Resolute Forest Products Inc (RFP) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Bowater, Incorporated's first quarter 2002 earnings release conference call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time.

If you should require assistance during the call, please depress zero, then star. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Bill Harvey. Please, go ahead.

Welcome to Bowater's first quarter conference call. I'm Bill Harvey, vice president and treasurer, and on the call today are Arnie Nemirow, our chairman and CEO, David Maffucci, our senior vice president and chief financial officer, and Julie Hofmann, our investor relations manager. I'll cover a few preliminary items and then Arnie will provide an overview of business conditions and Dave will review some financial information.

Following that, we will take questions.

Before we begin, I need to call your attention to the cautionary forward-looking statement language that is contained in the press release and on our website. If you haven't read it, please do so.

We will be discussing such forward-looking matters on the call today, and you should be aware that due to the uncertainties inherent in such statements, actual results will differ, and any such statements are not guarantees of future performance.

Also, I'd like to let you know that this call is available to all shareholders via live webcast and replay on Bowater's website at www.Bowater.com. The conference is also open to the press. Please note that while any member of the press who attends our call is free to quote the company's speakers, our participants in the call should not be quoted without their permission.

Now I'll turn the floor over to Arnie Nemirow.

Good morning, and thank you for joining us to discuss our first quarter.

I'll provide a general overview of our results and market conditions, and Dave Maffucci, our CFO, will discuss the financials in more detail. Bill Harvey, our treasurer, will then get back on and provide a brief Canadian lumber update. We reported earnings of $12.3 million, or 22 cents per share, for the first quarter. However, when we exclude asset sales, currency gains, and a onetime tax benefit, our loss for the quarter was 63 cents.

This loss was significantly better than the first call consensus. This was due to the impact of our profit improvement plan completed last year, as well as further austerity efforts and the impact of synergies from the alliance acquisition of last September. Although I'm obviously disappointed in the poor pricing environment, I am pleased with our internal accomplishments.

First, we achieved our $60 million synergy target for the Alliance acquisition nine months ahead of schedule.

We have now raised our goal by 33%, to $80 million by year end. So the 2001 profit improvement plan, the Alliance synergies, and austerity programs put in place for 2002 have dramatically reduced our operating costs.

Our company has benefitted from the continued improvement of the new machine at (inaudible) Quebec. It now produces over 88% of it's output on SCA paper at an exceptionally low cost. This operation, together with the conversion to lightweight coated at Catawba and our two (inaudible) plants are the center pieces of the strategy to broaden our product mix. In March, we start up our new new way coating facility in Covington, Tennessee ahead of schedule and below budget. The quality of the product is very good. Benton harbor, Michigan, our other new way plant, continues to make progress as well. The modernization of the Coosa Pines, Alabama newsprint mill was completed in the quarter. The mill is exceeding our expectations, in terms of quality and cost reduction. The 100% recycled sheet is low-cost, and has been received well at customer press rooms. So while the pricing environment is at rock bottom, we have continued to optimize our asset base and reduce costs, and I think we are well prepared for the turnaround.

Let me comment a bit on the state of the markets.

The advertising market is still weak, but beginning to show signs of improvement. Newspaper advertising lineage was flat year over year in March but our customers saw progressive improvements through the first quarter. March was better than February, and retail ad lineage was very encouraging, according to customers.

Broadcast media is bouncing back nicely. Print media should follow soon, and we think we're on our way to a strong advertising rebound here which will directly impact our performance later this year.

Our average transaction price in newsprint did decline by 9% in the first quarter, compared to the fourth quarter. Industry newsprint consumption in the first quarter was down 4.4%, but with consecutive monthly improvements. This tracks with what I said about ad lineage, of course.

Inventories at our customer plants are now at only 36 days of supply. Newsprint (inaudible) historic lows and although the pressure on newsprint pricing has continued in the second quarter, we expect to see a healthy increase in order flow as we move closer to the second half of the year.

In short, we believe we're at the bottom. Our customers are showing more optimism, and they are expecting better revenues, so we believe that the newsprint business, as I said, will recover in the second half of this year. Switching gears, coated and specialty papers pricing for Bowater declined by 8% in the first quarter, compared to the fourth quarter. Our shipments for coated (inaudible) were flat versus last grant. Inventories for coated ground will continue to be down year over other (inaudible) we expect that as we enter the seasonally stronger second half of the year we will see an improving trend in demand.

Pulp. Our average market pulp price was approximately the same as the fourth quarter, improving U.S. and European economies have improved pulp markets North can shipments were 4% higher in the first quarter than the Q1 2001. North can inventories at 1.7 million tons are considerably lower than the levels of March of last year. We expect them to -- we expect them to decline further. In light of these improving fundamentals, we did inform our customers that our market pulp pricing would be raised by $30 per ton in North America for all grades effective May 1st. As you know, improvements in market pulp pricing have typically been a precursor to improvements in other paper grades, and I believe we are at the beginning of a solid steady recovery in the pulp business. Let me turn briefly to lumber, and then Bill will talk again later, as I said, about the Canadian lumber situation specifically.

Housing starts, about 1.7 million in the first quarter, reflect a significant improvement over last year. The low interest rates and improving economy have given strength to the lumber markets, and our transaction prices rose about 17% in the quarter.

We expect that to continue.

I think our economy is clearly in recovery. The strong GDP growth in the first quarter and the improving market tone in our grades will begin to flow to our bottom line later this year. With that in mind, but because we expect another quarter or two of weak results, our priorities for 2002 are, first, cost and debt reduction, including getting the new Alliance synergies in place, and cautiously building out our coated paper strategy.

We will also continue to review our asset base and, as we have in the past, we may divest assets that may be worth more to somebody else than it is to us.

So in short, Bowater is well positioned to perform well in the recovery just ahead of us.

With that, I'll ask Dave Maffucci, our chief financial officer, to discuss the specific financial results.

Thanks, Arnie. Good morning, everyone. I'll just hit a few of the financial highlights. As Arnie already told you, that once we isolate some of those asset gains and currency gains out of our earnings, we actually came in with a loss of 63 cents. This was 21 cents better than what first call had at 84 cents, and they're primarily due to the significant reductions in the operating costs during the quarter coupled with tax benefits.

During 2001, we initiated several tax planning initiatives that will lower our future effective rate, and in future quarters we will have tax benefits of approximately $3.8 million or 7 cents a share. I also want to comment, and we laid it out in the press release in the table, specially, that we have stopped amortization of goodwill, and so that's not in the quarter, and also when you look back and compare the first quarter of this year to the first quarter of last year, you have to bear in mind that there is no results in there for Alliance. We didn't close out that until September.

Of course the story is really this quarter proved to be another successful quarter on managing our manufacturing costs. I think many of the people around this table were surprised at how well we have done in this quarter. Of course these costs came from several areas. The first area is at our Coosa Pines mill. You'll recall that in the fourth quarter, we put several things in place there. We shut down a high-cost newsprint machine, we started up a -- a new recycle facility, and we significantly downsized the workforce, so that happened late in December, so those results really are hitting us in this first quarter for the full benefit.

We've lowered our costs at that mill already by over $50 a ton.

Another area where we've -- where we've got significant cost savings, again, is attaining the Alliance synergies Arnie just mentioned to you, that we raised our goal 30% and in fact when I look at the numbers, we actually put in the bank $16 million in the first quarter. The other thing that we have done for this year is initiated, early in the year, significant austerity cuts to further minimize operating expenses in our cash outflow. As a result of these efforts, we were really able to offset rather significantly the effect of the lower product prices that we experienced in the quarter. On the cost side, our unit costs for the second quarter, they're going to increase a bit due primarily to some required maintenance outage at our Tennessee and Nova Scotia mills and also a continuing shift in our production to higher margin costs but also higher cost products.

Take a look at inventories and shipments. You'll see a rise in newsprint inventories of about 44,000 tons and that shipments have dropped 90,000 tons compared to the fourth quarter. This basically reflects our historical seasonal trends. When you look at our North American inventories, they only rose 7,000 metric tons. The balance of the increase was about 37,000 tons and was production that was made for a specific customer requirements in both Europe and Korea. There was no speculative buildup in our inventories.

During the first quarter, we took 70,000 tons of -- metric tons of newsprint downtime. This is lower than the fourth quarter because of those additional customer tons that were shipped to Europe and Korea, and also we used about 10,000 more tons of newsprint in our new way coating operations.

It's important to note that the 70,000 tons that I'm talking about here, they exclude the 90,000 tons of newsprint production that we permanently removed through the closure of the paper machine at our Coosa Pines mill and we don't count that as downtime.

Take a look at our pulp inventories. They rose about 20,000 metric tons compared to the fourth quarter, but we're down compared to the prior year same quarter. At the end of March, we were at a 19-day supply, and this is well below the industry average. Our operating rate for pulp will decrease slightly in the second quarter due to the increase in the scheduled downtime that I just mentioned to you.

Approximately 9,000-ton -- metric tons of pulp curtailment was taken in the first quarter. Also, in the first quarter, we completed a land sale and monetization that generated cash proceeds of about 94 million. This monetization was the final step in completing the land sales that we mentioned and talked about in the fourth quarter of last year. Cash flow and debt position, cash flow in operations was negative by $60 million. Increased working capital needs really were the primary cause for this cash outflow, and I'll take you through some of those. First of all, the higher inventories in Europe and south Korea accounted for about 20 million of that working capital increase.

We also had higher accounts receivables at the end of the first quarter. The accounts receivables were low at the end of December due to the -- due to the way we took downtime in the fourth quarter and took a lot of it in -- in December, so our receivables at the end of the year were a bit lower than normal. And that was -- that accounted for another $17 million of working capital increase. And then there were lower accounts payable of about 37 million, and what has happened there is over half of that was really severance payments that were made to the Coosa Pines -- to the 400 Coosa Pines mill employees that have left at the beginning of the quarter. Our quarterly capital expenditures were 70 million. They will -- we expect them to continue to decline for the balance of the year. We're forecasting roughly $50 million a quarter for the next three quarters. And that should bring us right in on our forecast of $225 million of capital spending for 2002. The cash proceeds from our timberland sales and the monetization offset a portion of our negative cash flow from operations, keeping it -- keeping total cash flow slightly less than break-even. If you'll look at our total debt, our total debt increased from quarter to quarter by a little over $20 million. Our total debt to total cap was at 50.6%, and that's about where it was at the end of the year.

I'm happy, very happy, to report that we have received commitments from our bank group to renew our bank facility, and our new facility is comprised of a $300 million term loan and a three-year, $500 million revolver. There are no significant covenants or triggers in that, and the only -- the only test that we have is that total debt to total cap is 60%. Upon closing, which we expect to occur in the next couple weeks, we will have about $380 million drawn against this facility, and when you combine the undrawn facility with what we have in Canada, we will have over 500 million in liquidity.

So I think we're well positioned here to weather the storm that may still prevail over the next month or so, or next quarter or so, and I feel very good about our liquidity position and our position with our banks. I'll now turn it over to Bill, who will talk to you about the U.S./Canadian lumber dispute.

Thank you, Dave. The Department of Commerce had announced that the accounts (inaudible) duties on Canadian lumber shipped into the United States would total approximately 27%. The U.S. international trade commission will make its decision on these duties in early May with an effective date of May 23rd. The impact of these duties will significantly impact lumber markets. Its final effect on pricing, demand, and imports, is difficult to predict, and we hope that a more reasonable resolution can be determined before the effective date. During the period until May 23rd, when there are no duties, we would expect shipments of lumber to the U.S. from Canada will be high, although there are no large inventory and the markets appear relatively normal.

As you're aware, lumber represents only a small portion of our business, and about 65% of our lumber capacity is from jurisdictions covered by these two duties. In the first quarter, we accrued 3.6 million Canadian, accruing at a rate of 12.58%, with respect to the duties. On a prospective basis, using the same shipments and lumber pricing as the first quarter, we would expect the quarterly impact of the 27% of duties would be about 5 million U.S. or about 10% of our quarterly lumber -- our quarterly lumber sales.

Again, although most of our saw mills are low-cost, in down markets, we'll have to monitor the smaller less-efficient markets.

That ends the formal part of the call. Operator, I'd now send it over to you to ask for questions.

Okay. Ladies and gentlemen, if you wish to ask a question, please depress the 1 on your touch tone phone. You will hear a tone indicating that you have been placed in queue. At any time, by depressing -- and if you want to remove yourself from queue at any time, please depress the pound key. If you are using a speakerphone, please pick up your handset before pressing the numbers. Again, ladies and gentlemen, if you do wish to ask a question, please press the 1 on your touch tone phone. One moment, please.

Okay. One moment, please.

And we are going to take a couple questions from the local audience first.

Operator.

Yes.

Are we still -- are we having a problem.

Yes, we are. Just one moment, please.

Okay.

Okay.

Is that a good okay or a bad okay?

One moment, please.

Uh-huh.

Ladies and gentlemen, please continue to hold. Your conference will resume shortly. Please continue to hold.

Ladies and gentlemen, we will continue with this conference. I apologize for the delay. Your first question comes from the line of Bill Reed from Deutsche Banc. Please go ahead.

Hello?

Mr. Reed, your line is open to ask a question.

Yes. Hi. This is -- can you hear me?

Yes, Bill, we can hear you.

Yeah. Just wanted to get a sense -- I'm usually not the first on the Q and A, so -- but wanted to get a sense of where you stand with the rating agencies at this point, if you can provide any color on that. Because they've been skittish on, you know, companies in general in this environment, and just want to see if you could characterize that for us, please.

Well, we -- we met with them in March. We presented our outlook for the year. We talked about some of the things that we were able to report out on this call. Basically, the austerity that we put in place, the excellent -- the excellent results we've seen from our synergies, the restriction on capital spending, and they were comfortable with what we told them and we haven't really heard anything negative since we met with them.

great. Thank you very much.

Your next question comes from the line of Peter rush Meyer from Lehman Brothers. Please go ahead.

thanks. Good morning. Can you hear me.

Yes, we can.

Great, thanks. You indicate your cost per ton were down $24 sequentially. I was curious if you could break that out a little bit more for us. You indicated some of that was synergies and cost-cutting, but can you break it down by some other components, perhaps? You know, if part of that is mix, fiber costs, recycle costs, energy. Any more color you could provide would be great.

I think certainly it was the synergies, of course, that came in quicker. We saw the full impact of the entire monetization of the Coosa Pines mill. I think our energy costs probably were slightly lower. A couple other things, Peter, if you can hang on just a second.

Okay.

Repair materials. We cut back on repairs, so that was a big number. Another one was the goodwill amortization. No, that's not -- that gets pulled out at the top. I'm sorry.

I guess those are the big items. We did have a little lower fuel, lower chemicals, and maintain Nance and repairs were lower.

Okay. Is it fair to say that the driver was probably Coosa Pines?

17 -- we did have the Alliance synergies were 17 million alone in the quarter in the bank, so that was a big, big driver.

Okay. All right. And just another question on your net debt. I think if you include the short-term debt, net out cash, you're up about 36 million, and I wanted to clarify. The proceeds for the monetization of the timber note which I believe occurred in note, was that 88 million, so the net debt rose 36 million despite a 88 million from proceeds of the timber note?

That's correct.

That's correct.

Okay. Great. Thanks very much.

Your next question comes from the line of Andrew fineman from (inaudible). Please go ahead.

Thanks. As long as we had that problem with the Q and A, I might as well just in the interest of quality control tell you it took them six minutes to get me on the call. In case you're interested. But that's not why I pushed the button. But I thought you'd want to know that.

Anyway, so I -- of the $24, can you tell me how much was energy? You know, chemicals, energy, things that are, you know, just because the world changed?

No. I guess we don't have that detail right in front of us Andy. We looked at it by product and we new the big things were going to be, you know, the carryover of our profit improvement program, austerity, synergies, and we've focused less on the individual elements. But it's really across the board.

It's really across the board, and energy and things like that did not have a huge and material impact. It was really just pure cost-cutting, Alliance synergies.

Okay. And at the end of the quarter, I see the average shares was 57.2. Do you know what it was at the end of the quarter, by any chance? Fully diluted outstanding at the end of the quarter?

Hi, Andy, it's Arnie.

Hi.

We'll give you less than a six-minute answer here. It's 57.1 shares outstanding at the end of Q1.

Okay. Thanks. Okay. I don't have any other questions. Thanks.

Thanks, Andy.

And your next question comes from the line of chip Dillon from Solomon Smith Barney. Please go ahead.

Hi there. Good morning. Back on the question on the net debt increase, is it fair to say, I guess, you know, it was up in the mid-30s, that when you get back to your normal level of capital spending, you would probably expect the rest of the year to see, you know, barring any asset sales, a fairly flat free cash flow-line? I mean, is that -- you know, with some -- unless prices go up and help you out? Is that a fair assertion? Or at least in the second quarter, would you expect your cash flow -- your net debt to be pretty much unchanged?

In the second quarter, net debt I would think is going to rise a little bit.

Okay. And that's even with the capex down to 50, okay.

Right. Now, second question is: When you look at the prospects going forward, just in the second quarter, obviously pulp is going to help you on the pricing line, but you mentioned more downtime for maintenance, and at least as we enter the quarter, we're seeing coated and newsprint prices lower. Would you expect, therefore, it probably would not be realistic to expect the sequential earnings to be better in the second quarter just because of the maintenance downtime coupled with the pricing which probably will more than offset the synergies you pick up?

Well, I guess the wildcard is pricing, and again, we don't -- we don't forecast, necessarily, by quarter how quickly synergies are going to come in but there could be a surprise there.

I think the only thing that we're -- we're sure will happen is we'll have higher costs as a result of that maintenance. Scheduled maintenance.

Okay. And then as we look at the rest of the year, would you expect the maintenance -- amount of maintenance you'll take in the second half and the back two quarters would be more like the first quarter, which I guess you didn't have much, or would it be more like the second quarter?

More like the first quarter.

Okay. And then as you look at the capex for next year, that would of course include Catawba, and what was -- what would that number came in at, about?

I think it's 275, but we could bring it down further.

For 2003?

Yes.

Now, let's say that the environment, which, as you said, seems to be turning, let's say that this, you know, turns out to be an unfortunate head fake and you find that it might make sense to defer Catawba. Sort of when is that point of decision where you really couldn't turn back and you'd have to proceed as you have planned?

We've probably got some flexibility there. I would imagine most of the construction activity will begin probably in the fourth quarter, beginning of the fourth quarter. So we could readjust there, if necessary.

And the way we should think about it now is let's say you go forward as planned, that would be basically done by what, the end of the second quarter of next year?

That's what the start-up for the machine is, yeah.

right, okay. And it phases in from there. Thank you.

Let me just clarify, too, chip while I've got you on the phone. I double-checked my numbers twice and total debt only changed by $21.8 million so I'm not sure where. Oh, you know what, we're looking at net debt.

Okay, okay.

Your next question comes from the line of Mark Connolly from Credit Suisse first Boston. Go ahead.

Just a couple of quick things. First, when we look at new way and the new tonnage coming up, could you give us a sense of the total expected new way tonnage this year?

I think we actually used almost 25,000 tons in the quarter. We're still on a ramp-up mode, so it's going to be some -- on an annualized basis it will be well north of that.

Okay, okay. And can you talk about who's using it and what -- what this paper is ending up substituting for, primarily?

Well, as we've talked about before, Mark, the buyers of this paper are really the same companies, by and large, that we have been selling LWC to, and the (inaudible) cases our SC grades, but we're opening up niches of price points in between the high and the low end of this spectrum, so end users would be the large retail centers, Kmarts and Wal-Marts and Home Depots who are now finding a more -- a better fit for the quality and the price points that a new way, which is discounted to an LWC as we've talked about from, say, 40 to $60 per ton.

I guess what my question is is: Are we finding this is more of an LWC substitute or more of an SC substitute, or is it -- is it right in the middle?

I'd say it's right in the middle.

Yeah, uh-huh.

Sometimes it's one, sometimes the other. What we're not doing is cannibalizing our own LWC business.

Okay. Right. And just a further question on downtime as you look at this quarter and next quarter, can you give us a sense of how that downtime is being taken? Is it -- you know, are you -- is it rolling across systems? Will it stay at just a couple of facilities?

Well, that's -- we don't know specifically, Mark, where it's going to come from. It's going to be based on how the (inaudible) book finally shakes out. We expect to take at least another 70 tons of market related downtime and of course we'll have the maintenance outage, so it will be north of that in total downtime.

: And you don't have a sense yet of where you will take it.

No.

Can you give us a sense of how it was taken, even if you don't want to give too much specifics, in this quarter?

Off the top of my head, I can't roll it out mill by mill.

No, no. There were some mills that ran full. No that. Maybe three or four mills took downtime and the balance ran full.

Okay, okay. Perfect. That's what I need. Thank you.

Your next question comes from the line of Matt (inaudible) from Morgan Stanley. Please go ahead. Matt Burler, your line is opening to ask a question, please check your mute button.

Okay. We will go on to the next participant. We have a question from the line of Mark wild from Deutsche Banc. Please go ahead.

Good morning, Arnie, Dave, Bill.

Good morning, Mark.

Hi.

Can you just walk us through the -- this tax benefit that you're going to have going forward?

Well, we've put a couple of strategies in place in the last year, Mark, that affected some of our state tax initiatives and some -- some federal tax initiatives. Probably the most meaningful one is the one that we put in place in the fourth quarter which helped enhance our interest deduction on our -- on our -- on the debt we sold in November. And that's -- that's the bulk of that 3.8 million that you'll see in the quarter.

And how far out does that go, Dave?

10 years.

Okay. So it's 3.8 million a quarter for a 10-year period.

Right, uh-huh.

All right. Another thing, can you talk with us about just you sold more timberland in the quarter. Is it possible that we see more timber sales, and can you give us a sense of just what you're finding? It seems like a lot of people are trying to market timber right now.

Well, this -- I mean, it was new from the standpoint that we did close on this transaction in the quarter, but we announced these agreements last year and it was just the final step in that 260 some odd thousand of timberland that we're selling. So this is not new news from the standpoint that it's new timberland. It's just that we did complete -- finally complete the transaction and get the cash in.

All right. So this right now, Dave, just to kind of recap, you would have about, what, about 440,000 acres of kind of remaining southern timber? Have I got that number about right?

About 500,000.

About 500? And would you consider monetizing any of that?

Well, of course we'll look at it from time to time. I don't -- I think right now is -- we're not -- we're not anticipating doing any other big blocks. We will be selling off bits and pieces, higher and better use property, but there -- we certainly don't anticipate any large tracts for the remainder of this year.

Okay. And any kind of thoughts on the land you own up in Canada?

Yeah. We look at that also. Any of our free hold that is marketable, we will examine and sell where it's appropriate, but we don't see a big block there. We do have about five or six hundred thousand acres in Nova Scotia, and some more in the province of Ontario and Quebec but we haven't identified any huge blocks.

All right, okay. And finally, sort of back one more time to this issue of costs and downtime, how much of that $24 a ton is just the result of more volume? Do you have any sense of that?

I -- Mark, if you'll think about it, that's $24 across all our tons.

Okay.

Including coated. It can't be more than 3 or -- $3 on volume.

Yeah, it's very fall.

It's very fall. If you just look quarter to quarter, it would be in the three -- three, at the most, four dollar range.

Okay. And you talked about like more maintenance downtime in the second quarter, but you didn't put any number on that. Can you help us with that a little bit?

No. I would imagine you'll see costs drift up maybe 3 to $5 a ton.

Mark, were you asking specifically the amount of tons?

Yeah, the amount of -- well, amount of maintenance, you know, downtime that we're going to see in the quarter.

We don't have that right in front of us, Mark.

10 to 15,000 tons probably.

Okay. All right. And then finally, can you just -- can you give us a little update on what you're seeing in terms of market conditions for both news and pulp outside the U.S.?

Yeah. There really isn't that much change from the last quarter offshore, when you talk about newsprint. We do see some significant improvement, however, in newsprint activity in Brazil, where advertising seems to be moving along quite nicely in terms of retail advertising, similar to what we talked about in the U.S. here. So we're -- we're looking at some nice trend lines moving along in the Latin American market focused on Brazil in terms of newsprint trends. The European pricing did kind of follow the U.S. trend in the first quarter. It drifted down somewhat. Our primary market in Europe is the UK, and that's been a good market for us. Pricing in the UK is better than average for us and that's where most of that inventory build that you noted was due to the first quarter inventory shipments to UK customers.

So overall, the market in the offshore areas hasn't changed that much, but it's starting to show signs of improvement as well. The Asian markets are somewhat flat from the last quarter. We continue to run well in Korea. The (inaudible) book at our Korean mill pricing has been very stable. Business conditions are improving in Korea. So overall, you know, we could use a weaker dollar, of course, but not a lot of change yet from quarter to quarter offshore.

Okay. And Arnie, if we don't get any change in the dollar and, you know, the uptick we get in consumption here in North America is, you know, two, three, four percent, does that mean that the industry probably has to take more capacity out in order to kind of get the market balanced so that maybe you can start to restore prices?

Well, I think what's going to restore prices is the growing increase in consumption, which we see starting to happen driven by advertising. I think we're comfortable with the level of downtime that we're projecting right now in the second quarter. We will manufacture product for -- for the order book, and I don't anticipate that our downtime for the second quarter will be all that much different than the first quarter.

I think the real swing factor is going to be a rise in consumption and we see that happening the second half of the year.

So you don't think the industry necessarily has to rationalize more capacity, then, over the next few quarters?

I'd rather not comment on industry downtime.

Okay. Thanks, Arnie.

Yep.

Okay. We'll go back to Matt Burler and see if we can get him. Matt better letter from Morgan Stanley, your line is open to ask a question.

Hi. Can you hear me?

Yes, Matt.

Hi, good morning. Can you tell us where your current pricing is for your various -- for your three major commodities: Newsprint, coated ground wood, and pulp today, versus your first quarter average?

Well, Matt, I think it's -- it's -- we could, but I don't -- I think in this kind of an environment, it really doesn't do us any good to tell the world and our customers in particular what our current pricing is. So we'd rather stay away from that.

Can you talk about the change today versus Q2 -- Q1?

No, I would -- I would make your own estimates on where that's going.

Okay. Can you tell us what your production of those three major commodities was Q1 versus Q4?

Well, I've got shipments handy.

Yeah.

You can get it by -- I'm sorry?

I'm sorry. Yeah. I see the shipments. I was curious about production.

I'd have to calculate it for you, with change in inventories plus shipments would give you the production.

Yeah. Really, the only difference would be the change in inventories.

Okay. So would it be fair to say that you ran -- well, what kind of operating rate would you say you had in your three -- for those three major commodities in Q1?

I got my hands on the tons produced here. We produced in the fourth -- in the fourth quarter of 2001 around 704,000 tons of newsprint, and we produced about 677 in the first quarter. There wasn't much difference in pulp. It was about 300,000 tons. And coated paper was up slightly at 117,000 tons.

Okay. And I just wanted to get a sense of your order book going forward. I got the sense from Arnie's comments that there was -- that you're hoping to see an improvement in your order book in the second half of the year, but it seems to me you've been able to run reasonably full -- not full, obviously, but reasonably well through this down cycle.

What -- and also, am I not right that you could probably keep your order book full just by selling at whatever it takes to sell? Selling at the price -- whatever the price is?

Yeah, I think we can sell at any price but I think there's been -- there's been discipline on our part. We've walked away from business. And we've taken the downtime when we needed to.

Okay. Can you say whether or not there's a -- an opportunity to increase your exports, particularly to Europe, given the sharp price decline here in the states, and I think the price differential that exists today?

Right. We have done some of that already. That's basically the whole reason behind the increased inventories in Europe is we have gotten additional orders in Europe and that's where the paper has gone. So you increased production here in north America and put it in inventory waiting to ship it to Europe?

No. Some of it was in transit, so the inventory is still on our books. Some of it is in public warehouses on a just in time basis for customers there, but it was all made specifically for customer orders. It's not just speculative inventory.

Okay. Okay. Very good. Thank you.

Your next question comes from the line of chip Dillon from Solomon Smith Barney. Please go ahead.

Yes. I just had a couple questions on the tax rate, and you may have mentioned this, but first of all, the -- at least when I strip out what I know of the gain, it looks like your tax rate was around 43% in the quarter, and the way you get there is it looks like the tax applied to the gain was 29.3 and the pretax would have been 73.9, and so if you just subtract that from the other numbers, you get 27.6 in terms of a credit on 64.3. As a pretax loss, so that's 43%. Is that a number that we should use for the rest of the year?

No. And it's hard to do what you're trying to do, chip, because most of the gain on the land sale that was recorded in the -- in the first quarter was deferred.

Uh-huh.

It was only the cash proceeds that were received at the time we closed the deal that we recognized any gain on. If you take a look at pretax income and just take a 35% tax rate, you wind up at $3.4 million in taxes, and when you back out -- and when you take a look at our total tax expense, it was a negative of 1.1, so you've got a swing of 4.5 million, and most of that was that 3.8 million that I talked about.

Okay. And the -- okay. I just was a little confused why at one point you say on the press release 44.6 million gain on asset sales, but in the financial statements, it says 73.9. What's the difference between that? I mean, I -- did you not provide for taxes and just defer them?

We yes. We provided for taxes and deferred them.

Okay, okay. You're just trying to point out the difference in -- that the cash taxes were much less than what was -- would have been provided for if I did the -- doing the math I just did?

Well, look at the effective rate, the only thing you're going to pull out are permanent type items, and the one big permanent type item, since we provided deferred taxes on the land sale as a timing issue, was that tax initiative that generated $3.8 million of benefit in the quarter.

Okay. Now, the 3.8 million, just so I understand that, I know there's a -- you point out this onetime benefit of 2.8. Now, that's completely separate from what you're talking about which I believe you said would last for 10 years, 3.8 per quarter.

Right. The other piece was related to some taxes that were provided when we sold star forms back in 1996, I think it was, and that year has gone through audit and we were able to take that back into income.

And then again, the 3.8 per quarter is based on -- where does that come from, again?

That's just really basically enhancing the interest deduction on the financing that we put in place in November.

Okay. And so basically what you're saying is, after taking that into account, should we just assume your tax rate is 35% or should we just take whatever preincome you have, multiply it by 35%, and then subtract 3.8 million?

I would use 38% and then subtract 3.8 million.

Gotcha. Thanks very much.

Okay.

Okay. Operator, I think we have time for only one more call.

Okay. And your last question comes from the line of Andrew fine man from Adrianna, thank you.

From meridian. Thanks. Sorry to bother you again. Chip just asked one of my questions, for the tax rate and I just want to make sure I understand. How much is the depreciation and amortization now for the full year without the goodwill in it, and what should I use for next year?

340.

Yeah, 340.

Okay. So that does not include goodwill amortization.

That's correct.

Okay. Fine. And so understanding, I guess, your last answer, we just use 38%, and then subtract 3.8 million a quarter and that's how we calculate taxes from now on?

That's right.

That's right.

Okay. Thanks.

Well, we'd like to thank -- this is Bill Harvey again. We'd like to thank you for your interest in Bowater. We will be available to take calls, and again, we thank you for your interest in Bowater.

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