Resolute Forest Products Inc (RFP) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Bowater second 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 and instructions will be given at that time. If, however, you should require assistance during the call, please press zero then star.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Bill Harvey. Please go ahead, sir.

Thank you. Welcome to the Bowater second quarter conference call. I'm Bill Harvey, Vice President and Treasurer and on the call today are Arnie Nemirow, our Chairman, President and Chief Executive Officer, David Maffucci, our executive vice president and Chief Financial Officer and Julie Hoffman, 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. The call is scheduled to last for about an hour.

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 Web site. 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 Web site at www.bowater.com. The conference is also open to the press. Please not that while any member of the press who attends our call is free to quote the company speakers, other participants in the call should not be quoted without their permission.

I'll now turn it over to Arnie Nemirow.

Good morning. Thanks for joining us to discuss our second quarter results. I'll provide a general overview of results and market conditions and Dave Maffucci, Executive Vice President and CFO, will discuss the financials in more detail.

Bowater reported a net loss of $53.7 million dollars, or $0.95 per share in the quarter. However, when we exclude asset sales and currency losses, the loss for quarter was $0.77. I believe pricing for our paper products bottom at cyclical lows in the second quarter, declining by about 3%. Market pulp prices began to recover throughout the quarter, although pricing for our products was disappointing, our accomplishments during this quarter were not. Our costs continue to improve; we curtailed production of new strength in the second quarter by about 120,000 metric tons, but kept our cost per ton flat. No downtime, our new spring costs were reduced by $13.00 per ton from the first quarter, and have dropped by over $30.00 per tonne compared with 2001. Our shipment of new spring rose by 3% in the second quarter, we continue to maintain production discipline by matching production, the customer demand and by keeping inventories low.

Alliance Synergies have continued to add significant value. We've reached our 80 million dollar revised target for Alliance Synergies six months ahead of schedule, and 20 million dollars of those are initial estimates. Our operational management teams have acted quickly at the stocks, we've a lower cost and provide synergies well ahead of plan. We have enhanced liquidity. In the second quarter we finalized our new banking arrangements, which provide us ample sources of liquidity to fund our ongoing operations for the foreseeable future. I am confident that we have seen the bottom of this cycle and we expect to see improvements in the second half as the economy and our customers' businesses improve. Let me spend a few minutes talking about specific markets. most recent newsprint data is very encouraging and signals that newsprint markets are recovering, inventories are at their lowest level since 1995, and demand trends have turned positive.

Year-over-year advertising linage in newspapers is up 2.1%, June verses June. Most importantly year-over-year news print demand and consumption are also turning positive. Customers are more optimistic about their businesses, and several have seen initital signs of recovery in newpaper advertising. Fortunately we have just settled a two month old labor strike at our Korean mill, and will now enjoy the pending recovery in our Asian newsprint markets. The mill started up on Monday, yesterday. Market conditions support our announced $50.00 per tonne newsprint price increase for August 1st. We expect that as demand improves in the latter half of the year, we will benefit from both the increased pricing and less production curtailments.

There will be some curtailments of newsprint production in the second half as we have mentioned in our release, and we have scheduled our budgets, but we believe that as business conditions improve, those scheduled downtime numbers will be on the high side. In otherwords, we'll take less downtime than we're planning. Market pulp, Northscan shipments were 10% higher in the first half of 2002 compared to 01, Northscan inventories remain low and at 1.35 million tonnes are at their lowest level since year 2000. These market conditions, combined with the weakening U.S. dollar have enabled us to implement three market pulp price increases since May 1st. We believe the stage is set for an extended recovery in pulp markets as paper demand strengthens. The weaker U.S. dollar, of course, has directly helped the pulp business. Today, for example, European customers are paying about 5% less in Euros, for pulp, than they were in March 2002, even though the price has increased more than $50 U.S. per ton.

Our pulp shipments were strong in the second quarter and our inventories at 13 days are very low. For second quarter, we took major maintenance at our and sites, we got that behind us. Although in the third quarter, we have planned an outage at the mill. I expect to see results materially improve in the pulp business for the balance of this year and in to next year.

Coated papers. Demand for the coated ground wood in grades increased in June by over five percent compared with 2001. Our order for both coated ground wood and specialties has improved, as advertising and the demand for publication papers increases, we expect industry operating rates and pricing to improve.

Lumber, we are not very big in lumber, less than 10 percent of our revenues overall are lumber, but there is a lot of activity and noise in lumber these days. Lumber prices rose $24 per thousand board feet after eliminating the adjustment of duties in the second quarter. Prices are anticipated to weaken as the demand capacity ratio is expected to approach the mid-80s. We expect to curtail some production at our Quebec sawmills in the third quarter to reflect some weakness, it's certainly a volatile lumber market in the short term.

We are seeking clear signs of recovery overall. Although we expect the third quarter to be challenging, we are working through these price increases in pulp and paper, and we've got the maintenance ; some we've already taken in July and some are still ahead of us. So, third quarter will be challenging in terms of the actual numbers, but we see - we expect a significant improvement in financial results in the fourth quarter of this year. Our asset base and cost structure will be the basis for a strong performance in 2003 and beyond.

So with that I will turn it over to David Maffucci.

Thanks, Arnold. Good morning everyone. I want to spend a few minutes on some of the highlights and explain a few unusual things to you.

As you know, we did have about 22 cents worth of currency exchange gains in the quarter as well - as well as four cents on asset sales. So we actually showed a quarter of - from earnings of 77 cent loss.

Let me - let me spend a little time on the - on the foreign currency exchange charge of 22 cents. It really arose as a result of the rising Canadian dollar. The Canadian dollar moved from 63 cents at the end of Q - Q1 to 66 cents at the end of Q2, and has really since then, has fallen back to Q1 levels.

We do hedge all of our Canadian dollar cash costs. So the 22 cents has nothing to do with our particular hedging program, which is working very well for us. It comes from two sources; one, there are some long-term liabilities that are non-cash that when translated at a higher dollar value, generate some translation losses. This is - and in our Canadian dollar sense, it falls around deferred taxes. about a couple of $100 million in the deferred taxes that get translated at about three cents higher quarter to quarter, so that generates about $6 million in traditional exchanges losses, or about eight cents of the 22 cents.

The other 14 cents arises from statutory taxes on our Canadian statutory books. On our statutory books in Canada, the strengthening Canadian dollar does generate exchange gains on a pre-tax basis so there is a tax expense incurred in Canada, but when those results are rolled up and rolled into the U.S. dollar functional currency, all those pre-tax gains basically get wiped out, but on the statutory basis, that tax liability remains. So that makes up the other 14 cents. Our net of our sales are operating decline, about $14 million from the first quarter, and this was primarily due to low transaction prices and production volumes. Our transaction price declined to newsprint covered in impacted operating income by about that $14 million.

Production curtailments in newsprint totaled about 120 thousand metric tons, as compared to 70 thousand tons in the first quarter, due to additional production curtailments, increased newsprint costs by about $10 million in the quarter, which we offset by cost reductions as a result of the alliance synergies and also our general, our company austerity program. Net of down time, our cost per ton continued to decline from quarter to quarter. And, as Arnie said, we've always set the same level of down time in Q3, we expect, as market conditions improve, that the actual market down time, as opposed to maybe some maintenance down time, will decline.

Our inventories, if you look at pulp and newsprint, are down from quarter 1, which we expected, and they're only up slightly higher than Q2 of last year. The reason they're higher than Q2 of last year is really two-fold. One is we have alliance in the second quarter of this year, if not in the second quarter of last year. And also in the second quarter of this year, we are shipping more tons into Europe than we were last year and it requires us, for service level purposes, to carry higher inventories. We continue to aggressively obtain the alliance synergies, as Arnie said, we hit our target, we actually slightly exceeded the $80 million target by the end of the quarter, and we feel very good about that.

SG&A was also negatively impacted during the quarter by a little over $7 million, 7.2 million, of non-cash charges, primarily related to stock-based compensation, and that's our EPR's. During the quarter, we also reversed the accrual of the and the to the tune of about $7.3 million, again the U.S. government ruled, around the end of April, that previous duties were going to be eliminated and the bonds that we posted were eliminated and then, on a going-forward basis, the duties resumed on May 23. So, during the second quarter we only had about five weeks of duties which equated to approximately $2 million. The rate is about 29 percent, split somewhere between 18 -- 19 percent duties and 8 or 9 percent on the anti-dumping duties. I think it's important as we talk about lumber, that I remind you that although these look, in terms of the size of earnings we have in the quarter, this $7 million of these other duties look material, we have to remember that lumber is essentially a very small part of our overall operating income.

We also saw increases in the price of old newsprint and it began to rise in the quarter. The impact on the newsprint cost in the third quarter will probably total about $5 to $10 higher per ton. Also in our quarter, the losses absorbed by our by our minority partners for the quarter increased by 4.2 million and it was higher as a result of the lower newsprint prices and other one-time charges in those partnerships.

During the quarter cash from operations was about 38 million, primarily as a result of positive contributions from working capital. Our capital spending came in about where we thought it would, about $55 million and we still expect to be around $225 million for the year.

Our debt, net of cash, increased by 30 million in the quarter. We are focused right now on turning cash positive quickly and expect to begin to generate cash and repay debt in the second half.

While the pricing is off the bottom and moving upwards, we expect that the increase in pricing in the third quarter will be offset somewhat through some major maintenance projects at our Catawba, Gatineau and Coosa Pines mills. We should begin to see some slight improvements in Q3 versus Q2 and, of course, strong improvements in Q4 due to overall better pricing and shipments for all of our products.

That concludes the prepared remarks. We can now open up the floor to questions.

And, ladies and gentlemen, if you wish to ask a question, please depress the one on your touchtone phone. You will hear a tone indicating that you've been placed in queue. You may remove yourself from queue at any time by depressing the pound key. If you're using a speaker phone please pick up your handset before pressing the numbers.

One moment please for the first question.

And we do have a question from the line of with JP Morgan. Please go ahead.

Hi. Good morning. Could you firstly quantify the negative impact that the strike in Korea had on your results in the second quarter?

Hi, Lisa. It's Bill Harvey. On the tons basis -- and you did say the second quarter, Lis, only?

Yes.

Okay. On a tons basis it was 27,000 tons of production curtailments, so in effect that's about 4 to $5 million on our bottom line.

And what about the third quarter? What should we expect there?

Third quarter will be less than that. It's 21,000 tons in the third quarter and it will be less than that will be in the $3 million range.

Okay. And if I can just ask one more question, the corporate and other expense line was bigger than normal. Am I to assume that all of the effect was in corporate and other and could you explain or perhaps give us some guidance on what would be a good corporate and other number to you going forward?

Well, the corporate and other would also have the EPRs that Dave talked about, which totaled I believe $7.2 million. That's a non-cash charge related to our share prices.

And I guess on a go-forward basis we're looking at somewhere between 16 and $17 million.

Yeah, 16 or 17 million would be more normal, just a more normal going forward per quarter amount.

Okay, the 16 to 17 versus sort of the negative 30 or so that we saw this quarter?

Right, yes.

Okay, thanks very much.

Thank you and now a question from the line of Matt at Morgan Stanley. Please go ahead.

Hi. Thank you. I just wanted to ask about the export trends. Dave, I think you mentioned that your inventories rose year on year because of that, but could you give us a sense of how those exports, particularly in newsprint, tracked 2Q versus 1Q and what the outlook is for 3Q, 4Q?

Yeah, just a two-part answer to that question, Matt. In addition, those inventories that we had at the end of the second quarter compared to the second quarter of last year does have alliance in that so that would cause that rise.

I think the export trends that we're seeing is we're shipping more particularly to England and as a result we need to build inventories to service them. There's not a lot of warehouse space that the publishers utilize, and also - we also are building some inventories to ship to Korea, in anticipation that we weren't going to settle this as soon as we did.

OK. And can you give us a sense of directionally, are the prospects for increased exports, particularly to Europe improving? And how big do you think the export - what were your newsprint exports from North America in 2Q, and what do you think they could rise to 3Q and beyond?

In 2Q they were at probably the top end of our normal range of the - of 27% of our shipments, but as typically that moves around quite a bit, and I don't - you probably should think of that as a round number going forward.

OK, so the spread in pricing between North America and Europe at this point, does not create a opportunity to materially improve increase, or exports to Europe at this point and time?

Our exports typically - are - to Europe are on contractual basis with long-term customers, so it's more filling needs over - on a year-to-year basis rather than moving into any type of swap market.

Got it, thanks. And then on pulp, did you say how much you're downtime was 2Q verses 1Q, and what the outlook is for 3Q downtime?

Pulp, we've took a 21,000 tons of downtime in the 2Q, and we'd be less than that in 3Q.

And what was it in 1Q?

1Q was up 9,000.

and did you the impact of that increased downtime, because it looks like even with the higher price that you referenced in your materials here, for pulp, I think the number was up $4.00. you're profitability dropped by about 4 million dollars in that segment.

and we did mention - I think we mentioned we may not have it on the first quarter conference call, that was a major outage, and there was maintenance expenses and other things going on at the mill, so that's directly attributable to maintenance at a average.

And I didn't quite catch - I understand that you have this maintenance outage, as Dave said, at then Catawba, Gatineau and Coosa Pines, but I didn't quite catch the split between newsprint and pulp in the third quarter. Can you share that with us?

I might have to get back to you on that. I don't have those details. I remember Gatineau is a only a newsprint mill. The outage at Catawba is on the pulp side of the business, but I don't have those details here. Again the shipments are improving in pulp, the market is good and these are just really related to just normal maintenance type of thing to keep operations in good order.

OK. Thank you.

If you give me a call, I can get back to you with this, but I just don't have it on hand here.

OK Thanks a lot.

thank you, and now from the line Rich Snyder at UBS Warburg. Please go ahead sir.

Yeah, I had a similar question on the pulp numbers. Just amplifying on it a little more, going from the second quarter into the third, is it expected that the downtime effect in pulp will have less a material impact on the numbers?

Yes, it will less an material impact, and of course, you would see the costs improve in pulp.

And in - how do we look at the newsprint situation, looking at it on a same basis? Will newsprint outages have sort of a similar effect it sounds like almost; in the third quarter versus second?

It will - it will - have a similar impact except that we also - our program is lowering our costs in newsprint on a -- very significantly, so you - you will see the costs in newsprint going forward to be stable. And in fact in the fourth quarter, of course is behind us going down significantly. On a year-to-year basis, anyway you look at it, our costs in newsprint even with down time. are - are around $30 lower than they were last year.

OK. And just clarification; of $4 to 5 million hits you put out there for Korea, that - that's a pre-tax hit?

That's pre-tax. That's on the cost side. Of course of and other things. But that's pre-tax cost side.

OK. And what - just briefly - what - what were the terms of the Korean's settlement?

Rich, this is Arnie. We - we had a number of issues on the table and we ended up basically giving them a - a modest wage adjustment of about three percent, which puts us competitively in line somewhere in the middle, as compared with other Korean newsprint mills. There was a lot of pressure for giving up management rights, but of course we did not budge on that. So basically, it was an economic settlement on wages that seems to be quite competitive and that's not an issue for us.

And - and how does things look with the mills coming back up? Is there any sort of break in period where you have to reestablish things with customers, or that was pretty smooth just because you've been supplying you know, the tonnage out of the U.S.?

It's been - it's been very smooth. There is always a little bit of minor hiccups mechanically, but that's already behind us. On - on the first day we are running well and expect to achieve our - our speed, normal speeds as we speak today, on the machine itself and as you say, we did supply several thousand tons of inventory from our mill primarily, during the gap. And we see very little market effect there. And so going forward, we are - we position it well and capture what looked like a very good and improving Korean and Asian newsprint market.

And let me say overall on newsprint, I'm not sure that this message got through, that in the third quarter we see a back in the domestic newsprint side here. You know, there is always some problematical dialog with customers the first month of an increase, which is August and we'll get through that. But we are very confident that by September 1 we will be operating at higher rates for our newsprint machines despite our previous downtime and the $50 per ton increase will be fully implemented as of September 1 as the North American - in the North American market.

Following that, the export market should tap into that. In the third quarter the newsprint export pricing is somewhat tough because those are done, as you know, in advance, so we are still crating it pre-domestic newsprint price increase levels offshore, so to speak. But fourth quarter should - we should have a catch up on that with newsprint pricing.

Have you announced the in export price increase now?

No.

OK. Just amplifying on those comments, there's not much movement you're expecting in August, or it's just gradually occurring in August, and then you get more of the full impact in September.

There is movement in August, but it's not fully across the board, $49.99 so to speak, but it's strong and despite some and public noise that you might hear to the contrary, we're very confident that by September 1, as I said, it'll be fully in place. And somewhat, partially, halfway, I don't know the number, in August, it'll be getting there. September 1 will be the...

Great.

... point. Their businesses are improving -- advertising , as I said earlier, their marks is moving up steadily and so we see a good second half, particularly fourth quarter, in newsprint, and so forth.

Terrific. Thanks, I hope you get that additional penny at the end of the quarter.

Thank you, and now for the line of Chip Dillon at Salomon Smith Barney. Please go ahead.

Hi, good morning. First question, just to make sure I understand the foreign exchange number, you, obviously on the face of the income statement, you show 4.6 million as being the foreign exchange loss. I would guess the other 8 million must be what caused the tax benefit to be lower than the statutory rate would imply.

Right.

So could you give us exactly where on the income statement that -- so would I just merely take the 12 -- why don't you tell me where on the income statement is that total number allocated.

It's in -- the other piece is in taxes.

And how much is that?

It's about 8 million bucks.

OK, so the 4.6 is effectively not tax affected. OK, so I would just take the difference between the total and that number. Hey, you mentioned, Dave, that it would get reversed when you take it into -- the loss into the U.S. accounts, I guess on a consolidated basis. But you didn't reflect the tax benefit of that reversal, if that makes sense. Does that only happen once you turn profitable again, or when do we see that, you know, that Canadian statutory tax hit come back our way?

Well, the statutory tax, it is there unless the exchange rate goes down again, which it has. On a pre-tax basis, the statutory functional currency is Canadian dollars so that's why there is also a tax expense when there's a gain. But, when we consolidate and report for U.S. GAAP, the functional currency is U.S. dollars. So that eliminates all those gains. But, from a liability standpoint, the Canadian dollar entity still owes the Canadian government those taxes.

OK, so on that 14 cents that we're talking about, not the 8 cents, if the -- let's just say that the exchange rate, just hypothetically, went back to 66 cents and stayed there until the end of the year, in that case, then, that number, that 14 cents, would not be reversed, right?

Right.

OK, but given that it's come back down, it looks like it has been in that -- if it stays where it is now, we'll see a lot of that come back in the third quarter?

That's correct.

OK, that's great. And then, when you look at the, I guess the way of thinking about the lumber reimbursement for the duty, that pretty much offset the hit you took on the stock compensation number, right?

Yes, exactly.

OK, and then going forward, we should count on the duties together to be about 5 to 6 million per quarter.

5 million.

5 million per quarter, okay.

And then on the O&P front you mentioned how that would increase your costs in the third quarter by 5 to $10 a ton. Is that the price of O&P to you or is that the cost per ton across your system going up 5 to $10?

That's the cost across our system. It's about the 5 to $7 range, I mean, at today's O&P price and it's something we're trying to offset and we do offset in the operations.

Gotcha.

And then looking at the cap-ex, I believe most of the heavy lifting, heavy spending on the Catawba project is supposed to be early next year, and you're pretty much all systems go on that, is that correct?

Yes.

Okay, gotcha. Okay, that's terrific. Thank you very much.

Thank you and now from the line of Mark at CSFB, please go ahead.

Just a couple of things. The Covington coated project is up and running. I had in my notes that that was going to do about 15,000 per quarter. Is it running at that level or are we ramping up to that?

We're ramping up to that but by the end of this quarter we would be at that range.

Okay. Okay, great. And with respect to the maintenance shutdowns in July and ongoing, how much of your total 110,000 of down time, how much of that is maintenance?

Sorry, it's 23,000.

Twenty-three thousand, okay.

And one last question: On your point about having the price increase in fully by September 1, does that mean that you have no price protection expectations beyond 30 days?

That's right.

Okay, thank you.

Thank you very much and now from the line of Mark with Goldman Sachs, please go ahead.

Thank you. Just following up on the Catawba and your capital spending expectations for next year, if you could just update us?

Yeah, the next year our capital spending is -- and we have not gone over the budget a second time. It was in at 275 million, which does include all of Catawba. It's a full-in capital spending, of course. We do have our budget series coming up in October/November and we'll review it and we could move it, if necessary, meaning lower the spending across the board.

Okay. Not necessarily related to Catawba but there would be other areas where you think you might have flexibility?

Yes.

Okay.

Also, I believe you had mentioned how in pulp essentially with the shipping exchange rates it's compensated for the $50 increases for European buyers. Where is newsprint pricing on an equivalent basis in Europe relative to the U.S. now?

That's a very good question. We've never done the analysis but it would be if you compare -- and our analysis really shows March to now and it really just shows that there has been on a pulp to a pulp customer point of view he hasn't seen any price increase. Of course, for a newsprint buyer in Europe the converse falls but I don't have that data, but if you give me a call later I could think it through.

Sure. Thanks.

Thank you and now from Don Roberts at CIBC World Markets. Please go ahead.

You've already hit the question. Thank you.

Thank you and Mr. Peter from Lehman Brothers, please go ahead.

Thanks. Good morning. A couple follow-up questions: Just to clarify that the 4.2 million sequential decline in pulp was largely attributable to the increase in downtime, for pulp for the quarter? Is that accurate?

Yes, increase in downtime in associated maintenance spending with the downtime.

OK. All right. And I was curios, in the wood product segment, it was stronger than I expected, even if you back out the duties, was curious if you could comment not what's going on within that segment, that it was so much better than a year ago, and first quarter.

I think it's pricing, was good in relative terms. Remember, too, that there was - the duty was in for half the period. starts are good, the volumes were good and the operations ran well. So it's a combination of all those things.

OK. And the lumber price you mentioned was up 24 sequentially, but that was including the CVD? Can you mention what it would have been excluding the CVD?

No, that actually was net. That was sort of all duties removed.

I see.

It was just a transaction price before duties.

OK, great. Your net debt, I believe, was up 28 million, your working capital, I think you squeezed out about 60 million. Is was just curious if you then working capital, going forward on your expectation as to whether you keep it status quo at these levels, whether we should expect working capital to go back up? Any comment there?

We continue to work on it, and inventories, of course, with the shipments improving, inventories are - our inventories are pretty low right now. In domestic newsprint, our inventories what is low as they can go, but we will try to get what we can out of inventories, as well as the only change you might see as price increases go through, of course, it does raise your ARs, so you'll see some impact of that, but that should be it. You will just see - our real focus is on working capital here.

OK, and last question, if I could. You know, in the past you've shown a terrific willingness, I guess, to monetize non-core, non-strategic timber lands, it appears that we've kind of gotten to the end of that, but you still have quite a bit of timber left. Can you comment on your willingness, or likelihood that you might consider additional timber sales.

We might consider additional timber sales. I would say we are not at the end of it. We are more in a lull, so is it a timing issue, when should you sell it, so we do have available assets for monetize and we are just not currently in the process of doing that. But I would not say that we are at the end of that process by any means.

OK. All right, great. Thanks a lot.

Your welcome.

Thank you. And now form Mr. line, at Deutsche Bank. Please go ahead.

It's Deutsche Bank. Good morning. Three questions. First on the lumber business. You've talked about potentially having to downsize some of the smaller mills up in Quebec, and I just wonder with low lumber prices in these duties now out there for an indefinite period, kind of where you're at on that issue?

We are - morning Mark, sorry. We are looking at that as these - you know the lumber - it's a volatile market and it's something we watch all the time. But I wouldn't be surprised, as I suggested earlier, that we have some modification of our production levels taking the smaller-higher cost, Quebec sawmills out of line as we did late last year, under similar circumstances, we just haven't pinned that down and it's pretty flexible. We can be up and down, so there might be three or four smaller sawmills that get taken off line permanently. But we are going to watch this situation unfold.

OK. The second question I had is just kind of a coming back to the down time issue; just so that we are clear about the quarter-to-quarter impact. In the second quarter, you said that maintenance down time was about 23,000 tons in newsprint. Can you first remind us, do you accrue for that maintenance down time all through the year or are you expensing that in the quarter?

We typically expense it. It's in the quarter. They are in the quarter here.

So when we think about sort of down time in the third quarter versus down time in the second quarter, it doesn't really matter whether it's maintenance or market down time in terms of - of how it affects the quarter?

That's more or less true expect for the fact when you take maintenance through associated expending - maintenance spending, but it's - it's - you are . The impact primarily is in the quarter, therefore for your purposes, , it's mostly similar to the market down time.

OK, and - and when answered the question earlier about the newsprint maintenance down time in the quarter, I think you said 23,000 or - you said 23,000, which I think was the number in the second quarter. So is it the same number again in the third quarter, or did you misspeak that?

No, it's 24,000.

OK. All right, so it's about the same.

And then finally, the one business you didn't talk about much is kind of coated and value added, where you had the biggest price decline in the second quarter where we have been dealing with a lot of new capacity and where it looks like Europeans prices are still coming down. Can you talk a little bit about that business?

Yes. We see it improving gradually throughout the rest of the year. It's probably not going to improve as quickly as newsprint, for all the reasons you know as well as I do, but we see a steady improvement coming particularly in the fourth quarter with more advertising activity and better demand for some of the grades that are slopping over in to coated ground wood. So it looks good, but it's probably on a flatter slope going up than pulp and newsprint.

What...

...Go ahead...

...I was just going to say, would it be fair to assume probably just based on the price erosion in the second quarter, that you'd be down a little more in the third quarter?

Flat, probably more flat.

Flat. OK, all right, great. Thanks.

Thank you.

Thank you. And now from the line of with D.A. Davidson. Please go ahead.

I should just thank for asking my exact question. Thank you.

Thank you...

...operator, we have time for one more question.

Thank you, sir. We do have a follow-up question from the line of . Please go ahead.

Arnie, you - you usually don't make such pointed statements as you did today about the outlook. And forgive me if I quote you incorrectly, but I think you said 3Q will be quite challenging. And directionally, after all of these questions about down time, is it fair to say that the increase in pulp pricing 3Q versus 2Q, together with slightly smaller impact from pulp downtime; together with the return to some - a more normal line, should result in some improvement at the EBIT level for 3Q versus 2Q? Or when you say quite challenging, do you mean a loss as large or perhaps larger, 3Q versus 2Q?

I think we are going to be about the same, 3Q versus 2Q. There's a lot of moving parts as I was trying to suggest, because we have some scheduled down time on the maintenance side, and some other things, and hopefully our market down time will be less than we have been talking about or budgeting. We see a strong pulp recovery moving forward, and that will continue. So I will have to really defer to the finance guys sitting on either side of me, but my guess is that at the EBIT level, we are going to be not any worse?

That's right, any worse or slightly better.

For the third quarter.

OK, thanks for clarifying.

Yep.

Thank you very much, this concludes our call. We are available for any follow-up calls and, again, thank you very much for your interest in Bowater.

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