Neenah Paper, Inc. Q2 2008 Earnings Call Transcript

Sep.13.08 | About: Neenah Paper, (NP)

Neenah Paper, Inc. (NYSE:NP)

Q2 2008 Earnings Call Transcript

August 12, 2008 11:00 am ET

Executives

Bill McCarthy – VP, Financial Analysis and IR

Sean Erwin – Chairman, President and CEO

Bonnie Lind – SVP, CFO and Treasurer

Analysts

James Armstrong – Citigroup

Mark Weintraub – Buckingham Research

David Taylor [ph] – David P. Taylor & Company [ph]

David Kim – Post Advisory

Operator

Good morning. My name is Cassandra and I will be your conference operator today. At this time, I would like to welcome everyone to Neenah Paper's second quarter 2008 earnings 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)

I would like to remind everyone that the presentation today contain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management's beliefs and assumptions regarding future events based on currently available information. Listeners are therefore cautioned not to put undue reliance on forward-looking statements as they are not a guarantee of future performance and remain subject to a number of uncertainties and other factors that could cause actual results to differ materially from forecasts. A more detailed description of these uncertainties and risk factors is provided in Neenah Paper's earnings release and filings with the Securities and Exchange Commission, which you are encouraged to view. Except to the extent required by applicable securities laws, Neenah Paper undertakes no obligation to update or publicly revise any of the forward-looking statements that you may hear today.

In addition, the Company may make certain statements during the course of this presentation that include references to non-GAAP financial measures as defined by SEC regulations as required by those regulations. If that were to happen, a reconciliation of these measures to what management believes are the most directly comparable GAAP measures would be posted on the Company's website at www.neenah.com.

Thank you. I would now like to turn the call over to Bill McCarthy. Mr. McCarthy, you may begin your conference.

Bill McCarthy

Thank you and good morning. With me today are Sean Erwin, our Chief Executive Officer; and Bonnie Lind, our Chief Financial Officer. I will briefly cover consolidated results and then turn things over to Sean and Bonnie to discuss in detail business performance for the quarter.

Our earnings release went out yesterday with expanded balance sheet and cash flow information and our 10-Q is also filed. Consolidated net sales from continuing operations were $195 million in the second quarter of 2008 versus $206 million in the same period last year. This reflected growth in Technical Products offset by lower Fine Paper sales. Quarterly operating earnings declined from $18 million last year to $14 million in 2008. While we realized benefits from higher selling prices, improved manufacturing efficiencies, and lower SG&A, we were unable to offset the impact of lower sales and higher input costs for raw materials and energy.

Earnings per share from continuing operations fell from $0.49 to $0.42 largely following the change in operating income. Losses from discontinued operations, which includes our timberlands operations as well as for the last time results from the Pictou pulp mill, were $31 million and included a mostly non-cash charge of $27 million to recognize deferred costs for the Pictou pension plan and other sale-related adjustments. Excluding this, losses were $3.5 million in 2008 and $4.8 million in 2007 with both periods including higher costs for the annual mill maintenance down.

Let me now turn things over to Sean.

Sean Erwin

Thank you, Bill, and good morning. I will cover actions we are taking in each of our businesses as well as progress on key strategic initiatives. But first I'd like to comment on safety, which remains a key part of our culture. Through June, our reportable incident rate was 1.9. While our overall performance remains better than industry standards and improved from a rate of 2.2 to last year, we continue to focus on ways we can further enhance results.

Let me turn to the external environment and what we're doing to address the challenges we and other companies are facing this year. The rapid and continued run-up in input prices for raw materials and energy has had a dramatic impact. In the first half, these costs were up $13 million with $9 million of this increase incurring in the second quarter. The big drivers were pulp, which represented slightly half – less than half of the total along with energy and other raw materials such as latex. In response to this, we've increased selling prices, reduced both mill and administrative spending, and continue our strong focus on driving manufacturing cost efficiencies and improvements. We have raised prices this year on both segments and in some cases multiple times. Nonetheless, as you have heard from other companies, we have not been able to recover all of the cost increases immediately through pricing. We continue to work with our customers on both selling price adjustments and/or product modifications to recover margins. Thus far, we have been able to offset about a third of the impact of higher input costs this year through price.

In Technical Products we increased prices successfully across most of our lines in January and again in July, the latter increase averaging just over 4%. A third and similarly significant increase is expected to take effect in the early fall. One exception has been in filtration where timing of price increases has lagged this year. However, this product line remains a large and profitable cornerstone of Technical Products and we're confident of our ability to benefit from future price realization.

In Fine Paper we're largely a branded business and don't move prices rapidly up or down in concert with pulp prices as commodity manufacturers typically do. Additionally, in a weak economy, we are sensitive to demand implication for premium price products. Prices were increased on our core brands in the fourth quarter of last year and on most other brands in May and more recently for our direct non-branded business. We do expect additional increases this year on branded and other products.

Turning to costs, we decreased controllable manufacturing costs by about $5 million to $6 million in the quarter. This reflects substantial benefits from waste reduction initiatives at our Technical Products mill in Munising, Michigan and also productivity and efficiency improvements resulting from the Fox River integration. In the second quarter however, much of this benefit was offset by added costs for asset startups in Germany and a paper machine drive failure at our Fine Paper mill in Ripon, California. Combined, these resulted in over $3 million of added costs in the quarter.

The integration process is now complete with a recent consolidation of finishing and distribution operations in Wisconsin and improved paper machine loadings at our remaining mill sites. Our machines have run extremely well, as a result, with productivity up 7% on a year-on-year basis and opportunities to increase these even further. We will maintain an asset footprint in line with volumes to ensure we continue to realize these cost benefits and synergies in the future. Our teams have done a good job executing the integration plan and as Bonnie will cover a little later, we're seeing tangible benefits and expected synergies from the acquisition, although these are being masked by challenging market conditions and higher input costs.

As we have previously communicated, our plan was to sell excess assets providing cash to help offset restructuring costs and reduce our net investment. In May, we sold our mill in Urbana, Ohio and are currently working to sell the Housatonic, Massachusetts mill, and our former distribution center in Wisconsin later this year. Cost reduction initiatives continue throughout the company with our ‘Ring the Bell’ program. We currently have over 180 active programs and employees at all locations are contributing. We're also actively managing administrative expenses and saw benefits from some of these initiatives in the second quarter.

Now I'd like to talk a little about each of our businesses. In Fine Paper, as you've heard, the printing and writing markets had one of the worst quarters on record with weaker demand due to economic conditions and inventory adjustments at most merchants. This had a large impact on our business. Our overall volume fell 19%, which reflects both a double-digit decline in the premium market and intentional reductions of non-strategic business following the Fox acquisition. Based on market data and ongoing customer reviews, we believe our leading position in the premium market remains strong and the recent decline in volume represents softness in the market magnified by some inventory movement. Our goal is to maintain and grow our share in the premium segment by strengthening our position with strategic customers.

Now that we've combined the Neenah and Fox businesses and successfully implemented an ERP system, our capabilities to implement more advanced supply chain practices benefiting us and our customers is greatly improved. The organization is also focused on leveraging our branded portfolio already known for quality and outstanding brand support to seek out additional end use niches and growth opportunities. We are continuing to invest in our brands as these investments deliver a return in support our premium position. Following the acquisition, we re-launched key Fox brands such as STARWHITE and SUNDANCE and saw immediate benefits. We are now focused on key heritage brands, which have not received as much promotional support in recent periods as the team focused on integration and other activities.

This month we are re-launching CLASSIC CREST and CLASSIC Linen, both great brands and number one in their categories, improving the breadth of our digital and color offering and also offering greater environmental sustainability options by making them both completely carbon neutral and FSC certified across the entire line. These are key brands and the re-launch is a very important event. In fact, environmental characteristics are increasingly important to paper choosers and designers and Neenah Paper is uniquely positioned in many ways to continue as leader in environmentally friendly premium papers. Different from others in the industry that just purchase green energy credits, we continue to invest in manufacturing processes to convert our waste into green fuel.

In addition, we use a significant amount of hydroelectric power at mills in Wisconsin and California. And in California we also use both solar and local wind power. Our membership in the Chicago Climate Exchange requires us to make a firm commitment to reducing our carbon footprint each year and we continue to deliver well ahead of these commitments.

The market looks more and more for eco-friendly paper position solutions and our ENVIRONMENT brand, which is made from 100% post-consumer fibers, plays a leading role in meeting this need and has continued to grow at a double-digit rate and become our second largest individual brand. As an example, Hallmark recently introduced a line of greeting cards using one of our ENVIRONMENT brand offerings made from 50% sugar cane pulp and 50% recycled fiber. We welcome opportunities like this where we can partner with industry leaders like Hallmark in meeting consumer demand for environmentally friendly products.

Finally, at a Board meeting last week, we approved a biomass energy project for our largest Fine Paper mill located in Whiting, Wisconsin. We're partnering with a third party who will fund, construct, and operate the equipment, which will burn wood byproducts that formally went to landfill as well as waste from the mill. The project will reduce our energy cost by shutting down our gas-fired boilers and in addition will reduce the carbon footprint at our largest Fine Paper mill by more than 50%. Start-up will occur in the second half of next year and further supports our commitment to meeting consumer demand for Neenah green products.

So despite an unusually tough market, our Fine Paper teams continue to take actions that will support our leading position in premium fine papers and improve our margins.

In Technical Products, results the quarter were mixed as our North American business did very well but this was more than offset by weakness in Germany. There we had unusually high cost as a result of the start-up of new equipment to meet growing filtration demand. In fact, filtration, which is our largest Technical Products business line, has grown volume this year at double-digit rates. While we did not see all of these benefits at the bottom line due to lags in pricing and higher costs for manufacturing inputs and start-up, the business remains profitable and our competitive position is strong.

In our other product lines, we saw mixed results but are encouraged overall about the direction. While wall covering was down due to recently added capacity from an existing competitor to meet strong market growth, and tape continues to reflect lower exports to Asia, we have successfully redesigned release paper products and also gained new business and market share in abrasives. We have added process capabilities to our assets including improved quality control equipment in Munising utilizing surplus Fox River equipment that also helped to reduce cost.

Our U.S. business team has embraced the new information available from our ERP systems and has used this to drive cost reductions, margin improvements, and a more profitable product mix. In products such as premask and decorative components, we improved results by premium and profitable grades and making price or cost related adjustments to remaining grades that have allowed us to make more profit with less volume. Better data has also allowed us to identify and address bottlenecks in our manufacturing process. In heat transfer, we more than doubled productivity for some grades. As a result, we are able to defer capital spending originally planned for this year.

Before turning things over to Bonnie, let me finish with a couple of comments on progress against strategic initiatives. With the sale of our Pictou pulp mill in June we have nearly completed the strategic transformation we first talked about in 2006. As part of this sale the new owners assumed all liabilities including environmental risks and pension and retiree benefit liabilities. Total cash payments for this sale will be around $10 million, which is less than originally communicated and we will be significantly cash positive from the transaction as a result of tax benefits that will be realized over the next few years. With the June 30 termination of the Terrace Bay pulp supply tolling [ph] agreement we're out of the pulp business and have no further supply obligations to Kimberly-Clark or other customers.

We have transitioned from a company that had a majority of its sales in pulp a little more than two years ago to a more profitable, 100% specialty products and premium papers company with leadership positions in many of our segments. We believe this transition represents the right move for our shareholders and our responsibility is to realize the benefits of this transition. We're actively working to sell our remaining 500,000 acres of timberlands, which is a profitable operation and represents an important source of additional value. This sale is still expected in the next six to 12 months. We will continue to evaluate other strategic opportunities that can deliver value but our priority and focus is now on improving margins and driving growth in our core businesses and I remain confident that we can do this.

Next, Bonnie will cover our financial results. Bonnie?

Bonnie Lind

Good morning. Today I will start with Fine Paper. Net sales were $85 million in the second quarter versus $104 million last year. The decrease was due to lower volumes, which reflected unusually weak market conditions. In addition, about a third of the decline was due to intentional reductions in non-strategic products. Partly offsetting the drop in volumes were gains in net selling prices.

Operating income of $11.7 million included a gain from the sale of assets compared with $13.2 million a year ago. The principal cause of the declines was lower volumes as higher input costs of $6 million were largely offset by improved manufacturing efficiencies and price realization. Manufacturing costs improved as planned as we ceased remaining operations at Urbana, Ohio, and completed the consolidation of finishing and distribution centers in Wisconsin. Former Fox River sites are now live on our Oracle ERP system allowing us to have a consistent and more efficient organization across the business. We have completed integration activities on schedule and as planned including realizing synergies of almost $3 million in the quarter.

We also had a few one-time items this quarter. We experienced a major operating disruption at our mill in Ripon, California when the main drive on the paper machine experienced a mechanical failure. This resulted in unplanned down time and higher costs of somewhere in the range of $1 million. Offsetting this was a gain on the sale of the Urbana mill and other miscellaneous assets of just under $3 million reflecting differences between actual proceeds and liabilities related to these sales versus our original expectations.

Moving to Technical Products, quarterly net sales were $110 million, up from $102 million in 2007. Translation benefits from a stronger euro and higher prices across most of our products offset the impact of lower overall volume. A 3% decline in volume principally resulted from three factors – lower export of tape from Germany to Asia due to stronger euro was one. Second is intentional reductions in unprofitable grades. And then a third factor, timing of sales for certain other mostly European products. Partly offsetting this was continued growth in transportation filtration where volumes are increasing in some of our most advanced products and also strong gains in abrasives papers.

Operating income fell from $8.7 million in 2007 to $6 million this past quarter due to shortfalls in Germany. Input cost increases were almost $3 million of which only part was offset by higher selling prices. In addition, while a strong growth in our transportation filtration business is great news and has been supported by the new saturator which started up earlier this year, we had excess cost in the quarter related to the start-up of this equipment and the rebuild of a melt blown nonwovens line. We've seen increasing efficiencies on both these assets and costs are improving. However, excess cost in the quarter from these start-ups as well as planned down time at one of our mills was close to $3 million. Offsetting part of these excess costs were improved operations at our Munising plant.

Next I will cover some purely financial items. SG&A expense for the quarter was $18 million, down from $21 million last year as a result of lower spending. Year-to-date SG&A of $39 million is only slightly higher than last year despite including two added months of Fox River direct selling and related costs. Because of timing, the year-to-date spending is more indicative of the run rate for this year although we are actively pursuing initiatives to reduce these costs going forward. Unallocated corporate expenses of $3.5 million was in line with prior year.

Quarterly net interest expense of $6.1 million fell from $6.6 million in 2007 due to lower interest rates. Our average interest rate in the quarter was 6.4% comprised of $225 million of 10-year notes that are rated 7 and 3/8% and remaining debt at an average of 4.6%. We ended the quarter with total debt of $362 million, about equal to where we were in March. Free cash flow in the second quarter was slightly positive and included costs for the Pictou down and our semi-annual bond interest payment.

Looking at taxes, we continue to be very tax efficient. In the second quarter our effective rate was 23% versus 36% last year. The reduction primarily resulted from lower statutory rates in Germany beginning in 2008. Also important to consider though that as a result of the Pictou sale we don't expect to pay cash income taxes in North America either this year or in the next few years and also expect to receive a sizable refund in 2009.

With the Pictou sale, we completed an amendment to our revolving credit facility. Our borrowing base was essentially unchanged as reductions due to the Pictou sale were offset by additional capacity secured by a portion of the timberland. As of June, we had over $75 million of borrowing availability under this facility and overall we continue to have adequate financing liquidity and availability.

Capital spending for the first six months was approximately $18 million representing more than half of full-year estimated spending of $30 million to $35 million. This compares to annualized depreciation and amortization of around $40 million to $45 million, including $3 million to $4 million for stock based compensation expense.

And without pulp, our net cash flows in this Company will significantly improve. Including operating losses, capital spending, and pension contributions since the spinoff, all in we have spent approximately $66 million in cash to fund these operations. Our balance sheet is stronger as well without pulp, pension, and benefit obligations. And last but not least it should now become easier and more transparent to understand the financial results of our Company and the cash flow generating capabilities of our paper segments.

I'll now turn things back over to you, Sean.

Sean Erwin

Thanks Bonnie. Let me highlight a few key items as we look at the balance of the year. We will continue to focus on cost reduction in all areas and have completed our plan to allow us to deliver expected synergies in Fine Paper from the Fox acquisition. Fine Paper brand re-launches and other activities currently underway are essential to our success in what has proven to be a very challenging market this year. Price increases being enacted in Technical Products and Fine Paper should help mitigate higher energy and material costs expected in the second half.

While unusual costs for the drive failure at Ripon and start-up in Germany won't repeat, the third quarter will reflect added costs for annual maintenance downs at all of our paper mills. Timing of these downs is similar to last year. Additionally, sales particularly in Europe tend to be a little slower due to vacation and holiday.

Finally, we're continuing to monitor and adjust operating schedules to balance with demand and keep inventories in check. Our labor contracts allow us to do this at most facilities with limited incremental out-of-pocket costs.

To wrap up, let me repeat what I said earlier. We're pleased with the strategic moves we have made divesting in a cash positive manner two pulp mills that had required significant funding. We believe this transition represents the right move for our shareholders. We're working on the sale of our remaining timberlands, which represents the final piece of the transformation and important source of additional value for the Company and our shareholders. Our acquisitions of Fox River and Neenah Germany have helped strengthen existing businesses and had business plans designed to deliver good financial returns. We have made the necessary investments and executed our plans. Now we need to deliver the value despite a challenging external environment. We realize nothing will drive better returns than improving the margins and driving growth in our businesses. Our teams are focused on growing share with key customers, reducing costs and improving efficiencies throughout the organization. I remain confident that the value of Neenah's people, our brands, and our abilities will be recognized.

Now let's open up the call to your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Chip Dillon with Citigroup.

James Armstrong – Citigroup

Hi guys, this is James Armstrong calling for Chip. Congratulations on a good quarter in a tough environment. Can you hear me?

Sean Erwin

Yes.

James Armstrong – Citigroup

Okay.

Sean Erwin

Yes, it is a tough environment. I wish – I was a little surprised. We obviously want better results. We're working damn hard to get them.

James Armstrong – Citigroup

Can you give us little bit of color on where – the Fine Paper sales were off quite a bit. Where in the market is it off most in your opinion?

Sean Erwin

And I think you've seen both from AF&PA that and other companies the market took a significant dip in the second quarter, well above any trend lines. And we felt that, we felt that directly. Of the declines in volume that we mentioned, probably a third of it was self-directed. This is business that Fox River had that we've exited with the closure of some of the facilities. And so we are really talking about declines that are more in line with the market. What we saw is – and it's pretty much across the board with our customers. We're seeing more of it in areas like Florida, California, some of the merchants in Nevada where housing is the weakest because quite a bit of the text and cover products go into housing developments, condos, areas like that. So we are seeing some of it based on the regional decline but it was pretty broad-based across the customer base. We work very closely with customers. I'm confident that it's not a share issue. It's a market-driven weakness economically and other reasons and we do see where we're getting growth. For instance, I mentioned the ENVIRONMENT brand is still having double-digit growth in a very weak market, and which is one of the reasons why we're re-launching our big brands with a much stronger environmental message because as a leader in this segment, we need to act like a leader and grow this. So we're continuing down that path.

James Armstrong – Citigroup

Absolutely. Are you seeing any – is it the ultra high end that's getting hit the worst or is it just across the entire price points?

Sean Erwin

We constantly monitor that. It's in discussions with all of the customers. There may have been some trading down where because of budget constraints people have dipped down the value curve. And it's our job as the leader to move them up to show them the benefit of moving it up, which is why we're re-launching as we speak with our big brands. And we have taken the position that as the leader we're not going to be a spectator to the market and just wait for things to improve. We have to take the actions to drive it.

James Armstrong – Citigroup

Okay. Switching topics, on the biomass program, do you – how will the energy costs be structured? Did you contribute any capital to the project? Little unusual to hear about a third party doing it. Could you give some color on that?

Sean Erwin

Yes, we looked at our cost of capital and we did – we worked the numbers both ways. Do we want to invest in it or let the third party invest in it? And the numbers came back to say let's let him do it. We're buying steam from them. The price is tied to some indexes and we think that it does two things for us. The savings are going to be substantial, $1 million to $2 million a year and – based on kind of current and predicted prices, $1 million to $2 million a year. And as importantly we're reducing our environmental footprint in our largest Fine Paper mill by more than 50%, which is a big deal in the markets in which we compete.

James Armstrong – Citigroup

Absolutely. I appreciate that. And on the tax refund in 2009, can you give us any color on when that will come and about how much it will be?

Sean Erwin

Let me turn that over to Miss Bonnie.

Bonnie Lind

Yes, we expect to file a quickie return, so in early 2009. The refund refers to the 2006 and 2007 taxes paid and we expect it to be in the range of $12 million to $13 million.

James Armstrong – Citigroup

Perfect. I appreciate that. Thanks for your help.

Sean Erwin

Thank you.

Operator

(Operator instructions) Your next question comes from the line of Mark Weintraub with Buckingham Research.

Sean Erwin

Good morning, Mark.

Mark Weintraub – Buckingham Research

Good morning. A question for you on share repurchase. I think that in the past you've indicated there are certain restrictions related to covenants on some of your debt. Is that something that you are actively looking at changing? Is it something that you can change? And maybe just your thoughts on share repurchase in general at this point. Your stock for a while there was trading to me seemed like incredibly low levels. It's still pretty low and just wanted to get a sense as to how you feel about it.

Sean Erwin

Mark, we have looked at that. As you are aware, we have some covenants in our bond agreements that limit how much we can do and we have talked to some of the folks that were involved with us in the selling of the bonds. And in today's market to go out and make the modification to those agreements would be prohibitive costs. And we have all things considered some very nice interest rates and I don't think it behooves us even with the equity price where it is it behooves us to open that up because we’d get hammered with the cost of that transaction.

Mark Weintraub – Buckingham Research

Fair enough. Separate question, with the weakness in the Fine Paper business from a volume perspective in particular, what is the thought process on potential additional rationalization of capacity?

Sean Erwin

We monitor that very closely. As a matter fact, the week before last we had our initial strategic review going forward in the five-year plan and we have various scenarios that we've developed. We're not going to carry excess assets if we don't need it. At the same time, we don't want to make permanent decisions for short-term situations and we are – in the meantime we are adjusting operating schedules to reflect demand. When we consolidated the mills we didn't crew up the mills for seven-day operations at all mills. So we're still very efficient at our mills for running a five to six day schedule and then taking a down time as necessary. We are very focused on working capital levels and making sure that we keep service and working capital at target levels.

Mark Weintraub – Buckingham Research

Thank you very much.

Sean Erwin

Thank you, Mark.

Operator

The next question comes from the line of David Taylor [ph] with David P. Taylor & Company [ph].

David Taylor – David P. Taylor & Company

Thank you.

Sean Erwin

Good morning.

David Taylor – David P. Taylor & Company

We're nearly halfway through the third quarter as we speak. Can you talk to whether or not the volume trends in Fine Paper that you experienced in the second quarter on a year-to-year basis realizing there's a seasonal downturn in the third quarter every year, are continuing?

Sean Erwin

Keep in mind we don't give guidance, but we're not seeing a miraculous recovery in volume. We're having to work very hard and we have the team out there, the right team that is working directly with the customers to get the volume and we're not seeing a significant (inaudible).

David Taylor – David P. Taylor & Company

It remains a tough market?

Sean Erwin

Oh, yes. Yes, but we have got some pretty tough guys.

David Taylor – David P. Taylor & Company

Okay. Thank you.

Sean Erwin

Thank you.

Operator

The next question comes from the line of David Kim with Post Advisory.

Sean Erwin

Good morning.

David Kim – Post Advisory

Hi, how are you guys doing today?

Sean Erwin

Pretty good.

David Kim – Post Advisory

I just wanted to ask you about the Pictou mill sale. It seems like – I think last quarter it was still sort of expected within 12 months and I think in the latest Q you said that it's still expected in the next 12 months. Are you guys still sort of actively looking at that or are you sort of putting it on hold for a little bit until the market gets better?

Sean Erwin

No, the mill is gone. (inaudible).

David Kim – Post Advisory

I am sorry, not the Pictou mill. I meant the timberlands. Excuse me.

Sean Erwin

No, no, no. We are active in it. We're very active in it. The good news is timberland buyers have a long-term horizon. It is a tough market. Quite a few sawmills in Nova Scotia have taken down time. But we're taking a – the interested parties are looking long term at the returns they can expect from the timberlands which are still profitable. The last call we said we expected in 12 months, this time we're saying six to 12 because we are active in the process.

David Kim – Post Advisory

Would you expect sort of the value to be like sort of in the same ballpark as your previous sale of your – I think it was the other 500,000 acres?

Sean Erwin

We – and I look forward to giving the details on a transaction as soon as we sign a definitive agreement. But from an overview standpoint, it’s a similar sized tract of land at about 500,000 acres. The first half had more what they call HBU land that can be sold for cottages and other uses whereas the second half is a little better inventory situation so we think that balances itself out. We did have in the first half sale an advantage fiber supply agreement for the buyer, which is why through the '06 and most of '07 we deferred income of about $9 million. We would expect the next transaction to be a market-based fiber agreement so that deferral won't take place. You have to look at some of the changes in the C dollar also between '06 and today because we're still getting bids in C dollars.

David Kim – Post Advisory

Okay. And can you remind us what the dollar impact is for the annual maintenance? I think you said that it would be similar to last year's?

Sean Erwin

Pulp was the big hitter and pulp is gone. Pulp we would say would be $8 million to $10 million a year. I'd venture that paper mills, it's not nearly as dramatic. But there's a lot of them. So I – and I'm shooting from the hip on this – all in I would say several million dollars.

David Kim – Post Advisory

So is that like a $3 million to $4 million kind of thing, somewhere around there?

Sean Erwin

2 to 4, I would say.

David Kim – Post Advisory

Okay. And can you remind us what your CapEx budget will be for 2008?

Sean Erwin

Yes, as mentioned in the call, we have come down the last two calls. I think the last call we said $35 million. Now we're saying 30 to 35 with about 18 on a year-to-date basis.

David Kim – Post Advisory

Do you think that the – I guess sort of the EBITDA that you're going to generate for the next four quarters will be sufficient enough to cover your interest and your CapEx? Or do you feel like you'll have to draw on your revolver to cover it?

Sean Erwin

One, we don't give guidance. But with pulp gone, we think the cash flow generating capabilities and free cash flow of our business is much stronger. Bonnie, any comments?

Bonnie Lind

We typically see a stronger second half cash flow generation than what we see in the first half because seasonally we have a depletion of working capital in the fourth quarter that we have to rebuild in the first half of the year.

David Kim – Post Advisory

Okay. Thanks a lot.

Operator

There are no further questions. I will turn the call back over to Mr. Erwin.

Sean Erwin

Well, thank you again for participating on the call. We look forward to updating you on our progress both with our core businesses and timberland activities over the balance of the year. So, thank you.

Operator

This concludes today's conference call. You may now disconnect.

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