration and when they are up – can you roughly send us any direction on that?

Mike Jackson

Well, Bruce it’s certainly groundwood is more of contractual type business than freesheet; freesheet is more spot. It’s – we don’t think we have ever given out what our exact percentages are, but the majority of both of those products are under some type of contract. But we try to limit the as far as when price moves, we try to keep that as much we can on a quarterly basis, and I think the majority of those products are on a quarterly type movement. There were some things that because ‘09 was so horrible and going into ‘10, no one knew exactly how that was going to play out. We probably had some type of some agreements that we maybe adding compensation that we normally don’t get into because it was such an unknown but those, that’s what we’re working through now that maybe while the realization has been a little bit slower than normal. But, like I said, it’s the prices will get better every month and I expect that to happen in the fourth quarter as well and somewhat in the first quarter of ‘11.

Bruce Klein – Credit Suisse

Okay, that helps us. And just on the end markets, you mentioned further rece which we read as well seem like there, I guess for the first time in a while I think are giving more sustainable improvements in some of the end markets driven by – but do you have any of your customers telling you anything new or different other than about what’s sort of driving that in terms of whether it’s a catch up or whether it’s real or anything else incrementally you would add to that?

Robert Mundy

No, I think Joe, that the primary comments, Bruce, I’m sorry, would be that that they just feel better setting up for 2011 as it relates to primarily ads and you can see that projection is quite healthy, it’s between that 2 to 3.5% range and that all means more ad pages and so they’re optimistic, I mean, they’re not totally optimistic, but I would say they certainly feel better going into 2011 and what their customers intend to spend than they did a year ago. So, those are positive numbers.

Bruce Klein – Credit Suisse

Okay, thanks. And lastly just the trade tariffs I know it doesn’t direct – directly affect relate to sheets, but I suspect on margins it’s helpful. Do you have anything incremental you would say on that or?

Robert Mundy

Well, Bruce I would agree with you. I think it has certainly had a spillover effect and in fact if you look at imports for the year and you look at imports for the last quarter that was reported rolls were actually down, which is a positive for us. So, whether there would be sheeted rolls or web rolls, I think it was off about 5% and I think that clearly has an impact based on of which you just described. So, yes it’s had a positive impact on us.

Bruce Klein – Credit Suisse

Great. I’ll pass it on. Thanks, guys.

Robert Mundy

Thanks.

Operator

And now, we’ll go to Imperial Capital’s Kevin Cohen.

Kevin Cohen – Imperial Capital

Thanks. Good morning, guys. I was just wondering if you could give us a little bit of your thoughts in terms of may be where your peak pricing will be and do you think 2011 just may be the peak or to make what the industry’s cost structure and pull where it is that peak pricing will be higher than the prior peak?

Mike Jackson

Kevin, first of all I guess I would just say that kind of re-emphasize what Bob and I’ve said already this morning, we’re continuing to see that price improve. And as it relates to your question about the peak of 2008, that was a pretty healthy number and I’m certainly not going to project really talk about where I think it will go. I am just happy to report that we’re continuing to get price realization. I think inventories are in good shape. I think our backlogs are fine. And as we move into their first quarter of 2011, we’ll take another look relative to what we’ve realized and how business feels and move as appropriate.

Kevin Cohen – Imperial Capital

And then, in terms of China any thoughts in terms of whether the new capacity over there will have any impact on pricing in North America or do they going to be more of a regional issue?

Mike Jackson

I do think it’s going to be more of a regional issue, and the truth is when you look at the cost curves, even though these are obviously good operations, the cost curves are really flattening out, if you will. They still have to put the products on a ship and send it to the West Coast and all in all I just think that we are going to be able to compete no matter what comes on stream. The other thing that I would say is, it’s not huge, but it is about 4.5 million tons of capacity that’s coming out in China. It’s not all coated free, it’s not all certainly mechanical. But, it is paper and 4.5 million tons really across the system in the next couple of years like people forgot that there is an impact there as well.

Kevin Cohen – Imperial Capital

Any sense in terms of just roughly the cost per ton to make it and ship it over to North America versus let’s say the average for North American producers, and it is sort of rough guesstimate on that?

Robert Mundy

Now, I’d say we’re all on the same boat relative to what their net would be and what our net would be and that’s why it said I think the cost differential is not as tremendous as it was. Remember, they also have to buy pulp and bring it in from either Brazil or certainly from North America, convert it and then send it back. So, when you add off all that puts in the calls, it’s clearly I would say fairly average in terms of them versus the North American base assets.

Kevin Cohen – Imperial Capital

That’s very helpful. Thanks a lot guys and good luck.

Robert Mundy

Thank you.

Operator

Moving on, we’ll go to Jeff Harlib with Barclays Capital.

Jeff Harlib – Barclays Capital

Hi, good morning.

Mike Jackson

Good morning, Jeff.

Jeff Harlib – Barclays Capital

If you look at your orders, can you just talk about what you are seeing with your different end markets magazine, catalog, commercial printing and also just generally coated groundwood and coated freesheet in terms of the pricing and which markets are tighter?

Robert Mundy

Let me see if I could take a stab at that. I would say that certainly coated freesheet right now is a bit better than coated groundwood. We are optimistic about some of the numbers that I think I quoted a few minutes ago as it relates to ad pages being up 2 to 3.5 really approaching 4% goal in 2011, that’s going to have a favorable impact on both the catalogers and certainly the magazine publishers and...

Jeff Harlib – Barclays Capital

Talking a little bit like what you’re seeing currently in your – from your customers, your orders?

Robert Mundy

Again, compared to last year we are very, we feel very good about our order book going into the last couple of months of the year. And so, we’ve seen that consistent backlog actually since last year at this time and so we’re optimistic. And again, I think between the two grades I would say freesheet was a bit stronger than was coated groundwood. But, and it certainly inventory levels I think customers are concerned about inventory levels. They are down from a year ago in terms of days, and I think coated free is down about 13 days and coated mechanical is down about, I think 11 days. So, pretty significant move on inventory as well which I think has helped to prop up our bookie.

Jeff Harlib – Barclays Capital

Okay. So, you haven’t seen any recent builds there in some of the stats as it looks like some of the inventories raging up a little bit?

Mike Jackson

I guess I’m talking more about mill inventories. Coated free is, I think it’s 31 days’ total supply and coated mechanical was 12. There has been a little bit of build on freesheet at the printer level. But it’s certainly not significant at all.

Jeff Harlib – Barclays Capital

Okay. And just in terms of the CapEx for 2011 and any reimbursements you expect from the – any grants or other reimbursements you expect?

Robert Mundy

Well, 2011, we are still taking a look at that, Jeff. It won't – giving consideration to the Quinnesec, the turbine project as we announced and any grants we may have associated with that. Our CapEx will be in something comparable to what a normal year would be maybe around that 80 number, will give or take a little bit maybe little above 80.

Jeff Harlib – Barclays Capital

Okay. And just lastly, just talk about how you're managing now, when you shipping higher than your capacity in coated and where you kind of concentrating – it seems like you have some flexibility relative to your capacity?

Robert Mundy

Yeah. I am not sure of the question. You could try that again for me.

Jeff Harlib – Barclays Capital

Yeah, you're shifting certain grades, more profitable grades, lot of less profitable grades and just right now you're shipping higher than your capacity levels and I'd assume.

Mike Jackson

Yeah, we, I think when you think about our strategy, we're always trying to and I'm talking in the coated mechanical side of our business, we always trying to move into lighter basis way. So I would say just as a overall strategy for us – the lighter the better and then we believe that that the lighter, the better for our customers as well because then their mailing cost come down.

So, I guess I would say in general – any opportunity we have to go from heavy weight and this is a groundwood comment to lighter weight, it's something we try to do honestly every day.

Jeff Harlib –Barclays Capital

Okay. Thank you.

Mike Jackson

You are welcome.

Operator

And now, we'll go to Tarek Hamid with J.P. Morgan.

Tarek Hamid – J.P. Morgan

Good morning and thank you. Most of my questions have been asked, but I would like to sort of touch on kind of the import situation and particularly with prices going up every month. Are you seeing anymore competition from imports particularly from Europe?

Mike Jackson

Not on the coated side. Let me back up, certainly, coated is always a threat from Europe. But, no matter where the euro stands, we've not seen any dramatic increase. In fact the ratio of shipments to demand and the percent that the European rolled has actually slipped for the last four years. So, we've no – the answer to your question, we'd not seen anything dramatic.

Mike Jackson

I’m sorry. And I think the other thing is does that particularly with groundwood, with the freight differential now, price still is an attractive or that attractive for the Europeans on the groundwood side. So, we have not seen that dramatic of an impact in certainly the last couple of years.

With these duties, we’ve seen some interesting numbers, I think already mentioned that. Web was off 5%, which was a surprise to be candidate. I thought that would show more in a sheet side but it did not. It showed in the web side. So, it's a kind of a mix bag, but bottom line is we've not seen a dramatic increase in import.

Tarek Hamid – J.P. Morgan

And I guess, just on your expectation for working capital until the end of the year?

Mike Jackson

I'm sorry. I couldn't hear you.

Tarek Hamid – J.P. Morgan

(inaudible) expectations for working capital since end of the year?

Mike Jackson

Yeah. Working capital will be, I think we normally have source of cash in the fourth quarter. Third quarter working capital was very, very low. But, I'll still think it will – it will be about a push maybe slightly, a slight sources of cash quarter-over-quarter.

Tarek Hamid – J.P. Morgan

Okay. Great. Thank you very much.

Mike Jackson

You bet.

Operator

And now, we'll go to Jefferies, Richard Kus.

Richard Kus – Jefferies

Yeah. Hey guys, good morning.

Mike Jackson

Good morning.

Richard Kus – Jefferies

Can you talk little bit about what you guys are seeing in the pulp markets and how that might affect you guys going forward into the fourth quarter?

Mike Jackson

Well, I think that a couple of – maybe weeks ago there was a concern that the Chinese had stopped buying and then of course that changed overnight. The market that was co projected to go down really – really hasn't fallen much at all, maybe 20 to 40 bucks a ton depending on the grade.

And honestly we don't see that changing, at least not now with based of what we know is going on in the other countries. We expect that at least for the next couple of months half of that $20 to $40 move that prices will probably stay there. And I guess we'll just have to see going into the first part of the year. But that projection – significant projection downward certainly has not happened yet.

Richard Kus – Jefferies

Okay. Great. Thank you. And then, with respect to inventory levels, do you guys believe that printers are really going to rebuilt any inventory levels if they are at low levels, or do you think they will just operate with the levels that they have going forward even if they're seeing higher-end market demand?

Mike Jackson

Yeah. I believe that there is been new level set and I just think that relative to a working capital perspective that the printers have changed their operating model a bit and I think that's why when you think about our backlog – a lot of that backlog as it is shipped just goes out to the printer and it hits the printing press where days gone by, that maybe would not have been the case. But I think the working capital is king right now. And I think coming out of 2009, a lot of people understood how to better manage that. So, I guess, that would be my response to that question.

Richard Kus – Jefferies

All right. Great. Thanks a lot guys.

Operator

And now, we'll open the floor to Hartford Financial's Eric Anderson.

Eric Anderson – Hartford Financials

Good morning. Most of my questions have answered, but I just want to ask you sort of about a bigger picture question. And that is and I may be incorrect in this, but, seems to me at least that the size of catalogs is shrinking along with the size of news papers in terms of physical dimensions. Just wondering if that is, if you share that assessment and if so what affect do you think that has in terms of the overall, overall market for tonnage and from the catalogs going forward.

Eric Anderson – Hartford Financials

Yeah, I think actually that change started about 18 months ago and I've honestly not seen a significant change since the first move where you could clearly see the catalogs were smaller, smaller and less pages. However, I would say now, what we're seeing as yet still smaller catalogs but more pages.

So, I believe, again, from what is that all mean from an impact perspective, I think you're seeing that and we've been pretty consistent with this. Remember, we've said hey, we believe that 11 or 12% of coated foresheet and coated groundwood is gone forever and I think that takes into affect which you just described.

Eric Anderson – Hartford Financials

Okay. Appreciate it. Thanks very much.

Operator

Now we’ll let Phillip Wirtz with Odeon Capital of Group take the floor.

Phillip Wirtz – Odeon Capital

Thank you. My first question was on chemical price increases. I was just wondering I had seen a few announcements now in September and also October and they were a lot earlier in the year too. Do you buy a lot of that under contracts or does it take a while for those chemical price increases to roll into your results?

Mike Jackson

Yeah, we do. In most all of our chemicals are under some type of contract or another.

Phillip Wirtz – Odeon Capital

And that's for a quarter or is it more like a year?

Mike Jackson

It just depends. We buy a lot of chemicals and there is just – it's – there is just varied.

Phillip Wirtz – Odeon Capital

And, so out of all the possible input cost headwinds that you might face next year is that probably your biggest concern at this point?

Mike Jackson

Yeah, I'd say it in the chemical area. Yeah, I think it's an accurate statement.

Phillip Wirtz – Odeon Capital

Okay. And then lastly, on the pulp side you are a net seller and my understanding is that’s its primarily hard with pulp but when you – the pulp that you do purchase, what is the mix between softwood and hardwood?

Mike Jackson

It's all softwood.

Phillip Wirtz – Odeon Capital

Okay. So, you've purchased strictly softwood but then sort of hardwood. Has there been any kind of an impact negatively from the spread between the two prices widening at all?

Mike Jackson

Yeah. I think a little bit quarter-over-quarter. It was slightly negative for the first time in a long time for us but nothing material.

Phillip Wirtz – Odeon Capital

Okay. All right. Well, thanks very much.

Operator

And now, we'll go to Chip Dillon with Credit Suisse.

Chip Dillon – Credit Suisse

Yes. Good morning.

Mike Jackson

Hi, Chip.

Chip Dillon – Credit Suisse

Yeah. By the way just on that earlier question about back to the peak. I think we saw little over 1,000 and in 2008 I guess for the record it was over 1,200 in 1995. So, it looks like we could have a long way to go especially with pulp being at their levels.

Now, when you look at the pricing for paper, I notice that you are up $39 a ton second to third and obviously it's very difficult following rece and trying to relate that to say, Verso because of the timing differences of what they reported and what guys see. As we go from third to fourth it would seem to me that you could see something close to another 30 – let’s say 30 bucks a ton, especially since we have to assume the pulps going to be lower.

Mike Jackson

I think that's not unreasonable.

Chip Dillon – Credit Suisse

Okay. And then, is there any reason if you don't say – if your expectations of higher EBITDA in the fourth quarter come to pass, I would assume that would mean that the earnings per share or loss per share change would be moving in the same direction. There is no other issue that would happen below the EBITDA line that would cause that not to be the case, right?

Mike Jackson

That's correct.

Chip Dillon – Credit Suisse

Okay. And then, I guess the last thing is, I think I heard you mentioned that CapEx as you look at '11 and '12 and your – in the Quinnesec project and the other Area 3 projects where I know there is some money coming in.

How should we think about CapEx, I think you said 80 for next year, but, how should we think about verify that the CapEx in '11 and '12 as it looks like today and how much of that would be offset by moneys coming from government sources for these projects.

Mike Jackson

Yeah. I would say Chip. Again, it's – we're still finalizing some of that, but 80's and 90 for each year over the next couple of years, net of any reimbursements.

Chip Dillon – Credit Suisse

Got you. Okay. All right. Thank you.

Mike Jackson

Okay.

Operator

Moving on, we'll go to James Daly with Deutsche Bank.

James Daly – Deutsche Bank

Good morning, guys. Great quarter.

Mike Jackson

Good morning, Jim.

Robert Mundy

Thanks, Jim.

James Daly – Deutsche Bank

Obviously, most of my questions have asked but just real quick, what you've see in the competitive landscape as far as competitors moving prices as they have been announced, as well as are you seeing any kind of may be market share grab as prices increase. What do you seeing out there or you think it is so tight, doesn't really matter?

Mike Jackson

Yeah. That's a good question, but I'm not sure that I would respond because I hate to make comments about competition. I guess all I would just say that we're continuing to push price and try to close that gap between what we've announced and what we've realized. And I think we've done it professionally and with good control. But, beyond that I think that's all, I probably won't to say about anybody else.

James Daly – Deutsche Bank

Okay. Thank you.

Mike Jackson

You bet.

Operator

And now, we'll go to Bank of America, Merrill Lynch's Roger Spitz.

Roger Spitz – Bank of America/Merrill Lynch

Thank you, good morning. I just want to make sure I heard correctly earlier in the call regarding the contracts. I think what you said is the majority of both your coated groundwood and coated freesheet volumes are sold under contract, but that coated groundwood has a higher proportion sold under contract. Was that, did I hear that correctly?

Mike Jackson

Yes.

Roger Spitz – Bank of America/Merrill Lynch

And that both coated groundwood and coated freesheet contracts prices typically moved quarterly. But that in the first half of 2010, certain special circumstances resulted in some longer price fixings perhaps six months for some contracts and even longer for others, is that also correct?

Mike Jackson

We just thought we had – we just – that's probably a fair statement. There were some things that we as I've said, '09 was such a disaster where the whole economy and not knowing what '10 was going to look like. We certainly didn't want to have 340,000 tons of downtime like we did in '09. So, there are probably some things down just make sure that until the crystal ball became clear, we had some good volume to keep those machines running.

Roger Spitz – Bank of America/Merrill Lynch

Fine. In ordinarily periods outside of what happened earlier this year and after 2009, would you say that the typical norm is for a contracted coated paper? The terms are typically one-year contracts regardless of the timing of any price changes within that contracted period?

Mike Jackson

Well, normally they are one-year type of agreements with like I said, normally we like to have the majority of those on a pricing move on a quarterly basis that can up or down and but they're typically in place for a calendar year type period normally.

Roger Spitz – Bank of America/Merrill Lynch

Excellent. And 2010 CapEx and cash tax expectations, can you update that for us, please?

Mike Jackson

I think our CapEx is what we've said all year, it will end up in the 70s mid 70s to low 70s maybe and no taxes, no cash taxes.

Roger Spitz – Bank of America/Merrill Lynch

Okay. And finally, is there any cancel of sales of biofuel tax credit possible?

Mike Jackson

I'm sorry the – could you just repeat that.

Roger Spitz – Bank of America/Merrill Lynch

The sales of biofuel tax credit I know some other…

Mike Jackson

Now, I wouldn't, I would not for us, no.

Roger Spitz – Bank of America/Merrill Lynch

Thank you very much.

Operator

And now, we'll here from Gary Madia with Gleacher & Company.

Gary Madia – Gleacher & Company

Thank you. Good morning. Obviously, most of my questions already been answered. But, Robert, I just want to flush out a little bit and not to be the dead horse here in terms of price increases and if I'm thinking about it correctly. You're average coated price per ton bottomed out in the first quarter of '10 at about 766. Earlier in the call, you mentioned that you had about 150 announced on groundwood and about 110 and kind of simply taking an average, obviously, now that you have more exposure to groundwood, knowing that since the first quarter average price comparing that to 812 in the current quarter, that's about 46. So, feeding of a Chip question too about 3Q versus 4Q, it would appear that the price momentum is not only going to continue from 3Q into 4Q but potentially could spill into first quarter '11, kind of, given that you’ve only thus now received about $46 from the first quarter alone. Am I thinking about that correctly?

Robert Mundy

Well, I think I said that. I think, I said that earlier on part of Chip's question that I expected that momentum to continues into the first quarter of 2011 and also you have to look prices per month. I think, on average, the price where we ended the quarter is higher than what you see as the average price. So, yeah.

Gary Madia – Gleacher & Company

Okay. And then just a final question on the cost per ton, it looks like sequentially that you guys did a nice job. It decreased about $15 a ton. Although you're projecting fourth quarter cost to be essentially flat, can we expect a slight uptick on a per ton basis as volumes come down?

Mike Jackson

Yeah, that could, well depending on our production volume I think it will be comparable. But on sales volume, I think it will be close to third quarter, maybe slightly down as we talked about and seasonally this time of the year, that's what happens. So, yeah, I mean, if obviously everything else being equal if have less tons then your per ton would be a bit higher. But, I don't think it will be anything dramatic at all.

Gary Madia – Gleacher & Company

Okay. Thanks. Great quarter that's all I have.

Mike Jackson

Thank you.

Operator

Sterne Agee's Sandy Burns is up next.

Sandy Burns – Sterne Agee

Just one thing, I know, one of your competitors just announced the restart of a small SC paper machine. I'm just wondering given where the industry and pricing is right now. Are there any other machines out there that you hearing about or concerned about that may restart over the next six months.

Mike Jackson

I've not heard of any outside of the group that you just mentioned. There is nothing that kind of pops out of us.

Sandy Burns – Sterne Agee

Great. Thank you.

Operator

And now, we'll hear from Raymond Chiarastella [ph] with Blue Mountain.

Raymond Chiarastella – Blue Mountain

Hi, just add a little more color on prices. Specifically [ph], can you give us that number? How much higher was your price than in the quarter versus the average for the quarter?

Mike Jackson

Well, I think we won't give that out, but I think just it was higher than the average because the prices moved up everything throughout the quarter.

Raymond Chiarastella – Blue Mountain

All right. Thanks.

Operator

And that does conclude our question-and-answer session at this time. I will turn it back to our speakers for any closing or additional remarks.

Robert Mundy

You know, what, I think we're good and we appreciate everyone joining the call and we look forward to talking to you after the next quarter results. Take care.

Operator

Ladies and gentlemen, that does conclude our conference call for today. Again, thank you for your participation.

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