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Executives

Mike Jackson – President, Chief Executive Officer

Robert Mundy – Senior Vice President, Chief Financial Officer

Analysts

Joe Stivaletti – Goldman Sachs

Bill Hoffman – RBC Capital Markets

James Daly – Deutsche Bank

Jeff Harlib – Barclays Capital

Bruce Klein – Credit Suisse

Tarek Hamid – JP Morgan

Chip Dillon – Credit Suisse

Richard Kus – Jefferies & Company

Eric Anderson – Hartford Financial

Gary Madia – Gleacher & Company

Mark Fisher – (Inaudible) Capital

Frank Duplak - Prudential

Verso Paper Corporation (VRS) Q4 2010 Earnings Call March 3, 2011 9:00 AM ET

Operator

Good day ladies and gentlemen. Welcome to the Verso Paper Corporation Fourth Quarter 2010 Earnings call. Please note that today’s call is being recorded. At this time I would like to turn the conference over to Mr. Robert Mundy, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Robert Mundy

Good morning. Thank you for joining Verso Paper’s Fourth 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

Thank you Bob, and good day everyone. As projected in our third quarter call, our fourth quarter showed continued upward price realization. Coated prices were up over 7% in the fourth quarter of 2010 compared to the fourth quarter of 2009, and grew almost 5% from the third quarter of 2010.

As expected, our volume seasonally declined in the fourth quarter; however, coated volumes for the entire year increased almost 17% from 2009 levels. Manufacturing operations improved over third quarter and helped drive our $17.4 million positive operating income. Our input prices were virtually flat versus the third quarter of 2010.

Printer and mill inventories ended the year in good shape. That is both a total tons available comment as well as a days to consume. Our working capital number was both below last year and better than our aggressive target by almost 20%, and we hit our CAPEX spending right on our budgeted number for 2010.

Adjusted EBITDA was up almost 56% from last year’s fourth quarter and up 9% from the third quarter of 2010, all very, very positive trends.

With that, I’m going to hand this over to Bob for some more details and then I’ll return to address some of the supply, demand and operating rate forecast. I’ll give you a more crystallized view of our energy projects and the EBITDA impact that these projects will have on our business going forward, and then talk a little bit about the view that we have for 2011.

Bob?

Robert Mundy

Thanks Mike. Turning to Slide 4, as we mentioned on our last call, our volume for the quarter was down from the seasonally strong third quarter and comparable to the fourth quarter of ’09. Revenues were up 7% versus last year on comparable volume, but with prices up over 7%. Sequentially sales were down due to the seasonally lower volume. Adjusted EBITDA for the fourth quarter of $50 million over 56% versus last year, and up about 9% versus the third quarter. Adjusted net earnings were much improved versus last year and the previous quarter, primarily due to our improved sales price realization.

Turning to Slide 5, you can see that coated volumes were down a bit from a very strong fourth quarter 2009 as well as down from the seasonally strong third quarter. We continued to see coated prices increase during the fourth quarter, and we expect prices to continue to increase as we move into 2011. Pulp prices were down about 9% versus the third quarter but about a $100 per ton above last year’s fourth quarter.

Turning to Slide 6, you can see the key changes between our fourth quarter 2010 adjusted EBITDA of $50 million versus the 32 million in the fourth quarter of 2009. As I mentioned earlier, overall volume was flat while improved pricing contributed $26 million. Operations were about $3 million better than last year, and overall input prices were about $8 million above last year with that primarily being driven by higher pulp prices and somewhat higher chemical prices.

Slide 7 gives you a view of the changes between the fourth quarter of 2010 versus the third quarter of 2010. Volume was down seasonally, as mentioned earlier, but continued realization from our price increase announcement was worth about $12 million. Manufacturing operations improved slightly versus last quarter, and prices for our input materials were flat quarter-over-quarter primarily due to lower pulp prices. The $5 million negative bar there was primarily driven by higher diesel prices and some changes in certain freight contracts driving up our distribution costs, along with the timing of certain SG&A expenses.

Moving on to Slide 8, you can see the direction our input prices were moving versus last year and versus the third quarter of 2010. In the chemical area, it’s a mixed bag of certain items going up and others flat or going down slightly. Latex has been up most of this year due to the tightness in butadiene, but things such as starch and clay were slightly better than last quarter. Overall, wood prices continue to stay at a very good level for us and energy prices were comparable to the third quarter driven by low gas prices and our ability to utilize our flexible energy platform to take advantage of this in our operations.

On Slide 9, you’ll see the key drivers of our 2010 adjusted EBITDA of $132 million versus 2009 of 77 million. As Mike will discuss shortly, much improved operating rates and volumes contributed significantly to our 2010 improvement with about $91 million between higher volumes and virtually no down time. Although sales prices have been moving in the right direction since the second quarter of 2010, full-year 2010 average coated prices were still about $53 per ton below the full-year average prices of 2009.

Manufacturing operations costs were $22 million better than 2009, and higher diesel prices were the primary driver of our higher freight costs versus last year.

With that, I’ll turn it back over to Mike.

Mike Jackson

Okay, thanks Bob. If you move to Slide 10, on this slide you can see some very positive operating momentum for both coated freesheet and coated groundwood. Both grades have improving trend lines since around June of 2009. On Slide 11, the view of longer term operating rates from three sources averages out to be above 92% for both coated freesheet and coated groundwood actually moving into 2014. The top left, as you can see, is the coated freesheet view and the bottom right is coated groundwood. As many of you know, 92% or above in terms of operating rates is a fairly healthy rate, and it sets up a good environment for pricing.

On Slide 12, with these projected operating rates you can see that RISI is projecting an upward trend in prices for the next few years from the fourth quarter 2010 levels. Slide 13 just gives you a sensitivity. You know, as a reminder, for every $60 per ton increase in coated paper, Verso realizes an impact of about $102 million in EBITDA.

Moving to Slide 14, we wanted to spend a bit more time as we move into 2011 and beyond to update and crystallize a bit the elements of our energy strategy, which we unveiled well over a year ago. Some of you may have seen this slide in the past, so it’s really time for an update. We are halfway through our five-year strategy. Beyond five years is not what we will highlight today, but instead really concentrate and focus on this first two and a half year period and what we committed to do well over a year ago.

We’ve executed against the items that are surrounded by the dotted line with the focus being on reducing our carbon footprint, reducing energy costs, and maximizing our green power. So what does that really mean to the bottom line? As we move through our capital process, our Board of Directors have been very supportive and today would like to be a bit more specific on the scope of this strategy, including how state and governmental grants have played a role.

If you move to Slide 15, listed on the left we currently have four areas that involve multiple components. They encompass the 12 DOE Area 3 Grant projects that we’ve spoken about: the Quinnesec Renewable Energy Project, the Bucksport Renewable Energy Project, and the RGAP initiatives that we’ve really come up with that focuses strictly on energy.

The $114 million over this two and a half year period is a large commitment, as you all know; however, between the government grants and new market tax credits, we have about $43 million coming back to Verso for net capital spend of $71 million. This equates to $50 million EBITDA improvement which represents a 44% return on the investment, or with the state and federal grants a 71% return. That run rate of 50 million will be all-in by the end of 2012. You know, clearly this is very exciting for our Company and, more importantly, very exciting for our stockholders.

Along with the significant impact on EBITDA, we have already achieved 35% of our 10-year commitment to the DOE in the usage of energy. We will have increased our internal generation of power by 36% and increased net power sales when this is all done by 50%.

If you turn to Slide 16, let me close by giving a view of 2011, and then we’ll turn it over for some Q&A. First and foremost, we see that consumer confidence is building, although it is slow. This confidence build always follows better news on the employment front, which in January had a slight improvement. As mentioned before, we expect coated volumes to be strong throughout the year and that we’ll continue to closely monitor and match supply with demand. As I pointed out on Slide 11, the average from three industry sources added up to a 92%-plus operating rate, which again supports a favorable pricing environment. We do expect prices to be well above the 2010 average. Capacity, closures and restructuring will continue and we believe that we will see imports continuing to be relatively flat, as they basically have been in the last four years.

We’ve committed again that our RGAP process will continue to negate anticipated price inflation. Certainly that is a challenge; and as I mentioned in our energy overview, our CAPEX for 2011 will be higher than normal as we build out the high return Quinnesec and Bucksport turbine projects.

What is as important is a positive position for 2011 sets us up well for what we believe will also be a solid 2012 as we look forward.

So Lisa, with that Bob and I will be happy to answer any questions.

Question and Answer Session

Operator

Thank you, sir. Ladies and gentlemen, if you have a question today, please press star, one on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, it is star, one if you have a question today.

Up first we’ll take Joe Stivaletti, Goldman Sachs.

Joe Stivaletti – Goldman Sachs

Good morning guys. A couple of things – your press release shows approximately 56 million of unrealized cost savings, and I was wondering what portion of that is expected to be achieved in 2011. You indicated that whatever you achieve on RGAP would be largely offset with cost inflation. I just was trying to clarify that number and also understand how the 50 million of energy savings fits in with any of that, or if it’s all separate.

Robert Mundy

Yeah Joe, about 40 million of that will be realized in ’11, and the remaining piece is related to the energy projects that spill over into 2012. And as Mike said, we expect that to be fully realized by the end of 2012.

Joe Stivaletti – Goldman Sachs

Okay. So is the 50 million of eventual savings from energy a subset of that 56 million?

Robert Mundy

It’s a piece of that. It is a piece of that, but that will continue on—you know, we pick up some additional savings. Of that 50, we pick another 20 or so in 2012.

Joe Stivaletti – Goldman Sachs

Okay. All right. And then I was just wondering, you indicated your expectation that prices would continue to move up in the first quarter, and of course there haven’t been announced price increases for first quarter. So I just wondered if you could give us a little bit of guidance on the amount of business that you do where customers had some sort of price protection that meant that the September/October price increases possibly weren’t felt until January. Just looking for some guidance on what we should be expecting for your pricing trends in the first quarter.

Robert Mundy

Yeah, that was exactly what I was referring to when I said that. What you mentioned is that there were some pricing agreements that really held prices through the end of the year relative to the announcements we made during 2010. And for those, those are expected to kick in in the first quarter of this year, and so that’s exactly what that is. Can’t give you the exact amount that we expect to get in the first quarter, but we do expect prices to move up from the fourth quarter based on those announcements we made in ’10 that weren’t fully realized.

Joe Stivaletti – Goldman Sachs

Given the stronger environment where it’s a bit more leverage on the part of the producers, is the tendency to give those types of price protection that was happening last year, has that sort of gone away?

Mike Jackson

Yeah Joe, in the fourth quarter of 2010, we had multiple negotiations going on; and to answer your question, yes, we have tried to corral some of those contracts and bring them into more of a quarterly basis, which is really what we had done in the past going back to ’07 and ’08. That was what we had tried to do, and obviously the environment in 2009 going into 2010 was quite different. But yes, to answer your question, I think our sales and marketing folks have done a very good job of changing the time frame as we go forward in 2011. So we should see quicker realization on price announcements.

Joe Stivaletti – Goldman Sachs

Okay, thank you.

Operator

Next up is Bill Hoffman, RBC Capital Markets.

Bill Hoffman – RBC Capital Markets

Good morning. Just a follow-up on Joe’s question – I just wonder if you could help us a little bit on maybe some kind of percentage of the contracts that didn’t pick up the pricing initiatives in 2010 where you actually get the flow-through. I mean, is it a quarter of the business, or is it less than that?

Mike Jackson

It’s less than that, Bill.

Bill Hoffman – RBC Capital Markets

Okay, thanks. And then just as we look into the first half of the year, typically from a coated paper side of the equation, demand is typically off; and last year you did a good job of offsetting with some of the others, especially paper. I just wondered if you could walk us through sort of what the outlook is for the first half of this year, what you see in coated demand, what you see sort of your mix being.

Mike Jackson

Yeah Bill, I think we’re going to see similar trends to last year. I think we have been fairly specific in terms of our need to build inventory, so to be honest with you, we’re hoping for just a little bit of a break that we can do some of that. But right now through the timeframe that we’re at through the first month, two and a half months or so, or maybe certainly a little less than that, is about the same type of volume that we experienced last year in terms of bookings - maybe a bit less but fairly close. So we’ve had a chance, by the way, to build a bit of inventory and hopefully we’ll continue to do so to prepare ourselves for the real busy season, which we didn’t have a chance to do last year.

Bill Hoffman – RBC Capital Markets

Right. Of the inventory it looked like you built in the fourth quarter, does that get you sort of two-thirds of the way there? Is that the way to think about it?

Mike Jackson

You know, maybe half, I would say.

Bill Hoffman – RBC Capital Markets

Okay. And then Mike, just from a bigger picture standpoint, as you guys look at 2011, and this is from your customers’ standpoint, capital budgets for the catalogue guys and the advertising people, whether it’s commercial print or magazines, I just wonder if you could talk about sort of what you’re hearing from the customers. There’s obviously somewhat less political spending this year, but maybe just some kind of thoughts on what their budgets are looking like.

Mike Jackson

Yeah, sure. Let me just make a comment on the political spend, Bill, is that because we’re mostly web, we don’t run sheets. The sheets were really driven from the political perspective last year, so we’re not going to see an impact that much one way or the other in our business. As it relates to our two key segments of the magazine and catalogues, I think the cataloguers are pleased in a sense, if that’s the right word, that there’s going to be very limited increase on the pulp side. They’ve already announced another summer fling, so to speak, which I think you know the last couple years has really helped mailings in the early summertime, which I think will be good for us. And we’ve not heard anything relative to any cutbacks on the catalogue side. I think we’re kind of through the window as it relates to the reduction of not only pages but the reduction of the size of the catalogue. So that’s a little bit on the catalogue side. I don’t see too much of a change in that area.

On the magazine side, clearly we all know that there are challenges out there as it relates to the electronic devices that are available. The good part is that certainly magazines, for the first time since 2007, actually saw ad revenue increase, and that was about a 3.1 or 3.2% increase over 2009 to 2010 which was very good. So we saw ad pages up and I think a key element of that, which is probably no surprise to you, is that automotive revenue was up 22%, ad pages up 17, the financial and insurance and real estate folks got back in the game a little bit. Cosmetics were fairly strong. Technology was up 6%, and so we saw some folks that had gotten out of the market on the advertising side move back in to the magazine business. And I think you’ve heard us quote this number before that the channel of magazines, of the $140 billion spent in the U.S., is about 18.5%, expected to go 19 for 2011.

So I guess all that said we expect the magazine business to recover a bit. It’s not going to be a home run, so that’s kind of the update from our customer base and what they’re seeing on both the magazine and the catalogue side.

Bill Hoffman – RBC Capital Markets

Great. Thanks Mike.

Operator

Next is Deutsche Bank’s James Daly.

James Daly – Deutsche Bank

Good morning guys. Great quarter. Most of my questions have been answered. I just have a question on Slide 16 – you mentioned overview of 2011, some capacity closures possible. Can you kind of give us an update, kind of why you’re thinking that might be necessary?

Mike Jackson

Well, I guess, James, the main comment would be the capacity closures really already took place in the first quarter, where you saw an announcement from a major manufacturer shutting down 250,000 tons of coated groundwood. I think the other thing that I would say is, and I think we’ve mentioned it in the past, is with UPM’s recent purchase of Myllykoski, that clearly they – and their CEO has stated this – they have some work to do relative to cleaning up their—restructuring their portfolio. So between that and what just took place—250,000 tons, by the way, is about 6% of capacity in North America. So I think all that adds up to that favorable operating rate that we talked about, that 92 to 95% operating rate. So that’s kind of what I was referring to, James.

James Daly – Deutsche Bank

Okay, thanks for clearing that up. Any kind of planned maintenance in the first quarter or second quarter that we should be aware of – any cost related to that?

Robert Mundy

There will be a little in the second quarter, Jim, but nothing really significant. You know, just sort of our normal—we have some outages and so forth, but nothing that should e significant.

James Daly – Deutsche Bank

And just to be clear – what is the CAPEX spend budget for 2011?

Mike Jackson

Well, it will be in the high 80-ish type range, somewhere between 85 and low 90s, something like that.

James Daly – Deutsche Bank

All right, great. Thanks guys.

Operator

Jeff Harlib at Barclays Capital is up next.

Jeff Harlib – Barclays Capital

Good morning. Maybe you can talk about kind of near term what you see on input costs with higher energy, chemical prices. And also, natural gas, what kind of hedging you have in the place for the year?

Mike Jackson

Yeah, we certainly see some headwinds on input costs, primarily in the chemical area. You know, things like titanium and caustic and starch, maybe a little bit on the latex side, will be the main drivers of those headwinds. But as we say, we feel like with our cost savings initiatives that we have in place, we hope to keep that in check.

And your other question, I’m sorry, Jeff, was—?

Jeff Harlib – Barclays Capital

On natural gas.

Mike Jackson

Yeah. You know, gas we do hedge. We have a significant portion hedged in 2011, and about all I can tell you is it’s at a very good price, so we feel really good about keeping gas prices in a good place this year.

Jeff Harlib – Barclays Capital

Okay. And just on the financing of the projects, I see there was a loan to the holdco relating to the Quinnesec Project. Do you see more of those loans; and just to clarify, the high 80s, low 90s CAPEX, that’s cash CAPEX before government and other financing?

Mike Jackson

No, that would be a net number, to answer your second question. That would be a net number. The other is—you know, that was related to the Quinnesec Project, and it was just the way the structure works relative to these new market tax credits, which is a very complex undertaking but it’s well worth it at the end of the day. But we did that for Quinnesec. Right now, I don’t see that on the board for anything else we have. We have some other things going on relative to both the Quinnesec and the Bucksport turbine project, but not the new market tax credit type of arrangement.

Jeff Harlib – Barclays Capital

Okay. And just with the 50 million of savings you expect from the energy projects, how predictable is that number? Are there uncontrollables that could alter that number with changes in uncontrollable costs, or just maybe a little feel for that?

Mike Jackson

You know, we feel good about the savings. Obviously, gas prices move—obviously, if they get higher then your savings would be more, even though all of these savings aren’t attributable to the price of gas. But no, we feel good. We feel these projects are not rocket science type of things. They’re pretty conventional technology that we’re installing there at the two mills, and the things we did on the DOE side – those initiatives that are winding up now – we feel good about achieving these savings.

Jeff Harlib – Barclays Capital

Okay. And then just lastly, coated freesheet versus coated ground with demand entering 2011, and if you see any indications of customers building inventory in the face of price increases.

Mike Jackson

You know, we would not doubt that there was some inventory build in that fourth quarter, to be candid. I think folks were concerned that prices were—because some of those guarantees were at a low level, kind of recognizing what the operating rates might be for 2011. We do believe there was a bit of build, which was not surprising to us.

Jeff Harlib – Barclays Capital

Okay. And on coated freesheet versus coated groundwood?

Mike Jackson

Just about the same. I would say coated groundwood from an inventory perspective is in a bit of better shape than coated freesheet, although both are okay. I would say groundwood as we sit today is currently a little better than coated freesheet.

Jeff Harlib – Barclays Capital

Okay, thanks.

Operator

Did you have anything further, sir?

Jeff Harlib – Barclays Capital

No, that’s it for me.

Operator

Next up is Bruce Klein, Credit Suisse.

Bruce Klein – Credit Suisse

Hi, good morning guys. On the CAPEX, just so I understand, the gross – the number you might spend is maybe more than 110, and then government grants will knock another 20 or 30 out of that? Is that the right way to think of it? Is that what you meant by net?

Mike Jackson

Well, the net number, Bruce – it will be sort of in that 90ish range. That will be a net number.

Bruce Klein – Credit Suisse

Okay, net – you mean net of the money—

Mike Jackson

Net of any reimbursements we expect to receive in 2011. Yeah.

Bruce Klein – Credit Suisse

Oh, okay. And then the energy projects – are there any sort of procedural or permitting bottlenecks or hoops you have to jump through in order to continue that project, or any major hurdles there?

Mike Jackson

No, nothing like that. Obviously on the grants that we’re pursuing for the two turbine projects, there’s certainly some hurdles and some things we have to make sure we take care of, but nothing that we feel is insurmountable or that we feel would jeopardize us receiving those grants.

Bruce Klein – Credit Suisse

And then lastly just the—I guess the coated price hikes, I think one of your competitors is out in March. Do you guys stick to your time, or do you move that? And how’s, I guess—are you starting to see the benefits? I guess as you said earlier, you’re starting to see the benefits, hopefully sooner than last year, because of what needed to happen in contracts last year. Is that fair?

Mike Jackson

Yeah, I think we’re—to answer your first question, Bruce, our announcement is our announcement, and that’s number one. Number two is we do believe, because of these changes in some of our contracts, a significant amount of our contracts, is that the realization will happen quicker than it happened in 2010.

Bruce Klein – Credit Suisse

Okay, great. Thank you, guys.

Operator

Our next question today comes from Tarek Hamid, JP Morgan

Tarek Hamid – JP Morgan

Good morning guys. You talk a little bit more on the chemical side – you know, one of the comments made by one of your competitors was that they expected a lot of the first price increase to be eaten up by just sort of raw chemical and diesel cost inflation. Is that what you’re seeing, or do you think your cost savings put you in a little bit more of a unique position?

Mike Jackson

You know, I can just speak for us, and we hope that the timing of our savings initiatives stays in step with any inflation that we see coming at us. So that would mean that we expect to, as far as any sales price realization, we expect to see that at the bottom line.

Tarek Hamid – JP Morgan

Okay. And then I guess with sort of Europe following the U.S. lead on tariffs on coated paper from Asia, could you talk a little bit about what you think is going to happen with trade flows over the next couple quarters?

Mike Jackson

That’s a great question. Right now, certainly Asia is a bit boxed in; but they are in the process right now – and a lot of folks have not seen the outcome of this – but they’re within six months of probably shutting down almost 4 million tons of productivity, and that’s a comment for China. I think that you’ve also seen a couple of start-ups delayed, or at least some capital announcements delayed. I still think that China has a significant presence still in South America, Australia; and I’m sure that they’re going to find a way to get product into the areas that, right now, they have stop sign up on. But again, we’ve not seen any impact—or we have seen impact, which has been positive in the last three or fourth months, and we expect that to be the case going forward for at least the next three or four years.

Tarek Hamid – JP Morgan

Okay. So you don’t expect sort of Europe to try to import more into North America to offset what they’re losing in other markets, or--?

Mike Jackson

No, you know what? I don’t. I think that—again, I mentioned the restructuring that we believe has to continue. You probably just saw that Europe announced another coated increase, which according to reliable published sources say is going through, and of course the euro this morning was at 1.38 or something like that. So all that said, I think they feel they’ve got to focus on their own organization in Europe, get that in order. And again, we have not seen, by the way, any significant increase over the last four years. In fact, the coated imports have actually over the last four years lost about 3% market share to the North America demand, and we expect that to kind of remain the same.

Tarek Hamid – JP Morgan

Great. Thank you very much.

Operator

We’ll take the next question today from Chip Dillon, Credit Suisse.

Chip Dillon – Credit Suisse

Hey, good morning. I noticed if you compare the 10-Ks from this year to last year that you actually were able to increase your pulp capacity. It looks like 7%, 57,000 tons; and it was also interesting to see that your paper all-in went up about 6%, by 113,000 tons. Was that sort of an offshoot of some of the energy spending, especially on the pulp side, or was it just merely reconfiguring the machines? I can understand that in paper, but not so much in pulp.

Robert Mundy

Well we always have productivity increases built into our cost savings plans, which improves our cost from an indirect absorption standpoint; and those things I think we did very well in 2010, Chip. I don’t know if that answers your question, but—

Mike Jackson

Yeah, Chip, I would also add to what Bob said – you may remember that back in ’09, I think we made the comment that we were able to actually swing that hardwood pulp machine to softwood as we fed internal machines at an opportune time to do so. And when we did that, candidly, we found some bottlenecks that we were able to deal with because of that switch that just came up as opportunities, and that allowed us to get into that, dig at it and improve our productivity. So it really was a process improvement that we found as well.

Chip Dillon – Credit Suisse

And if I look at the—that’s great. And when I look at the 895,000 tons for pulp, what is the mix now between hardwood and softwood? You still make some hardwood, right?

Robert Mundy

Yeah, we make about 280,000 tons of hardwood.

Mike Jackson

We sell about—yeah. But you know, like, Quinnesec, they’ll provide the hardwood they need for their paper production as well.

Chip Dillon – Credit Suisse

Yeah. And how do you regard your pulp balance? I mean, obviously you list your capacity of 895. How much do you sell? How much do you buy? What’s your net position?

Mike Jackson

Yeah, we sell around 280ish type of number. We buy something less than 140,000 tons.

Chip Dillon – Credit Suisse

Got you. And all 280 you sell you said was hardwood, right?

Mike Jackson

That’s right.

Chip Dillon – Credit Suisse

And the 140 you buy, is that softwood?

Mike Jackson

That’s right.

Chip Dillon – Credit Suisse

Okay. Got you. Okay, thank you.

Operator

Next up is Richard Kus, Jefferies.

Richard Kus – Jefferies & Company

Hey guys. Just a quick one for you – if you look at your coated volumes between fourth quarter 2009 and fourth quarter 2010, can you give a little more color on why the decrease there year-over-year?

Mike Jackson

Yeah, I think the primary reason for that is really what we talked about earlier in price. I think people in the fourth quarter—customers saw that this price had probably reached the point where they better order some inventory, and I think that was what the case back a year ago and that’s why you saw that type of increase in volume. I mean, they recognized that that price at that time was very, very low and I think the signs going forward on operating rates was going to be very positive. So that, to us, was a clear sign of inventory build and customers trying to protect the price.

Richard Kus – Jefferies & Company

All right. That’s all I have. Thank you.

Operator

Eric Anderson of Hartford Financial is up next.

Eric Anderson – Hartford Financial

Good morning. I wonder if I could draw your attention to Slide 14, and just trying to understand the numbers that you were then reviewing from Slide 15 – that’s the 114 million of capital spend. Is that just in the box that’s been highlighted, or would that include things out in the outer years?

Robert Mundy

No, that’s just that box.

Eric Anderson – Hartford Financial

Okay. Then my question relates to what’s then phase two of this if you look two years and out in terms of potential capital spend and also potential revenues from the sale of green power?

Mike Jackson

Yeah, I think we’re being very careful about this because obviously all these projects have to be Board-approved, and I think you can appreciate that. When we began this strategy, which actually we started working this almost three years ago and then kind of unveiled it a little over a year ago, we would probably be looking at, in terms of expected savings, an additional—I’m going to say 30 to $50 million on top of what we’ve already got out there. In terms of the capital spend, it would be perhaps a little less than that, and it would be over a two and a half year period if we’re able to get these projects Board-approved. But we’ve got a very, very sound strategy and we’ll see how that plays out. We’re pleased we were able to do this so far, and we expect to accomplish the task, so to speak, going forward.

Eric Anderson – Hartford Financial

So then to combine those two, we’re talking then more than a dollar per share of savings just from energy.

Mike Jackson

That’s right.

Eric Anderson – Hartford Financial

Okay. My last question relates to Slide 19. I know you’ve had various initiatives over the last year or two to restructure the debt maturities, and you’ve had a lot of moving parts. I wonder if you could just summarize for those of us that are not on the debt side in terms of what you’ve actually been able to accomplish.

Robert Mundy

Well, what we did in January and February, we did a tender offer on our existing second lien fixed rate notes, and then issued some second lien notes with a maturity five years further out from 2014 to 2019 at a lower interest rate. And then subsequent to that, we did a tack-on offering – we did a call on some of our first lien notes and did a tack-on and pushed that maturity out, again to 2019 and again at a lower interest rate than those first liens.

Eric Anderson – Hartford Financial

So the smaller box, then, down here on the right-hand bottom of the page, that’s sort of pro forma what it looks like after everything is done?

Robert Mundy

That’s right. That’s what it looks like as we sit here today. That’s correct.

Eric Anderson – Hartford Financial

Okay. Good job. Thanks.

Operator

We’ll now to go to Gary Madia, Gleacher & Company

Gary Madia – Gleacher & Company

Thanks. Good morning. Most of my questions have been answered, but Bob, could you just explain—I think the only thing I have left is kind of explain the step-up in the fourth quarter on the SG&A line. I think there was some verbiage in the press release that basically said it was going to kind of stay at around 20, 21 million a Q, and that’s up 5 million per Q. Can you just speak to that a little bit?

Robert Mundy

Yeah, the sequential change?

Gary Madia – Gleacher & Company

Right, exactly; and that seems to be, based upon the verbiage in the press release, that’s going to be the new run rate going forward, whereas I think you guys have been pretty consistent around 15, 16 per Q.

Robert Mundy

Yeah, the change there is just due to the timing of some SG&A things that you don’t really true up until the end of the year. SG&A is, as you close out the year, based on performance and then some other things going on. You make sure your accruals are up or down. You get those adjusted so you finish the year where you need to be. But our SG&A will really not be—it won’t be 20 million per. It will stay in that sort of 70ish range—you know, low, low 70, like 70, I expect for this year.

Gary Madia – Gleacher & Company

Okay, thanks. Thanks for clearing that up. That’s it.

Operator

Up next is Schroder’s Chris de Young.

Chris De Young – Schroders Investment Management

Asked and answered. Thank you.

Operator

And once again ladies and gentlemen, if you have a question today, that’s star, one on your touchtone telephone. We’ll go next to Mark Fisher, (Inaudible) Capital.

Mark Fisher – (Inaudible) Capital

Hi. I just want to understand a little bit more on the capacity increases that you made. Some of the energy projects that you’re doing right now, will that actually increase the capacity a little bit more, and should that capacity increase, do you have demand for those products as well?

Mike Jackson

What we have going on on our product side is not a lot of capacity. We’re really focused on the bottom line in terms of energy, usage of chemicals, usage of water. It’s really all related to that, so we’re not focused on capacity increase.

Mark Fisher

Got it. But the capacity that you had, the increase that you’re showing the end of 2010, it was up – it looks about 10% or so from 2009. Is that something that you’re going to be able to find demand for, or do you expect utilization to go down a little bit?

Mike Jackson

Well you know, part of that increase is just due to a very poor 2009, and there is a little bit of creep in there for a capacity standpoint but we’re also—you know, we haven’t talked a lot about it today, but some of that is some of our new product work that we’re doing that we have on our machines as we further get our new products up and running, and that added some volume as well.

Mark Fisher

Got it. Just want to understand the earnings power here a little bit more. You talked about—or your competitors, obviously, talked about higher chemical. You talked about a little bit higher SG&A here, but it seems like everything you’re doing on the cost side should offset that. If we’re kind of thinking about things going forward, should we really just kind of take the price increases that you’ve announced and really just flow them all down to the bottom line, which—you know, you talk about $40 increase coming—you have for April 1, and then maybe a $10 leftover from the prior year. It implies $50, maybe even closer to $100 or so of increase. Is that kind of how we should be looking at things going forward, or are there some other offsets that we should be thinking about?

Robert Mundy

Well you know, there’s always some offsets that you could throw in here and there, but hopefully it plays out something similar to that. We’ll see.

Mark Fisher

Okay. And just lastly on pulp, you also have some contracts on the pulp side where you haven’t seen the full price decline yet, similar to on the paper side where you haven’t seen the full price increase yet in the numbers?

Mike Jackson

Yeah, actually on the pulp side it’s sort of hung in there. It dipped in the latter part of last year, but actually prices have picked up just a little bit from the end of the year. So pulp prices have sort of hung in there. They work differently than paper prices, but pulp prices, our sales prices have hung in pretty well.

Mark Fisher

Got it. So we shouldn’t see another leg down in ASPs in pulp in 2011 similar to what we should see in the increase on the paper side?

Mike Jackson

I don’t see a big drop in pulp prices this year, no.

Mark Fisher

Okay. Thank you.

Operator

And a final reminder to the phone audience, it is star, one if you have a question. We’ll pause for just a moment.

We’ll go next to Frank Duplak, Prudential.

Frank Duplak – Prudential

Hi. Just had one question – on Page 15 when you talk about the net 71 million of net capital spend, have you given timing for that? Is that kind of even over the two years? Is it really front-end loaded in 2011? Can you give us any guidance there? I know you’ve given us overall CAPEX guidance. I was just trying to get a feel for how much of that each year.

Robert Mundy

Yeah, it will be this year and it will spill over into 2012; and I would expect 2012 CAPEX to be something comparable to slightly less than what we spend to the guidance we gave to this year.

Frank Duplak – Prudential

Thanks guys.

Operator

And at this time there are no further questions. Ladies and gentlemen, that does conclude today’s conference. We would like to thank you all for your participation. You may now disconnect.

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