(November 05, 2008) Neenah Paper, Inc. today reported income from continuing operations for the third quarter 2008 of $5.0 million, or $0.34 per diluted common share, compared with $13.3 million, or $0.87 per diluted common share, in the third quarter of 2007. Third quarter 2007 results included reductions in income tax expense of $10.0 million, or $0.66 per share, primarily due to a decrease in deferred tax liabilities resulting from a change in German tax rates.

Consolidated net sales of $186 million in the third quarter of 2008 declined five percent from $195 million in the third quarter of 2007, as increased sales of Technical Products in 2008 were offset by a decline in Fine Paper revenues. Operating income was $12.3 million in the third quarter of 2008, an increase of 19 percent from $10.3 million in the prior year, as higher Technical Products profits and a $3.6 million gain on the sale of a converting facility in Wisconsin offset lower Fine Paper operating profit. Operating income in both periods included costs associated with scheduled annual maintenance downs at the company's Fine Paper and Technical Products plants.

Commenting on results, Sean Erwin, Chairman and Chief Executive Officer, said, "While year on year comparisons continue to reflect a rapid run-up in input costs, including almost $9 million in the third quarter, our business teams have worked closely with customers and suppliers and have taken appropriate actions to control costs and improve pricing and mix. We also have completed important actions this year in line with our strategy to transform Neenah Paper into a premium and specialty paper company, with the integration of Fox River and sale of the Pictou pulp mill. The benefits and timing of these actions, coupled with declines in commodity and energy prices which now appear to be underway, will help support operating margins and contribute to our longer-term success. A dramatically slowing global economy will present near term challenges with weakening demand. However, Neenah Paper remains solidly profitable with a strong balance sheet and as a market leader, we are well-positioned to respond to these conditions."

Fine Paper third quarter 2008 net sales of $82 million declined from $95 million in 2007. Decreased sales in 2008 were due to lower shipments as a result of weaker market demand for premium writing, text and cover papers and the intentional elimination of low margin business following the March 2007 acquisition of Fox River. Operating income in the third quarter of 2008 was $11.1 million, including the gain on the sale of assets, and $9.3 million in the third quarter of 2007. Excluding this gain, operating income declined in 2008 due to higher input costs and lower volumes that more than offset benefits from increased selling prices, reductions in spending and other efficiencies resulting from the Fox River integration.

Technical Products net sales of $104 million in the third quarter of 2008 increased from $100 million in the third quarter 2007. The sales increase reflected higher selling prices, a more favorable product mix and the impact of foreign currency translation of German results from a stronger Euro in 2008. Volumes in total were lower in the third quarter of 2008 primarily due to reduced export tape volumes from Germany as well as other intentional reductions of grades that no longer met profit targets. Partly offsetting these declines were increases in volume for higher-value filtration, abrasives and heat transfer papers. Operating income in the third quarter of 2008 was $4.1 million compared with $3.2 million in the third quarter of 2007. This improvement in income resulted from higher selling prices and a more profitable mix of products sold, as well as improved manufacturing efficiencies, which in total offset cost increases for raw materials and energy.

Consolidated selling, general and administrative expense of $16.6 million in the third quarter 2008 was below the prior year level of $20.1 million due to lower incentive and benefit costs in 2008, as well as spending reductions in other areas. Unallocated corporate expense was $2.9 million in the third quarter of 2008 and $2.2 million in the third quarter of 2007. The increased expense in 2008 was primarily due to the absence of currency translation gains recognized in 2007 and higher expense in 2008 for post-employment benefits for Terrace Bay retirees. These items offset benefits of lower spending in 2008.

Net interest expense of $6.3 million in the third quarter of 2008 decreased from $6.5 million in the third quarter of 2007 as lower interest rates offset higher debt levels. Tax rates in 2008 remain lower than 2007 (excluding the $10.0 million reduction in tax expense) primarily as a result of lower statutory rates in Germany beginning in 2008.

Discontinued Operations

Net income from discontinued operations was $1.5 million, or $0.10 per diluted common share, in the third quarter of 2008 and $2.1 million, or $0.14 per diluted common share, in the third quarter of 2007. Income in 2008 resulted from revenues recognized on timber provided to Northern Pulp during the quarter. In 2007, income included operating results for both the Pictou pulp mill and the timberlands operations.

Year to Date

For the first nine months of 2008, consolidated net sales from continuing operations of $586 million grew two percent from $574 million in the same period of 2007. Higher revenues in 2008 resulted from growth in Technical Products that was partially offset by lower sales of Fine Paper. Operating income from continuing operations in the first nine months was $44.4 million in 2008 and $47.9 million in 2007. Net income per diluted common share for the same periods was $1.33 and $2.03, respectively. In addition to the aforementioned benefit in 2007 from a reduction in tax expense, lower earnings in 2008 resulted from input cost increases that offset higher selling prices, improved operations, lower administrative expenses and gains from asset sales.

Year to date losses from discontinued operations were $110.5 million in 2008, compared to income of $1.9 million in the first nine months of 2007. In 2008, losses included $105.5 million of mostly non-cash charges related to the write-down of assets and loss on the sale of the Pictou pulp mill in June.