8-K

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): November 1, 2011

P. H. Glatfelter Company
__________________________________________
(Exact name of registrant as specified in its charter)

Pennsylvania	001-03560	23-0628360
_____________________ (State or other jurisdiction	_____________ (Commission	______________ (I.R.S. Employer
of incorporation)	File Number)	Identification No.)
96 S. George Street, Suite 500, York, Pennsylvania		17401
_________________________________ (Address of principal executive offices)		___________ (Zip Code)

Registrant’s telephone number, including area code: 717 225 4711

Not Applicable
______________________________________________
Former name or former address, if changed since last report

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[  ]  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[  ]  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[  ]  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[  ]  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition.

On November 1, 2011, P. H. Glatfelter (the "Company") reported its results of operations for the three months and nine months ended September 30, 2011. A copy of the press release issued by the Company is furnished herewith as Exhibit 99.1. The Company also held a teleconference call that same day, during which management discussed the Company's financial performance for third quarter of 2011 and other matters relating to its business. A copy of the teleconference transcript is furnished herewith as Exhibit 99.2.

Item 9.01 Financial Statements and Exhibits.

A copy of the press release dated November 1, 2011, to report results of operations for the three months and nine months ended September 30, 2011, is furnished herewith as Exhibit 99.1.

A copy of the transcript from the Company's teleconference held on November 1, 2011, to discuss its third quarter 2011 results of operations is furnished herewith as Exhibit 99.2.

A copy of the press release and transcript are furnished as Exhibit 99.1 and 99.2 to this Current Report on Form 8-K. The information furnished in this Current Report on Form 8-K and Exhibits 99.1 and 99.2 attached hereto shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	P. H. Glatfelter Company
November 2, 2011	By:	David C. Elder
		Name: David C. Elder
		Title: Vice President and Corporate Controller

Exhibit Index

Exhibit No.	Description
99.1	A copy of the press release dated November 1, 2011 issued by the Company to report its results of operations for the three months and nine months ended September 30, 2011.
99.2	A copy of the transcript from the Company's teleconference held on November 1, 2011, to discuss its third quarter 2011 results of operations.

EX-99.1

EXHIBIT 99.1

Corporate Headquarters
96 South George Street
York, Pennsylvania 17401 U.S.A.

www.glatfelter.com

For Immediate Release	Contacts:
	Investors:	Media:
	John P. Jacunski	William T. Yanavitch
	(717) 225-2794	(717) 225-2747

GLATFELTER REPORTS THIRD QUARTER 2011 RESULTS
– Consolidated Net Sales Climb to Record $416.5 Million –
– Rising Input Costs Adversely Impact EPS by $0.20 –
– Continued Profit Growth from Composite Fibers and Advanced Airlaid Materials –

YORK, Pennsylvania – November 1, 2011 – Glatfelter (NYSE: GLT)today reported financial results for the third quarter ended September 30, 2011, with sales increasing 10 percent to a record $416.5 million, versus $379.1 million a year ago.

Adjusted earnings were $12.8 million, or $0.28 per diluted share, compared with $16.7 million, or $0.36 per diluted share, in the third quarter of 2010. On a GAAP basis, third-quarter 2011 net income was $13.0 million, or $0.28 per diluted share, versus $39.4 million or $0.85 per diluted share, in the same period of 2010. The 2010-third quarter GAAP-basis results benefited from cellulosic biofuel production credits totaling $23.1 million, or $0.50 per diluted share.

“Our strong top-line growth in the third quarter reflects the continued success of our Composite Fibers and Advanced Airlaid Materials businesses, the global growth engines for Glatfelter,” said Dante C. Parrini, chairman and chief executive officer. “Composite Fibers delivered a 20 percent increase in revenue led by growth in the single-serve coffee and tea markets, while Advanced Airlaid Materials grew revenue by 14 percent driven by the feminine hygiene market. Likewise, we are pleased with the continued progress the Advanced Airlaid Materials business is making to improve its profitability. This was accomplished while also constructing and beginning the start-up of a second proprietary festooning line in Gatineau, Canada.”

Mr. Parrini continued, “Significant input cost inflation of $15 million impacted results for the quarter, especially for our Specialty Papers business which was also impacted by severe weather conditions associated with Tropical Storm Lee and higher maintenance costs to improve paper machine reliability. We are, however, seeing a pull back of input costs especially for purchased pulp which we expect will help us in the fourth quarter.”

Adjusted earnings is a non-GAAP measure that excludes from the Company’s GAAP-based results certain non-core business items. The following table sets forth a reconciliation of results determined in accordance with accounting principles generally accepted in the United States of America to non-GAAP adjusted earnings discussed herein:

	Three months ended September 30
	2011						2010
In thousands, except per share	After tax income			Diluted EPS			After tax income			Diluted EPS
Net income	$	13,026		$	0.28		$	39,437		$	0.85
Cellulosic biofuel and alternative fuel mixture credits		–			–			(23,100	)		(0.50	)
Acquisition and integration related costs		–			–			407			0.01
Timberland sales and related transaction costs		(245	)		(0.01	)		—			—
Adjusted earnings	$	12,781		$	0.28		$	16,744		$	0.36

The sum of individual per share amounts set forth above may not agree to adjusted earnings per share due to rounding.

2011 Third-Quarter Business Unit Results

Specialty Papers

	For the quarter ended September 30
Dollars in thousands	2011			2010			Change
Tons shipped		199,583			195,350			4,233		2.2	%
Net sales	$	225,410		$	217,334		$	8,076		3.7
Energy and related sales, net		2,840			3,313			(473	)	(14.3	)
Operating income		16,965			22,978			(6,013	)	(26.2	)
Operating margin		7.5	%		10.6	%

On a year-over-year basis, Specialty Papers’ net sales increased $8.1 million primarily due to a $4.6 million benefit from higher selling prices and a 2.2 percent increase in shipping volumes. Specialty Papers’ shipments continued its seven-year track record of outperforming the broader uncoated free sheet market, which was down 3.6 percent in the year-over-year comparison.

Specialty Papers’ 2011 third-quarter operating income declined $6.0 million compared to the 2010-third quarter primarily due to the unfavorable impact of rising input costs outpacing benefits of higher selling prices. Input costs increased an aggregate $8.4 million in the year-over-year comparison. Operations in Spring Grove, PA were interrupted during the quarter by Tropical Storm Lee, which caused unplanned downtime and excess costs aggregating $1.1 million. In addition, maintenance-related costs were higher in the comparison to 2010 due to spending incurred to improve paper machine reliability.

Composite Fibers

	For the quarter ended September 30
Dollars in thousands	2011			2010			Change
Tons shipped		24,105			22,846			1,259	5.5	%
Net sales	$	124,852		$	103,727		$	21,125	20.4
Operating income		10,057			9,700			357	3.7
Operating margin		8.1	%		9.4	%

Composite Fibers’ net sales increased $21.1 million, or 20.4 percent reflecting a 5.5 percent increase in shipping volume led by single-serve coffee and tea products. In addition, higher average selling prices added $2.7 million and foreign currency translation contributed $7.7 million.

Composite Fibers’ third-quarter 2011 operating income increased 3.7 percent or $0.4 million. The benefit from higher selling prices was more than offset by $3.8 million of higher raw material and energy costs, primarily related to abaca and synthetic fiber prices. The results include $0.4 million of costs incurred related to recently announced initiatives to expand its inclined-wire production capacity to support the growing single-serve coffee and tea markets. Adjusted to exclude these non-recurring strategic costs, operating income increased 7.3 percent in the comparison.

Advanced Airlaid Materials

	For the quarter ended September 30
Dollars in thousands	2011			2010			Change
Tons shipped		23,052			22,053			999	4.5	%
Net sales	$	66,232		$	58,036		$	8,196	14.1
Operating income		4,133			1,164			2,969	n/m
Operating margin		6.2	%		2.0	%

Advanced Airlaid Materials’ net sales increased $8.2 million, or 14.1 percent reflecting a 4.5 percent increase in shipping volume, a $2.9 million benefit from higher selling prices and $2.7 million from foreign currency translation.

Operating income was $4.1 million in the third-quarter 2011, the third consecutive quarter of higher profitability and nearly a three-fold improvement from results in the same quarter of 2010. During the third quarter, selling price increases outpaced higher input costs of $2.4 million. In addition, this business’s overall performance benefited from previously outlined improvement initiatives including supply chain synergies, waste reduction and higher machine output.

2011 Year-to-Date Results

For the first nine months of 2011, on a GAAP basis, the Company reported net income of $33.0 million or $0.71 per diluted share, compared with $39.2 million or $0.85 per diluted share in the same period of 2010. The following table sets forth a reconciliation of net income on a GAAP basis to adjusted earnings:

	Nine months ended September 30
	2011						2010
In thousands, except per share	After tax income			Diluted EPS			After tax income			Diluted EPS
Net income	$	32,953		$	0.71		$	39,166		$	0.85
Cellulosic biofuel and alternative fuel mixture credits		–			–			(23,100	)		(0.50	)
Acquisition and integration related costs		793			0.02			8,728			0.18
Foreign currency hedge on acquisition price		–			–			1,673			0.04
Timberland sales and related transaction costs		(1,895	)		(0.04	)		(99	)		—
Adjusted earnings	$	31,851		$	0.69		$	26,368		$	0.57

The sum of individual per share amounts set forth above may not agree to adjusted earnings per share due to rounding.

Consolidated net sales for the first nine months of 2011 were $1,211.2 million, a 12.2 percent increase compared with $1,079.2 million for the same period of 2010, reflecting generally stronger shipping volume in all of our businesses, higher selling prices and the favorable impact from foreign currency translation. In addition, the 2011 amount includes nine months of the Advanced Airlaid Materials business unit compared with seven and one half months in 2010.

Balance Sheet and Other

Capital expenditures totaled $44.6 million in the first nine months of 2011 compared with $23.3 million in the same period of 2010. Capital expenditures are expected to be approximately $60 million to $65 million for 2011.

Cash and cash equivalents totaled $98.3 million at September 30, 2011 and net debt, excluding cash collateralized borrowings, was $197.8 million, a decrease of $2.7 million compared with year-end 2010. Free cash flow (cash provided by operations less capital expenditures) was $36.5 million for the first nine months of 2011 and $100.1 million for the comparable period of 2010. Free cash flow in 2011 and 2010 included $17.8 million and $54.9 million, respectively, of cash tax benefits related to cellulosic biofuel and alternative fuel mixture credits. (Net debt and free cash flow are non-GAAP measures. Refer to the calculation of these measures provided in this release).

In April 2011, the Company announced a $50 million share buyback program authorized by its Board of Directors. Through September 30, 2011, the Company repurchased 2.0 million shares of common stock for approximately $27.5 million reducing 2011-third quarter average diluted shares outstanding by 908,260 shares. The Company is not obligated to repurchase any particular amount of common stock and the program may be modified or suspended at any time at the Board’s discretion.

In the 2011-third quarter the Company recorded an after-tax charge of $1.2 million, or $0.03 per share, associated with the retirement of the Company’s former chief executive officer. Such costs are not allocated to a business unit and are reported as “Other and Unallocated” in our table of Business Unit Financial Information.

Outlook

For Specialty Papers, the Company expects shipping volumes in the fourth quarter of 2011 to be approximately five percent less than the third quarter reflecting normal seasonality; selling prices are expected to be in line with the third quarter. Input costs are expected to be in line with the third quarter, with the exception of significantly lower purchased pulp prices. The Company expects full year 2011 operating income for this unit to approximate full year 2010.

For Composite Fibers, the Company anticipates shipping volumes to be slightly lower in the fourth quarter compared to the 2011 third quarter reflecting seasonality in the metallized papers market. Selling prices and input costs are expected to be largely in line with the third quarter.

Shipping volumes for the Advanced Airlaid Materials business unit in the fourth quarter of 2011 are expected to decline approximately five percent compared to third quarter levels due to normal seasonality. In addition, selling prices and input costs are expected to be largely in-line with the third quarter levels. The benefits from continuous improvement initiatives and efficiency gains should offset the impact of lower volumes.

Conference Call

As previously announced, the Company will hold a conference call at 11:00 a.m. (Eastern) today to discuss its second-quarter results. The Company’s earnings release and an accompanying financial supplement, which includes significant financial information to be discussed on the conference call, will be available on Glatfelter’s Investor Relations web site at the address indicated below. Information related to the conference call is as follows:

What:	Glatfelter’s 3rd Quarter 2011 Earnings Release Conference Call
When:	Tuesday, November 1, 2011, 11:00 a.m. Eastern Time
Number:	US dial 888.335.5539
	International dial 973.582.2857
Conference ID:		17582471
Webcast:	http://www.glatfelter.com/about_us/investor_relations/default.aspx
Rebroadcast Dates:	November 1, 2011 12:00 through November 15, 2011 11:59 p.m.
Rebroadcast Number:	Within US dial 855.859.2056
	International dial 404.537.3406
Conference ID:		17582471

Interested persons who wish to hear the live webcast should go to the website prior to the starting time to register, download and install any necessary audio software.

Caution Concerning Forward-Looking Statements

Any statements included in this press release which pertain to future financial and business matters are “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to numerous risks, uncertainties and other unpredictable or uncontrollable factors which may cause actual results or performance to differ materially from the Company’s expectations. Various risks and factors that could cause future results to differ materially from those expressed in forward-looking statements include, but are not limited to: changes in industry, business, market, political and economic conditions in the U.S. and other countries in which Glatfelter does business, demand for or pricing of its products, changes in tax legislation, governmental laws, regulations and policies, initiatives of regulatory authorities, acquisition integration risks, technological changes and innovations, market growth rates, cost reduction initiatives, and other factors. In light of these risks, uncertainties and other factors, the forward-looking events discussed in this press release may not occur and readers are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements speak only as of the date of this press release and Glatfelter undertakes no obligation, and does not intend, to update these forward-looking statements to reflect events or circumstances occurring after the date of this press release. More information about these factors is contained in Glatfelter’s filings with the U.S. Securities and Exchange Commission, which are available at www.glatfelter.com.

About Glatfelter

Headquartered in York, PA, Glatfelter is a global manufacturer of specialty papers and fiber-based engineered materials, offering over a century of experience, technical expertise and world-class service. U.S. operations include facilities in Spring Grove, PA and Chillicothe and Fremont, OH. International operations include facilities in Canada, Germany, France, the United Kingdom and the Philippines, a representative office in China and a sales and distribution office in Russia. Glatfelter’s sales approximate $1.5 billion annually and its common stock is traded on the New York Stock Exchange under the ticker symbol GLT. Additional information may be found at www.glatfelter.com.

P. H. Glatfelter Company and subsidiaries
Consolidated Statements of Income
(unaudited)

	Three months ended						Nine months ended
	September 30						September 30
In thousands, except per share	2011			2010			2011			2010
Net sales	$	416,493		$	379,097		$	1,211,249		$	1,079,153
Energy and related sales – net		2,840			3,312			7,887			8,834
Total revenues		419,333			382,409			1,219,136			1,087,987
Costs of products sold		364,417			326,669			1,066,553			952,571
Gross profit		54,916			55,740			152,583			135,416
Selling, general and administrative expenses		31,430			27,782			94,520			91,299
Gains on dispositions of plant, equipment and timberlands, net		(698	)		(150	)		(3,902	)		(318	)
Operating income		24,184			28,108			61,965			44,435
Non-operating income (expense)
Interest expense		(6,456	)		(6,565	)		(19,377	)		(19,045	)
Interest income		134			232			491			570
Other – net		(137	)		(251	)		(405	)		(3,868	)
Total other income (expense)		(6,459	)		(6,584	)		(19,291	)		(22,343	)
Income before income taxes		17,725			21,524			42,674			22,092
Income tax provision (benefit)		4,699			(17,913	)		9,721			(17,074	)
Net income	$	13,026		$	39,437		$	32,953		$	39,166
Earnings per share
Basic	$	0.29		$	0.86		$	0.72		$	0.85
Diluted		0.28			0.85			0.71			0.85
Cash dividends declared per common share	$	0.09		$	0.09		$	0.27		$	0.27
Weighted average shares outstanding
Basic		45,299			45,950			45,813			45,898
Diluted		45,839			46,286			46,341			46,330

Business Unit Financial Information
(unaudited)

Three months ended September 30									Advanced Airlaid
In millions	Specialty Papers				Composite Fibers				Materials				Other and Unallocated						Total
	2011		2010		2011		2010		2011		2010		2011			2010			2011			2010
Net sales	$	225.4	$	217.3	$	124.9	$	103.7	$	66.2	$	58.0	$	-		$	-		$	416.5		$	379.1
Energy and related sales, net		2.8		3.3		—		—		—		—		—			—			2.8			3.3
Total revenue		228.2		220.6	$	124.9		103.7	$	66.2		58.0		—			—			419.3			382.4
Cost of products sold		198.6		184.3		104.6		85.6		59.2		54.9		2.0			1.8			364.4			326.7
Gross profit		29.6		36.3		20.3		18.2		7.0		3.1		(2.0	)		(1.8	)		54.9			55.7
SG&A		12.6		13.4		10.2		8.5		2.9		1.9		5.7			4.1			31.4			27.8
Gains on dispositions of plant, equipment and timberlands		—		—		—		—		—		—		(0.7	)		(0.2	)		(0.7	)		(0.2	)
Total operating income (loss)		17.0		22.9		10.1		9.7		4.1		1.2		(7.0	)		(5.7	)		24.2			28.1
Non-operating income (expense)		—		—		—		—		—		—		(6.5	)		(6.6	)		(6.5	)		(6.6	)
Income (loss) before income taxes	$	17.0	$	22.9	$	10.1	$	9.7	$	4.1	$	1.2	$	(13.4	)	$	(12.3	)	$	17.7		$	21.5
Supplementary Data
Net tons sold		199.6		195.4		24.1		22.8		23.1		22.1		—			—			246.7			240.2
Depreciation, depletion and amortization	$	9.2	$	8.9	$	6.2	$	5.7	$	2.1	$	2.0	$	-		$	-		$	17.5		$	16.6
Capital expenditures		6.7		5.1		5.7		2.7		4.3		—		—			—			16.8			7.8

Nine months ended September 30									Advanced Airlaid
In millions	Specialty Papers				Composite Fibers				Materials				Other and Unallocated						Total
	2011		2010		2011		2010		2011		2010		2011			2010			2011			2010
Net sales	$	662.6	$	633.8	$	356.5	$	307.2	$	192.2	$	138.1	$	-		$	-		$	1,211.2		$	1,079.2
Energy and related sales, net		7.9		8.8		—		—		—		—		—			—			7.9			8.8
Total revenue		670.5		642.6		356.5		307.2		192.2		138.1		—			—			1,219.1			1,088.0
Cost of products sold		592.5		560.9		295.1		255.8		174.3		130.4		4.6			5.6			1,066.6			952.6
Gross profit		78.0		81.7		61.3		51.5		17.9		7.8		(4.6	)		(5.6	)		152.6			135.4
SG&A		38.9		40.1		29.6		26.6		8.3		4.4		17.7			20.2			94.5			91.3
Gains on dispositions of plant, equipment and timberlands		—		—		—		—				—		(3.9	)		(0.3	)		(3.9	)		(0.3	)
Total operating income (loss)		39.1		41.6		31.7		24.9		9.6		3.4		(18.4	)		(25.4	)		62.0			44.4
Non-operating income (expense)		—		—		—		—		—		—		(19.3	)		(22.3	)		(19.3	)		(22.3	)
Income (loss) before income taxes	$	39.1	$	41.6	$	31.7	$	24.9	$	9.6	$	3.4	$	(37.7	)	$	(47.8	)	$	42.7		$	22.1
Supplementary Data
Net tons sold		590.1		576.3		70.0		67.1		66.9		53.2		—			—			726.9			696.6
Depreciation, depletion and amortization	$	26.7	$	26.2	$	18.7	$	17.6	$	6.4	$	5.0	$	-		$	-		$	51.8		$	48.8
Capital expenditures		20.0		13.8		16.2		6.0		8.4		3.5		—			—			44.6			23.3

The sum of individual amounts set forth above may not agree to the consolidated financial statements included herein due to rounding.

Selected Financial Information
(unaudited)

	Nine months ended
	September 30
In thousands	2011			2010
Cash Flow Data
Cash provided (used) by:
Operating activities	$	81,136		$	123,380
Investing activities		(40,200	)		(252,016	)
Financing activities		(39,495	)		60,315
Depreciation, depletion and amortization		51,779			48,802
Capital expenditures		44,642			23,269
Sept 30				December 31
		2011			2010
Balance Sheet Data
Cash and cash equivalents	$	98,251		$	95,788
Total assets		1,350,027			1,341,747
Total debt		332,741			333,022
Shareholders’ equity		558,622			552,442

Reconciliation of GAAP Financial Information to Non-GAAP Financial Information

This press release includes a discussion of earnings before the effects of certain specifically identified items, which is referred to as adjusted earnings, a non-GAAP measure. The company uses non-GAAP adjusted earnings to supplement the understanding of its consolidated financial statements presented in accordance with GAAP. Non-GAAP adjusted earnings is meant to present the financial performance of the company’s core operations, which consists of the production and sale of specialty papers, composite fibers papers and airlaid non-woven materials. Management and the company’s Board of Directors use non-GAAP adjusted earnings to evaluate the performance of the company’s fundamental business in relation to prior periods. The performance of the company’s operations is evaluated based upon numerous items such as tons sold, average selling prices, gross margins overhead, and operating margins, among others. Gains on the sale of timberlands, acquisition and integration related costs, charges for environmental reserves and shutdown and restructuring charges are excluded from the company’s calculation of non-GAAP adjusted earnings because management believes each of these items is unique and not part of the company’s core business, and will only impact the company’s financial results for a limited period of time. Gains from timberland sales are distinct from revenues generated from product sales. Unlike items such as cost of raw materials and overhead costs, acquisition and integration related costs are unique items that do not represent direct costs incurred in the manufacture and sale of the company’s products.

Unlike net income determined in accordance with GAAP, non-GAAP adjusted earnings does not reflect all charges and gains recorded by the company for the applicable period and, therefore, does not present a complete picture of the company’s results of operations for the respective period. However, non-GAAP adjusted earnings provide a measure of how the company’s core operations are performing, which management believes is useful to investors because it allows comparison of such operations from period to period.

Free cash flow and net debt are also non-GAAP financial measures, however, the calculation of each is derived directly from information included in the Company’s GAAP based consolidated financial statements. The Company believes these provide meaningful measures of the Company’s financial position and of its ability to generate sufficient levels of cash flow to support its business strategies.

The following tables set forth the calculations of free cash flow and net debt.

Calculation of Free Cash Flow	Nine months ended September 30
In thousands	2011			2010
Cash from operations	$	81,136		$	123,380
Less:
Capital expenditures		(44,642	)		(23,269	)
Free cash flow	$	36,494		$	100,111

Calculation of Net Debt	September 30	December 31
In thousands	2011			2010
Short term debt		$	–	$	798
Long term debt	332,741				332,224
Total	332,741				333,022
Less: Cash			98,251		(95,788	)
Total debt less cash	234,490				237,234
Less: Collateralized debt	(36,695)				(36,695	)
Net Debt	$197,795			$	200,539

Non-GAAP adjusted earnings, free cash flow and net debt should not be considered in isolation from, or as substitutes for, measures of financial performance prepared in accordance with GAAP.

EXHIBIT 99.2

CORPORATE PARTICIPANTS

John Jacunski

PH Glatfelter Co. — SVP, CFO

Dante Parrini

PH Glatfelter Co. – Chairman and CEO

CONFERENCE CALL PARTICIPANTS

Mark Wilde

Deutsche Bank — Analyst

James Armstrong

Vertical Capital — Analyst

Stuart Benway

Standard & Poor’s — Analyst

PRESENTATION

Operator

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Glatfelter’s third-quarter earnings release conference call.

All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the call over to Mr. John Jacunski. Please go ahead, sir.

John Jacunski - PH Glatfelter Co. — SVP, CFO

Thank you, Michelle. Good morning and welcome to Glatfelter’s third-quarter earnings conference call. I am John Jacunski. I am the Company’s CFO.

Before we begin our presentation, I have a few standard reminders. During our call this morning, we’ll use the term adjusted earnings as well as other non-GAAP financial measures. The reconciliation of these financial measures to our GAAP-based results is included in today’s earnings release and in the investor slides. We will also make forward-looking statements today that are subject to risks and uncertainties. Our 2010 Form 10-K filed with the SEC and available on our website discloses factors that could cause our actual results to differ materially from these forward-looking statements.

These forward-looking statements speak only as of today and we undertake no obligation to update them.

And finally, we have made available a slide presentation to accompany our comments on this morning’s call. You may access the slides on our website or through this morning’s webcast provider.

I will now turn the call over to Dante Parrini, Glatfelter’s Chairman and Chief Executive Officer.

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

Thanks, John. Good morning and thank you for joining our call today. Earlier this morning, we reported earnings for the third quarter and slide three of today’s presentation summarizes these results. Adjusted earnings came in at $0.28 per share in the quarter compared to $0.36 last year.

Our businesses again generated strong top-line results reporting net sales of $416 million, a 10% increase and another quarterly record. Composite Fibers revenue of $125 million was the third consecutive quarterly record and 20% better than 2010. This growth was driven by a 6% improvement in shipments including a substantial increase in single-serve coffee filter papers.

On a year-to-date basis, shipments of single-serve coffee and tea products are up 9%. We are well-aligned with the leading global single-serve coffee and tea producers, and we expect continued strong growth in this area of our business.

With our current operations nearly at capacity, last Thursday, we announced a $50 million investment to expand Composite Fibers inclined-wire capacity by nearly 20%. This expansion will enable us to continue to support the growth of our key customers around the world.

Advanced Airlaid Materials also delivered an impressive quarter, including a 14% increase in revenue as a result of strong shipments of feminine hygiene products. From an earnings perspective, our Advanced Airlaid Materials business continued to enhance its performance through solid execution of our continuous improvement initiatives, which allowed us to more than triple operating income versus a year ago and increase 11% from Q2.

Significantly higher input costs adversely impacted our consolidated results by $0.20 per share during the quarter and outpaced selling price increases. While this hurt each of our businesses this quarter, Specialty Papers experienced the most significant cost inflation of more than $8 million, which greatly reduced profitability for the quarter.

Specialty Papers delivered improved top line results and shipments again outperformed the broader uncoated freesheet market. However, rising input costs, higher maintenance costs to improve machine reliability, and severe weather conditions from Tropical Storm Lee caused a 26% reduction in operating earnings. This has been a more volatile year for Specialty Papers earnings than we have typically seen, driven by the differing pace at which selling prices and input costs have moved.

However, we expect pulp prices to moderate in Q4 with full year 2011 operating profit for this business finishing in line with 2010 while again generating substantial free cash flow for the Company.

Looking at our results on a year-to-date basis, adjusted earnings per share are 21% higher than 2010, reflecting the impressive profit growth achieved by Composite Fibers and Advanced Airlaid Materials. We continue to generate healthy free cash flow which totals $36 million so far this year. After several years of lower investment due to economic conditions, we have increased our capital expenditures for maintenance, cost reduction initiatives and to improve production efficiency. And although we have invested in working capital to support our growth, our metrics remain in line with our expectations.

The strength of our balance sheet and cash flow profile provides us with the capacity and flexibility to continue funding our growth initiatives. As I mentioned earlier, last week we announced plans for a $50 million investment in Composite Fibers to support its global growth opportunities and we continue to execute a $50 million share purchase program initiated in April, all while maintaining our current annual dividend of $0.36 per share.

These actions underline our confidence in our ability to generate sustainable cash flows and deliver value to our shareholders. Let me now turn the call over to John to provide more in-depth comments on this quarter’s results. John.

John Jacunski - PH Glatfelter Co. — SVP, CFO

Thank you, Dante. On a GAAP basis, we reported net income of $13 million or $0.28 per share for the third quarter compared with $39.4 million and $0.85 per share a year ago. The prior year amounts included $23.1 million or $0.50 per share from Cellulosic Bio-fuel production credits.

Slide four in this morning’s presentation shows the bridge of our adjusted earnings per share for the year-over-year comparison. For the third quarter, we earned $12.8 million or $0.28 per share on an adjusted earnings basis after excluding gains on sales of Timberland compared to $16.7 million or $0.36 per share last year. Composite Fibers’ improved results added $0.01 per share to this quarter’s earnings and Advanced Airlaid Materials added $0.05 per share. This was more than offset by a $0.10 decline in earnings from Specialty Papers and as I indicated on our last call, we recorded a $0.03 per share pension charge during the quarter.

Slide five shows more details for Specialty Papers where operating income declined $6 million in the year-over-year comparison. Net sales increased nearly 4% to $225.4 million, benefiting from higher average selling prices and a 2% improvement in shipments which again beat the broader UFS market, which was down 3.6%. This continues a seven-year trend of our performance compared to the broader market.

The volume growth was again led by increased shipments of forms, envelope and engineered products which offset declines in book and carbonless products. Third-quarter results were adversely impacted by higher input costs which rose $8.4 million and outpaced the realization of higher selling prices by $3.8 million. Input costs were higher almost across the board. Wood costs increased by $2.7 million driven by very wet weather, causing us to source wood from longer distances and by higher fuel costs. We also experienced increases in starch, caustic, and fuel oil by a total of $3 million.

Pulp prices were down slightly compared to last year but are expected to fall more significantly in Q4.

Maintenance-related costs also increased this year, driven in part by efforts to improve paper machine reliability at our Ohio facility, and we incurred costs associated with severe weather conditions. During the quarter, Tropical Storm Lee caused extensive flooding in parts of Pennsylvania and disrupted our operations, costing us $1.1 million during the quarter.

Slide six shows Specialty Papers year-to-date performance where operating income is down only slightly, and we expect full-year 2011 operating income to be in line with 2010 as lower pulp prices will help Q4 results.

Moving to Composite Fibers on slide seven, you see operating income for this business increased 4% compared to the third quarter of 2010. From a revenue viewpoint, Composite Fibers reported its third consecutive record quarter. Net sales increased $21 million or 20% in a year-over-year comparison. This growth was from a 6% increase in shipping volumes and an improved mix led by double-digit increase in single-serve coffee products, and $2.7 million from higher selling prices. Currency translation added $7.7 million to net sales.

The benefits from higher selling prices were more than offset by broad-based increases in fiber and energy costs, totaling $3.8 million. The most significant increases were for synthetic fibers, base paper used in our metallizing operations and natural gas.

We continue to see very attractive growth opportunities in both single-serve coffee applications and tea products, and we recently announced a significant investment to expand capacity to serve our customers. Composite Fiber’s results for the third quarter included approximately $400,000 of cost related to this project.

Turning to slide eight Advanced Airlaid Materials operating income of $4.1 million represents this business’s best performance since becoming part of Glatfelter in early 2010. The $3 million increase in profitability was led by improved operating efficiencies and cost reduction efforts, which contributed $2.5 million in the comparison.

Net sales increased $8.2 million or 14%, reflecting higher selling prices and a 4.5% increase in shipments, driven by feminine hygiene products. Net sales also benefited $2.7 million from foreign currency translations. A $2.9 million benefit from improved selling prices was substantially offset by higher raw material and energy costs.

During October, we completed our previously announced $7.6 million investment in additional festooned converting capacity that we believe will provide further profit improvement opportunity for this business. Demand for festoon products is high and this investment will allow us to serve our customers with a more value-added product and will also improve our operating margins. We are currently in the start-up phase of this project and it should begin to add to earnings in 2012.

Slide nine outlines a few other financial highlights for the quarter. As I discussed during our second-quarter call, we recorded an after-tax charge of $1.2 million during the third quarter for the normal pension accounting expenses associated with the retirement of our former CEO.

Our $50 million share buyback program is proceeding well. During the quarter, we purchased 1.7 million shares at an average price of $13.55. This brings our total purchases through the end of Q3 to 2 million shares or 4% of our total shares outstanding for an aggregate purchase price of $27.5 million. This reduced our diluted shares outstanding for Q3 by 908,000 and added less than $0.01 to earnings per share for the quarter. The current authorization expires in March of 2012 and with the 0.5 million shares we repurchased in October, we expect to complete the program by the expiration date.

Turning to slide 10, you see we generated $36.5 million of free cash flow so far in 2011. This includes $17.8 million of cash tax benefits from the Cellulosic Bio-fuel credit and a $21 million increase in capital spending, including the $7.6 million investment in festooning capacity. We have also invested $18.5 million in working capital to fund the revenue growth we generated. However, our overall working capital base remains in line with 2010 year end.

Capital expenditures totaled $44.6 million year-to-date compared with $23.3 million in 2010. For all of 2011, CAPEX is expected to be $60 million to $65 million compared with total depreciation expense estimated at $68 million. In 2012, capital expenditures are estimated to be $95 million to $100 million. This includes $35 million of the $50 million investment we recently announced to expand capacity to serve Composite Fibers’ growing markets.

As shown on slide 11, pension expense totaled $8.1 million thus far in 2011, compared with $6.9 million in 2010. The 2011 amount includes a charge I mentioned earlier. On a full-year basis, we expect to recognize $10.1 million of expense. Our qualified pension plans remain overfunded and we are not required to make cash contributions this year nor do we expect to have to make cash contributions for the foreseeable future.

Slide 12 summarizes our strong balance sheet. Despite using $27 million for share repurchases and $13 million for dividend payments this year, our cash balances increased to $98 million. We also have over $200 million available under our revolving credit facility and our leverage on the net debt basis is low at 1.2 times.

This concludes my remarks, so I’ll turn the call back to Dante.

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

Thank you, John. Before opening the call for your questions, I have a few comments on our outlook which are summarized on slide 12.

Economic conditions and sovereign debt concerns provide continued uncertainty in the global business environment. To this point we have seen isolated pockets of weakness in our business, but no major impacts. We have performed well during the turmoil of the last few years and we expect our businesses will continue to perform well in these uncertain economic times.

Specialty Papers has been successful in growing revenue and keeping its machines full by leveraging opportunities from its market-leading positions, product diversification and superior customer service. And we expect Composite Fibers and Advanced Airlaid Materials to continue to be the global growth engines of Glatfelter.

During Q4, we expect to see stable market conditions across all of our businesses. However, shipments are expected to be lower than Q3 due to normal seasonality as customers manage year-end inventory levels. For the most part, we expect slowing inflationary pressures, particularly in Specialty Papers where purchased pulp costs are easing from recent highs.

Our commitment to cost control, continuous improvement, and operational excellence will remain a top priority as we continue to work to improve our profitability. And we are very excited about the $50 million investment we are making to expand capacity to serve customers in Composite Fibers’ growing global markets.

The return on this investment is very attractive as we expect to achieve a 15% to 20% return within three years. This investment is further evidence of our confidence in the long-term profitable growth of this business and our commitment to maximizing its potential.

Finally, I continue to believe we are well-positioned to generate value for shareholders over the long term. I continue to expect our leading positions in global growth markets’ commitment to continuous improvement and strong balance sheet to serve our shareholders well into the future. We look forward to updating you on our progress during future calls.

At this time, I would like to open the call for questions.

QUESTION AND ANSWER

Operator

(Operator Instructions). Mark Wilde.

Mark Wilde - Deutsche Bank — Analyst

Good morning. Thank you. Can we start out just by talking about the capital budget going forward? I am curious, first of all, with the Gernsbach project that you announced last week, can you give us a timing on which years that $50 million is going to drop into? And then, do you have any contractual arrangements for volume coming out of the expansion?

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

Sure, I’m happy to address both of your questions. In terms of our CAPEX for 2012, we expect to spend about $35 million for the G10 rebuild in 2012. And so if you add that to our $60 million to $65 million which is consistent with 2011, that should give you a feel for CAPEX cash flows.

Mark Wilde - Deutsche Bank — Analyst

Okay and is that remaining $15 million, is that coming kind of part of that this year and part of that in 2013?

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

No. It’s mostly 2013.

Mark Wilde - Deutsche Bank — Analyst

All right. And then, can you also just as we think about the three businesses broadly, how are you spending capital relative to depreciation in each of the businesses?

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

I would say generally speaking we have been spending at or below depreciation, especially in North America. The overall split enterprise-wide is a little more heavily weighted towards the global growth markets of Composite Fibers and Advanced Airlaid Materials. John, do you have anything you want to add to that?

John Jacunski - PH Glatfelter Co. — SVP, CFO

No, I guess Specialty Papers generally has been below, slightly below depreciation and as you said we are spending a little bit more on Composite Fibers and Advanced Airlaid Materials.

Mark Wilde - Deutsche Bank — Analyst

Is it possible to get a little more detail in North America? Because it seems like the mill out in Ohio took a lot of capital under prior owners. In Spring Grove, there was a new pulp mill that went in in the early ‘90s, so I would actually be — think that you would be able to spend well under depreciation at those two sites. Particularly given where the markets are headed.

John Jacunski - PH Glatfelter Co. — SVP, CFO

Yes, I think you need to keep in mind that the purchase price that we paid for the Chillicothe facility was quite low. So we paid $80 million and as part of the purchase accounting, we received about $87 million of working capital. So there’s really virtually no fixed asset basis in that investment. Any fixed assets we have in the balance sheet today for that business are what we have invested since we acquired it.

So typically, we are investing below depreciation levels for Spring Grove. But we are investing above depreciation levels for Chillicothe because we have very little fixed asset basis on our books because of the purchase price. Keep that in mind as you consider what level — the level at which we are investing.

Mark Wilde - Deutsche Bank — Analyst

Okay. And then, can you give us, John, some sense that the incremental maintenance that you spent in the third quarter in Specialty Papers?

John Jacunski - PH Glatfelter Co. — SVP, CFO

Sure. Our — if you look at the slide that shows the waterfall from earnings, we have a $3.1 million negative variance on operations. We talked about Tropical Storm Lee being about $1.1 million. And then the balance, that $2 million, there is a little bit of just typical cost inflation in there, but the balance of it is related to the maintenance type cost, including the impact of having to take a little bit of downtime in that business to do the maintenance.

Mark Wilde - Deutsche Bank — Analyst

And if we step over to the Airlaid business, can you give us a sense in that business of both what the operating rate is in the business and then what’s your target EBIT margins in that business?

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

On a year-to-date basis, we are at about 80% capacity — 87% capacity utilization. Q3 was 90%. So, those markets continue to grow and we have grown our volumes substantially and we have grown them above market since we have owned the business.

John Jacunski - PH Glatfelter Co. — SVP, CFO

From a margin perspective, Mark, our margins are approaching 10%. Certainly, we expect that in the near term our objective is to get our margins back to the level they were at when we acquired the business, which is about 12%, and certainly we will take it from there. But our near-term objective is to get our margins back to the levels they were at when we acquired the business.

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

Yes, and those are EBITDA margins.

John Jacunski - PH Glatfelter Co. — SVP, CFO

Correct, that’s right.

Mark Wilde - Deutsche Bank — Analyst

So it is a 12%, 12.5% per EBITDA, not a 12%, 2.5% operating margin you are trying to get to in that business? That right?

John Jacunski - PH Glatfelter Co. — SVP, CFO

That’s right.

Mark Wilde - Deutsche Bank — Analyst

All right. Then, the pulp impact that you mentioned in the fourth quarter, can you just remind us, in the North American business, how much pulp you are purchasing?

John Jacunski - PH Glatfelter Co. — SVP, CFO

Sure, in the fourth quarter it will be 25,000 to 30,000 probably closer to low end of that range. On an annualized basis we are buying about 120,000 tons a year.

Mark Wilde - Deutsche Bank — Analyst

Okay and just a ballpark number for how much you might think that that price is going to be down in the fourth quarter? Just based on what you can see right now.

John Jacunski - PH Glatfelter Co. — SVP, CFO

The price announcements are continuing to be made, lower price announcements. Our guess is it’s probably about $50 a ton. Lower in Q4 versus Q3.

Mark Wilde - Deutsche Bank — Analyst

Okay. So that suggests that it is something shy of $1 million quarter to quarter impact. Is that right?

John Jacunski - PH Glatfelter Co. — SVP, CFO

It would be more $1.25 million.

Mark Wilde - Deutsche Bank — Analyst

Sorry, I’m sorry — about $1.25 million.

And then, could you update us on land sales? It looks like there were some small land sales in the quarter. I just — I can’t remember quite how much you got left. I assume it’s still not a great market to unload a lot of land in.

John Jacunski - PH Glatfelter Co. — SVP, CFO

No, that’s correct. We sold about 250 acres in the third quarter at about $2,000 an acre. It was in Pennsylvania. As we have talked before you know if there is an opportunity to sell land, it is more likely in Pennsylvania where there is a more of a recreational market. But we don’t expect significant land sales in the near term, given the market conditions. And we have about — still have about 32,000 acres remaining, split between Northern Virginia, Delaware, and Pennsylvania, maybe about 12,000 acres in Pennsylvania, and about 10,000 in Virginia and about 8,000 or so in Delaware.

Mark Wilde - Deutsche Bank — Analyst

That sounds good. I’ll turn it over. Thanks.

Operator

James Armstrong from Vertical Research.

James Armstrong - Vertical Capital — Analyst

Good morning. First question, in what commodity did you see the most cost inflation excluding pulp? And as we look forward into the fourth quarter, what are you seeing on the cost side?

John Jacunski - PH Glatfelter Co. — SVP, CFO

I would say that wood costs, we had the most inflation in would cost during the quarter. And again there was an impact of both the wet weather where we had to go longer distances to source our wood and certainly transportation costs, higher fuel costs contributed to the landed cost at the mill.

You know, our expectation, as we go into Q4, we see generally stable pricing with the exception of purchased pulp. We have lower purchased pulp cost in our Composite Fibers business, but we are also seeking some inflation pressure in our back of fiber prices and our synthetic fiber prices that will generally offset any benefit we get from lower wood pulp costs. But we do expect that in Specialty Papers, wood pulp cost would be down and the balance of our input cost would be about flat.

James Armstrong - Vertical Capital — Analyst

That helps. Switching gears a little, as the festooning capacity comes online, does that product demand better prices and if so by how much per ton?

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

The festooned products do carry a premium with them for the additional converting step, and we do expect that should improve our mix of products sold in North America, predominantly in 2012. In terms of exactly what the up charges, we haven’t disclosed that publicly. There’s some proprietary technology. I don’t know, John, how you might choose to offer guidance in that regard.

John Jacunski - PH Glatfelter Co. — SVP, CFO

No, there’s some competitively sensitive information there because this is a discrete operation that is priced separately so that’s not something we’d — we like to disclose.

James Armstrong - Vertical Capital — Analyst

Fair enough. And lastly, just on Tropical Storm Lee, how many tons do you expect you lost during that tropical storm and was there any maintenance or anything associated with repairs due to that storm?

John Jacunski - PH Glatfelter Co. — SVP, CFO

I don’t recall exactly the lost production. It was in terms of say about a day of downtime, maybe a day and a half. It was — I think the bigger cost was really just the cost to fix the problems from the amount of water. It’s interesting that we were surrounded by floods and our issue was we couldn’t get enough water to run our mill because of plugging of intakes and things of that sort.

So it didn’t have a significant impact on overall production. But there were some costs and a little bit of downtime to fix it.

James Armstrong - Vertical Capital — Analyst

Okay, that helps. Thank you very much.

Operator

(Operator Instructions). Stuart Benway from S&P Capital.

Stuart Benway - Standard & Poor’s — Analyst

Good morning. Just a little more on input cost in Specialty Papers. I mean, you say costs will be in line except for lower pulp costs but aren’t pulp costs like a major part of your overall cost in that business?

John Jacunski - PH Glatfelter Co. — SVP, CFO

Yes. That’s exactly right which is why we are trying to provide a little bit of additional guidance on that separately. So as we spoke earlier, we will use in the fourth quarter we will use between 25,000 and 30,000 tons of purchased pulp and we expect prices to be down on the order of $50 a ton.

The balance of our input cost we expect to be generally flat from Q3 to Q4.

Stuart Benway - Standard & Poor’s — Analyst

And those are things like starch, caustic and fuel oil?

John Jacunski - PH Glatfelter Co. — SVP, CFO

Yes.

Stuart Benway - Standard & Poor’s — Analyst

What do you think is driving the growth in the single-serve category in Composite Fibers? Some of it I guess has to do with the shift in Asia from loose tea to tea bags and maybe I guess use of more flavored coffees in the office pantry. Are those some of the factors that you see?

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

I’ll be happy to provide a little more color. Let’s just speak categorically. Our view of the tea market worldwide says that that is going to grow 4% to 5% as certain regions of the world transition from loose to packed teas as you pointed out in your question. And we are a leading provider of those materials to the major market makers around the world. So we believe we are well-positioned to participate in market growth.

When it comes to single-serve coffee, there has been a lot of news in the press about the success of various companies and, again, we are the leader in that particular category and have strong supply positions with major players who are looking to Glatfelter to be able to support their continued growth. And that was the impetus behind the investment in adding more inclined-wire capacity to serve single-serve coffee, tea, as well as some of our other specialty niche markets.

Stuart Benway - Standard & Poor’s — Analyst

And do you have any kind of a rough breakdown for your sales into let’s say Asia versus North America versus Europe in that category?

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

When you say in that category —

Stuart Benway - Standard & Poor’s — Analyst

Well, yes, the business, the overall — the composite materials as a total — Composite Fibers.

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

I think what we have shared publicly is that about 35%, 37% of our sales are outside of North America. The biggest region is continental Europe. We do have revenue in Asia Pacific, Latin America, Middle East Africa, although they are smaller components.

John, I don’t know if you have more specifics that you would like to share.

John Jacunski - PH Glatfelter Co. — SVP, CFO

I would say that in Asia-Pacific out of Composite Fibers, who has more revenue going there than our other businesses, it is about 10% of their overall revenue.

Stuart Benway - Standard & Poor’s — Analyst

And growing, I’m assuming?

John Jacunski - PH Glatfelter Co. — SVP, CFO

Generally, yes.

Stuart Benway - Standard & Poor’s — Analyst

You talked about weather as being a problem in the third quarter. It has been a problem in the Northeast here for a while now, but do you expect any problems from the most recent snowstorm here?

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

No.

John Jacunski - PH Glatfelter Co. — SVP, CFO

No, I think —. No, we’re not worried about it.

Stuart Benway - Standard & Poor’s — Analyst

Okay, good. Thank you.

Operator

Mark Wilde from Deutsche Bank.

Mark Wilde - Deutsche Bank — Analyst

Just a few follow-ups. You mentioned that carbonless and book volumes were both down. Can you just give us an order of magnitude on the decline in both of those businesses?

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

Sure. If you look on year-over-year basis, book publishing volumes were down a little over 7%. And our carbonless products were down just under 5%. We have guided pretty consistently that our view of the market for carbonless is that it will continue to decline at a rate of 7% to 10%. So we did better than the market.

I would say that our book business was off a little bit more than normal and I would attribute that to most predominantly to a later fall book season than we would typically experience. Sometimes the volume turns up in September, sometimes it turns up in October. This year, we saw transition of more of the fall book season showing up in October.

But on a sequential quarter basis, our book volumes were up versus Q2.

Mark Wilde - Deutsche Bank — Analyst

Okay, and how are you thinking about that sort of the trend rate of decline in that business? Has the — have the iPAD and other things changed your view on that?

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

I think we have been pretty consistent in addressing this question as well. That our internal estimates are a 3% to 5% decline rate for the book business. We are planning around that. I’ll call your attention to the fact that we are now in our seventh consecutive year of outperforming, from a shipment standpoint, the broader uncoated freesheet market and that is a testament to the new business development and new product government capabilities we have and the flexibility across our asset base in North America.

So we continue to plan for that. Our book business is still an important part of our business. It is a part of the legacy Glatfelter business. We have strong brand equity. We do have a leadership position in the uncoated freesheet space for book publishing and we will continue to serve that market well and be there for our customers.

However, we are — in terms of planning and capacity utilization, we are making sure that we have contingency options that allow us to run full and to generate the free cash flows this part of the business has been generating and that is so important to our overall strategy.

Mark Wilde - Deutsche Bank — Analyst

And then, Dante, over at Gernsbach once you get this latest machine conversion, how much of the output at Gernsbach is now on inclined-wires?

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

It will be 100% with the exception of our metallized business.

Mark Wilde - Deutsche Bank — Analyst

Okay.

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

This is the last flat wire machine we have within the Composite Fibers business unit.

Mark Wilde - Deutsche Bank — Analyst

Okay. And what should we assume in that Composite Fibers business? What are you —? What might we think of as kind of a normalized EBITDA margin in that business once you make the conversion? Do you have any sense?

John Jacunski - PH Glatfelter Co. — SVP, CFO

We haven’t provided sort of a three-year outlook on our margins, but I think the after-tax return expectations we provided will give you an ability to get a sense for what our expected impact on operating profit is. But we haven’t provided that kind of a three-year outlook and we are not going to start now.

Mark Wilde - Deutsche Bank — Analyst

And I just wonder also with the capital going into Gernsbach, I think you have also been looking at whether you wanted to move that Composite Fiber business into other parts of the world from a production standpoint. Any thoughts on that?

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

Sure. We view our markets as global markets, and as part of the analysis and assessment we considered a variety of factors that ranged from how we best serve our customers and we felt that, given the fact that we were approaching full capacity and that these markets are growing, we wanted a solution that would give the markets confidence that we would have the additional capacity available and ready when the market required it.

The risk profile of converting an established flat wire machine in Gernsbach versus going greenfield somewhere else, trying to buy brownfield and retrofit, was a more attractive risk profile. And all of those things added up to a better return profile. And given the focus that this management team has on capital efficiency and improving our return on capital employed over time as a means of delivering long-term value to our shareholders, we felt this was the best way to balance serving markets, getting the risk profile that we are most comfortable with and being prudent with the use and deployment of capital.

Mark Wilde - Deutsche Bank — Analyst

Very good. Listen, good luck in the fourth quarter, Dante.

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

Thanks.

Operator

(Operator Instructions).

Dante Parrini - PH Glatfelter Co. — Chairman and CEO

Okay. Well, thank you again for joining us today. We appreciate your questions and your interest in Glatfelter. Have a great day.

Operator

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