Resolute Forest Products Inc (RFP) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Bowater third quarter earnings release conference call. All participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions given at that time. Please press zero then star if you require assistance. As a reminder this conference is being recorded. I will now turn the conference over to your host, Vice President and Treasurer, will Bill Harvey. Please go ahead.

Thank you. Hi this is Bill Harvey. I would like to welcome you to the third quarter conference call. On the call today are Arnold M. Nemirow, Chairman, President and Chief Executive Officer; David G. Maffucci, Executive Vice President and Chief Financial Officer; and myself, William G. Harvey, Vice President and Treasurer. I'll cover a few preliminary items and Arnie will provide an overview of business conditions and Dave will review some financial information. Following that, we will take questions. This call is scheduled to last 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 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 would like to let you know that this call is available to all shareholders via the live webcast and a replay on Bowater's website at www.Bowater.com. The conference is also open to the press. Please note that while any members of the press who attend our call is free to quote the company speakers, other participants in the call should not be quoted without their permission. Now, I'll turn the floor over to Arnie.

Good morning. Thanks for joining us to discuss our third quarter results. Bowater reported a loss of $32 million or 50 cents per share in the quarter. When you exclude asset sales and a gain on currency exchange, our loss for the quarter was 80 cents. We also reported a benefit related to equity participation rights of 13 cents per share.

Markets are stabilizing, but the recovery in demand we have begun to see for our grades and publication papers will continue albeit at a slow rate. Economic indicators remain mixed.

In newsprint, the most recent industry data continues to show a gradual improvement in consumption by U.S. dailies. Consumption by U.S. dailies has turned slightly positive and inventories for U.S. dailies at 37 days are relatively low. It's also important to note that newspaper ad lineage on the year over year basis has been positive for last five months. Although there are still areas of weakness, our customers for the most part expect a continued gradual recovery in their businesses.

Retail national and auto advertising for our customers have improved materially, throughout the year but help wanted ads and business to business ads remain weak. We implemented a newsprint price increase to our domestic customers on August 1, and obtained $28 of this by the end of September. Our shipments declined in the quarter as a result of the loss of some customer orders. We curtailed production by 123,000 metric tons in the quarter. Our overall third quarter average news print transaction price rose by only $6 as compared with quarter two, and the reasons primarily are the impact of the news print price increase being mitigated by weaker pricing in offshore markets and lower sales volume in Korea due to the work stoppage at our Korean mill which ended at the end of July.

In the fourth quarter we'll benefit from the resumption of normal sales activity in Korea, modestly better pricing and better volumes in the export markets and the impact of the balance of the domestic price increase. In the coated area demand for coated ground wood increased significantly over the last six months. The demand in September was 13% higher than a year ago, and continuing a strong recovery trend in demand over if last several months. Magazine ad pages and catalogs have also shown some improvement. But pricing improvements have been slow to follow as the customary seasonal pickup occurred later than usual due to the uncertain economic conditions that we are in.

Pulp markets have improved but there is some uncertainty. North can shipments were 7% higher than a year ago. North can shipments have been averaging 1.8 million tons per month which supported the price improvement we saw earlier in the year. Demand for hardwood grades has been stronger than softwoods particularly in export markets. Softwood pulp markets have been impacted by the weak coated groundwood markets and reduced levels of purchases by China, though we expect that to pick up later this year. The uncertainty revolves around price differentials in MBSK in North America and other markets, but norescan the inventories are not high. Not high at 1.6 million tons and the strengthening of the Euro since the beginning of the year supports more stable pricing in our pulp.

So from Bowater's perspective, a major portion of our pulp business is directed toward tissue and toweling and over 70% of our sales are in North America. We ended the third quarter with low pulp inventories and expect demand for our pulp to remain solid for the balance of this year.

Lumber markets have been a problem. They have deteriorated in the third quarter. Housing starts remained very strong in the third quarter. We have curtailed production and definitely closed one of the small saw mills. At the current level of pricing in lumber, we're monitoring all of our saw mills very closely, of course, to ensure positive cash flow. We also will be taking seasonal market down time in the fourth quarter.

As I stated last quarter, business conditions are very challenging and the recovery remains slow, but newsprint pricing did bottom in the second quarter. We are taking the necessary steps in the face of these continued difficult conditions. We will continue our currents austerity programs, although costs were affected in the third quarter by significant maintenance down time and some discrete cost pressures such as ONP pricing and energy, I am pleased with the impact that the austerity program has made on the controllable costs. On a unit cost basis compared to last year, our costs have dropped by 4% across our grade mix and we expect do even better in the fourth quarter. Over the last year, we have implemented salary increases and these austerity measures across the company. The current operating performance requires even more aggressive action to restore our company's profitability. So we plan to further reduce our work force, and we plan to implement more austerity measures and compensation areas. We plan to lower the manufacturing costs again. And we plan to better rationalize our production equipment. And we will have more timberland sales. These initiatives are already under way in the fourth quarter, and we will announce the full details of this program later in the quarter.

I believe it's also important to reinforce that we are a company well positioned to benefit from the recovery. For instance, just a $10 increase in prices across our grade mix would result in an increase in annual cash generation of $56 million. We have upside in earnings and a management team that will make the difficult decisions to improve financial performance in a very difficult operating environment.

With that, I'll ask David Mafucci, our CFO, to discuss the financials.

Thanks. As Arnie indicated, our reported loss per share was 57 cents per share. To relate this back to our guidance that we issued in September, you've really got to adjust it for three things. Exchange, asset sales and EPRs. When you do this, our loss comes out at 93 cents per share, which was in the higher end of the range that we gave you guidance about which is 85 to 95 cent loss.

In the quarter, as you know, we were impacted by higher down time. There was some additional non-routine maintenance and increased electrical costs in Ontario. Also the work stoppage at our Korean mill that ended in July did impact our ability to ship into the local Korean market. Average prices rose in news print and pulp, but were basically offset by lower coated and speciality paper prices as well as lumber. Cash from operations covered $65 million of capital spending in the quarter. Our forecast for capital spending for '02 is now around $245 million, which is slightly above our previous estimates.

Our net debt remained unchanged quarter to quarter. And it's important to note here that our cash flow was enhanced in the quarter by approximately $40 million of tax refunds. Newsprint shipments were slightly lower than the second quarter. We also took about 123,000 tons of production curtailments. Of that, 21 was related to maintenance down time and another 21 related to the strike at our Korean mill, and the balance that was market based.

Average coding and specialty paper prices declined in second quarter, resulting in the average third quarter price being $16 below the second. However, we saw no further price declines in the third quarter compared to June levels, and our shipments actually rose 3% compared to the second quarter.

Pulp prices rose about $20 a ton and the shipments remained flat when compared to the second quarter at about 293,000 tons.

A little more detail on the cost pressures. We took a recovery boiler [outages] at each of our four Kraft pulp mills around North America and accounted some unexpected damages at the Thunder Bay mill and that increased the maintenance cost. We saw cost pressures rising from OMP in the range of about $10 to $15 per purchased ton, depending on the location. This impacted about $4 per ton across our newsprint costs.

The final reason for the cost pressures during the quarter rose at our Thunder Bay mill in May of this year the province of Colorado deregulated the electricity. We purchased about half of our [car] under this program at spot and when you combine this with the record-high temperatures during the quarter, it raised our newsprint costs compared to the second quarter by about $4 million. This is a seasonal impact and we'll see that revert back.

Finally, we plan, as Arnie said to implement a number of initiatives to eliminate or incur operating costs and reduce G & A expenses. This is very preliminary and as Arnie said we'll come out with much more specifics later on. I think when you look at the size of the program it is going to be around the $75 million mark. We think that the head count reductions will be in the range of 250 to 300 employees, which is about 3% of our total head count. Of very preliminary estimate of the charges associated with taking these actions is 12 to 15 million dollars and I think we'll see the bulk of that being taken in quarter four.

Give you a little guidance on the fourth quarter, of course we will get news print pricing improvements in the fourth quarter. As we get the full impact of the domestic price increase, we will be back in selling more into Korea. Which is our higher prices and also expect to see export prices in the other markets strengthening. In the fourth quarter, we plan to take about 100,000 tons of market-related newspaper prices down time in North America which is about the same as Q3. We anticipate the coding prices will be flat, and we may experience a little downside pressure on pulp prices.

Lumber pricing will continue to weaken during the quarter. On the positive side, however, we think our costs should improve in the fourth quarter and be at least $5 a ton lower than Q3 when you look at it across all of our products. I think when you work all that in, we expect to see the fourth quarter come in with a loss somewhere between 70 to 80 cents per share, and this will be before any of the one-time charges we may take related to our cost reduction program.

That's all the prepared remarks. If we could ask Stacy to go ahead and open up line for questions.

Thank you. If you wish to ask a question, please press one on your touch-tone phone. You will hear a tone and indicating you have been placed in queue. You may remove yourself from the queue by pressing the pound key.

We have a question from Mark Connolly with Credit Suisse First Boston.

Thank you. A couple of things. Arnie, you spoke about rationalizing production equipment. I wasn't certain what part of the business you were talking about doing that?

We are looking more intensely than ever at our highest cost paper machines, our least efficient. There is always a spectrum of them in any company, of course. It's a little premature now to say which machine might be the most likely candidate, but it could be from any of our paper grades. As I said, we'll announce the details some time in the fourth quarter.

Okay. A couple more things. First, does the recent store announcement of their big, big spending plans and new capacity in SC and otherwise, does that concern you given your own plans to grow capacity in coated paper?

Well, any capacity increases of course concern us. As we have said all along in our coated program, we are going to adjust to supply and demand conditions. We are planning to convert and start up our number three machine at Catawba in the middle of '03, and if we need to adjust some production levels at some of our other specialty or converting operations, in that segment we will. It's little early, again, to project whether we need to do that. But we are prepared to do that to bring on that machine and not destroy pricing.

And last question. How is Bowater thinking of the dividend right now?

We are continuing the dividend. We think it's an important aspect of our capitalization. And at this point we see no reason to be reducing or eliminating the dividend.

Thank you very much.

Thank you. We have a question from Chip Dillon with Salomon Smith Barney.

Good morning. A question first of all regarding the capex for next year. I know you're planning to finish up Catawba then. What type of number do you think we'll be looking at right now?

Well, the engineers want to have us spend 300 million and I think it should be $250 million. I think we'll be closer to the $250 million. We are going to put a squeeze on capital spending. It will only be focused on absolutely essential compliance and safety-type things and really the bulk of it is devoted to finishing up those two large product projects which cost about $180 million.

So you'll be spending 180 of the 250 on the Catawba project and what's the other one?

Well, there are a couple --the bulk is at Catawba. One is the machine conversion, and he other is the [fiber line], which is due to start-up in the third quarter.

All right. So the rest of the company would spend around 70?

Right.

And then on the depreciation amortization, I know -- how does that shake out with all the, you know, the midyear start-up of the projects?

It's still looking 340 to 350 somewhere around there.

Okay. I would assume -- when you look at your balance sheet and you see the timber land that -- the account, can you give us some rough idea, because I know you're looking at selling timberlands, roughly how many acres would you say you are considering selling or would you have available to market, you know in the next year or so?

Probably 100 to 150,000 acres.

And this is mostly southern stuff, so you could, you know, look at recent transactions in the south and make our own conclusions?

I would say the bull is in the south, although we're looking at Canadian timberlands also.

So that's 150,000 mostly in the south. And then last question is some people on the debt side raise a question about the pension situation, and I know a lot of companies now are taking a look at with the stock market down in terms of both the book accounting and the possible cash contribution changes, do you have any outlook for that, for Bowater?

Yeah. I think I can add a couple things there. One, we've got preliminary work done by the actuary that we need to go back and refine and of course cover with our audit committee the details before we finally do make any kind of an adjustment. I think if you look at just what's happened in the markets, of course we use a September evaluation date and we look at September of '01 versus September 02, the S&P 500 is down over 22%. So that alone is going to impact us quite significantly.

We think, however, the net reduction in equity as a result of taking an AML charge after tax will be something less than $100 million. And of course that's the impact on the accounting. When we look at the funding side our funded position is a lot better. We made contributions or will make contributions this year to our pension plans of about $15 million, and that will probably go up another $10 million next year to a total of $25 million.

Gotcha. Ok. Thank you.

Thank you. We have a question from the line Mark Weintraub with Goldman Sachs. Please go ahead.

Thank you. The $15 million has or has not been contributed so far this year on the pension side?

I think there's a small final installment that we make in the fourth quarter.

It has not been made.

Very good. On the news print price, I believe Arnie mentioned that prices in the domestic market were up $28 per ton in September versus where they had been at the start at the quarter, was that right? Perhaps if you can just clarify where average domestic prices were relative to the prior quarter?

I think -- I think the $28 is basically from the lows that we saw earlier in the year. So that's a $28. I think average to average it's $16 or $17 a ton average quarter to average quarter is where we came out on the domestic price.

And would it be fair to expect most of the balance to show up in the fourth quarter or because of the way it gets staged through will a meaningful proportion show up in first quarter of next year?

I think we'll see the bulk of it come through in the fourth quarter.

Thank you.

We have a question from lie that Peter Rushmeyer with Lehman Brothers. Please go ahead.

Thanks. I have a question on the lumber business, I was curious if you can comment on the impact of the countervailing duty in the quarter and then perhaps related to that, to talk about the strategy for the lumber business longer term and then related to all this do you see any evidence of escalating fiber costs in Canada resulting from some of the higher costs, saw mills shutting down in the business? In terms of input cost to the paper mills?

Hi, Pete. Bill Harvey. With respect to the CVD, it was $4 million -- and ADD, it was $4 million in the quarter.

Okay.

On the -- strictly with the cost pressure, there is some cost pressures on fiber. It has had an impact with the acquisition of Alliance in Quebec, for instance, it makes us more or less fiber sufficient but there is some cost pressures on fiber.

But not -- not too big a degree at this point.

In terms of the longer term, Pete, I'd see us as a gradual scaling down over our lumber capacity. We took 10% out on a temporary basis, including one small mill on a permanent basis recently and as we -- and you might see asset sales, you might see just some permanent shuts of some the less efficient saw mills. But I see us trending down, but not to the point where we're jeopardizing the fiber supply, particularly in Quebec, to our specialty mills.

Okay. Great. Maybe one small question, if I could for Dave. I think you mentioned Dave, that the recovery boiler was $4 million impact. Was that just one recovery boiler, or all four outages, if you can quantify the four outages?

I think the added 4 million I was referring to really had to do with the electricity costs in Ontario during the quarter as a result of deregulation and buying on the stock market.

Okay.

The recovery boiler expenses we are month in the $9 million range across the company.

$9 million.

That's all four repairs.

Great. Thank you very much.

Thank you. We have a question from Rich Snyder of UBS Warburg. Please go ahead

Just to clarify, you know, could you relate the $28 to the $50 price increase? That means we've got 28 --you've gotten 28 of the $50 increase and do you expect to get the full 50 or could you just clarify that situation?

By the end of September, we got $28 on average of the $50. We expect to get most of the balance of the remaining $22. I can't say we're going to get it all, but most of the balance should be in by October, November.

Okay. And what were the kinds of weaknesses in pricing you saw in the off-shore market during the quarter? How much did that come down?

Well, it was a combination of thing, Rich. The prices were actually going up in local -- in Korea, and we shipped half as many tons because of the outage there.

That of course impact us, and I think in the other markets we actually shipped probably 7 or 8,000 more tons off shore and those prices were down about 12 bucks at times. When you average it all out that gets you to the six bucks a ton.

Okay. And could you discuss what's going on in export price increases in the export market, or is there a price increase in Korea or is it just getting the tonnage back?

I think we'll see two things happening. One, our tonnage in local Korean market will increase, so that we'll eel benefit in that we also see some strengthening in the other export markets so we get a benefit from that. Plus, the other portion of the domestic price increase. So from a pricing standpoint, it looks like it's everything is going in the right direction.

So just could you quantify what you're seeing in price movement in the export markets then?

We haven't seen a lot of detail yet on it because we're just kind of in the middle of October here. But we do know that there's --it's coming off the low levels of the previous quarter.

Okay. If you look at your coated paper operation in the quarter, the way you've got segments, from that you lost $13 million in coated paper operations in the quarter, down from, you know, $5.6 million in the same quarter. As you pensioned, your price was down $16 but your volume was up, and a $16 drop in price doesn't, you know, give you an $8 million variance between, you know, third and second quarter. I'm just wondering what went on in the coated operation in third quarter to come out with the loss of the magnitude you posted?

We had some cost increases. We also had some at our Catawba mill. We also had some operating issues in Nuway. We did shut down the original line in Benton Harbor, Michigan in line one and Nuway indefinitely. We have a second line there and a new line in Covington, Tennessee, both Nuway lines, and those are still working through a learning curve. We have had some difficulties in production and frankly in quality. That's impacted the pricing arithmetic that you see in the coated specialty segment. And we're stilling working through some of the difficulties in the Nuway into the business frankly.

Could you give us a -- you know, a forecast on where you think, you know, things will be going with Nuway? Do you expect to get these issues resolved in any time soon?

We expect to get them resolved in first half of next year. And we'll have to look at that situation, you know, as we start up the new machine at Catawba and the strength of the market. Of course, part of the problem is the pricing situation, there is a compression of pricing between the Nuway grades and other grades. So I expect us to resolve the Nuway issue, you know, within the next two quarters.

Okay. Thanks.

Thank you. We have a question from the line of Steve Chercover with DA Davidson.

Good morning. There seems to be restatement between the third -- of the second quarter sales numbers. Can you tell us what happened there? You say 270.

This is Bill Harvey. I'll have to get back to you on that. I don't have data on that here, and I'm -- I don't want to -- it may relate to if you have old information, we at one point had the CVB and ADD in transaction price and then following the appropriate accounting principal that is now in distribution costs. I believe that's the issue, but our -- but I need to get back to you on it to confirm that.

Are you getting relief at all on OMP price

They have been flat since the end of the quarter, so not in that. But the industry in Ontario was a seasonal thing, and that's returned to normal. But OMP has been normal.

Thank you. We have a question from the line of Lisa Shonefield with J.P. Morgan.

I just wondered if you can comment on competition in the newsprint? They were commenting on the conference call last week. They have been significantly increasing their exports of newsprint, particularly to Asia. I wondered if that was hurting you or causing sort of any pricing weakness there?

Well, yes. Obviously, the pricing picture we painted off shore a few minutes ago does reflect increased, more intense competition from a few of our competitors. Particularly in the southeast Asia. And a few other places. So there is increased competition, and that's become more of a challenge lately. And it's reflected in the pricing.

Okay. And then also, I just wonder could you quantify the 13 cent gain that you got from stock compensation on a pretax basis, please?

About $4 million. Pretax.

Okay. Thank you very much.

We have a question from the line of Mark Wildie with Deutsche Banc. Please go ahead.

Good morning. Can you talk with us at all about any pulp time that you took in the third quarter or what you might anticipate in Q4 and Q1?

We did say pulp down time, correct?

Yes, pulp down time.

I think the only time we took was related to maintenance and it was 4 or 5,000 tons.

Right now, you're not assuming anything for the fourth quarter?

No. No.

Okay.

The point of the order book is good. We sell 70% of our pulp in North America.

And just to kind of round out the view for newsprint you were moving more into the European market, a quarter ago. I wonder if you can talk about that and talk of what the impact of all the turmoil down in Brazil has been because they're historically big net importers of newsprint.

Mark, we continue to ship strongly into the U.K. I think it'll on an annualized rate over 1,000 tons of news print at good levels, good pricing. That will continue. It does require more inventorying, but still it's at a good level for us. Good returns. And that should continue. That's our primary market in Europe.

Mark, on Brazil, there is turmoil in Brazil and consumption has fallen, but, at the same time, it's been market where we've been in for a long period of time and we have -- we think with the appropriate customers. So although our volumes have been effective, it still remains a good market. Pricing has been under pressure obviously, but it still remains a good long-term market for us.

You know, it sounds to me historically that's been one of the biggest dumping grounds for news print in a weak market. It sounds like you're not seeing those type of price levels right now.

We tend to have customers in the long term. With our point of view, from the customers, Bowater and Brazil, in a good and bad market they're the same dust hers. So it's not for us necessarily been anything like a dumping ground.

Can we come back around to the timber number you have thrown out of 100,000 to 150,000 acres? I think you still own between a million acres between the southern lands and places up in Nova Scotia. Can you give us a little more color on, you know, why that number is relatively modest in relation to the whole and whether we might see that number increase?

We might see that number increase, but for now we think the best next move is the primarily the southern timberland in terms of our view, the market and timing of sales. We don't think from a -- from liquidity point of view we have to sell all of our timberland. There's a lot of other proposed sales out there as you know. So it's more of our own market strategy rather than what's salable over the long term.

Finally, Dave, if Moody's makes a move on your credit rating, have you gone through and looked at what that might do to your cost of borrowing across the board?

We have a pricing grid in our facility that is the higher of the two ratings. So the fact that S&P lowered us -- I guess it was last month, really is the one that moved our -- the cost of borrowing, but I think it was an eighth or less.

Yes. Not a huge amount, mark.

Okay. Thanks, bill and Dave.

Thank you. We have a question from the line of Matt Berler with Morgan Stanley.

I wondered if you could just clarify for us what the quarter to quarter change in your average news print pricing will be given what you've said, and given -- and what's in the guidance that you gave us for fourth quarter, Dave. Just a little hard to figure it out, $6 average change, $28 in by the end of September. What does that really mean as we look at full quarter, fourth quarter average versus third quarter?

Well, we typically don't give specific guidance on average pricing or pricing by product. Or by markets in newsprint. So I think you just have to use the information that we gave you about the Korean markets coming back, and improvements in exports and of course through the $28 -- I'm sorry, the balance of the particular price increase coming in and just arrive at your own conclusion.

Can you quantify the impact of Korea in the third quarter? And what the swing will be there?

I think we sold about half the tonnage we normally sell. In Korea. In the third quarter, as prices went up about 20 bucks a ton. So I would think we were going to return to those levels or even get a little bit higher as far as shipment goes.

And what kind of earns impact will that be?

We're not going to give over the particular guidance on any one market.

Okay. So what was -- you tell what sale what the impact was in the third quarter as -- just an actual number?

The impact -- the impact on pricing more or less and this is a rough estimate would be for Korea and additional tons would be in the 3 to 4 dollar range.

Three to four negative?

Negligent 'til third. Of course it would reverse in the fourth.

Okay. And how about -- can you tell us what the EBITDA impact was in terms of the loss tonnage?

We don't disclose that on a per mill basis.

Okay. On the pension side, can you just reconfirm what your pension expense will be this year and what you think it might be next year?

The pension expense this year is approximately -- is about $14 million. And we could see -- and these are rough estimates of maybe 10 to 11 more than that next year.

So major -- so no major change?

That's correct. No major change with the information we have on hand now.

Okay. And then on -- back to lumber, is it possible through further shuts and some restructuring actions and cost cuts that you could offset what you think might be further declines in lumber pricing in the fourth quarter?

Or should we not count on that?

Actually, I think we -- when we said further declines, we just meant a weak market from where we are now, we don't see any further declines at this point. In lumber. But it would be -- we characterize it as a weak market.

Okay. I thought I took Arnie's wording to suggest Q4 average lumber prices will be lower.

I'm sorry, Q4 would be lower, but not from today's transaction price. I see what you're saying.

If I do take current pricing, it does lead me to a loss. In the $3 million to $4 million range.

Yeah. I think we take each of the saw mills and monitor them weekly and we'll manage the situation to if there is a loss it would be small because we will not have a negative cash flow saw mill.

Okay. Just moving on to news print domestically, Arnie, did you give guidance on fourth quarter shipments? You gave down time, but I notice that your inventories have risen there. We should expect some increased shipments, shouldn't we?

Inventories have risen slightly. Down time should be less in the fourth quarter. Therefore, we should have an increase in shipments approximately at --

Yeah, will be up 700,000 tons. Remember, too, Matt that the Korean mill will be operational for the fourth quarter. So in effect that impacts us by 20,000 tons in the third quarter of 50,000.

Increase in shipments. 50,000, 60,000 ton increase in shipments quarter to quarter, Matt.

Okay. Will that you think get the inventories down to where you want them to be in the seasonably softer first quarter?

Yeah. Remember, we do sell into some locations where our inventory level in news print, if you look historically will be higher than just going back in history because we just selling more into Europe and other places. So 93,000 tons is not an order of magnitude higher than we run at. In fact, in the domestic market, we have low inventories right now.

Just add on a comment about the first quarter, we are shutting down the number three news print machine in Catawba for six weeks so this that's going to impact newsprint availability.

Mm-hmm. And how much would that be lost tonnage?

240,000 ton machine, so it will be operating in January, but it shuts down as of February 1. So you get 30,000 tons of news print production that would come out right away.

Of course, its gone forever though.

Okay. All right. I think that does it. Thanks very much.

Operator, we have time for one more question. er from okay. We go to the line of Howard Kaminsky with King Street Capital. Please go ahead.

Hi. Thank you for the information today. You talked about cash flow in the quarter. But you didn't give a number. I think you said that it approximated capex of 65. Can you confirm that? That's one question. And it seems as though -- and I realize that we're in trial periods for some of your product lines, but the balance sheet is somewhat stretched. You're ht not going to cut your dividend. You will sell some assets, but is it a concern to you that if prices don't improve, and volumes don't improve and you continue to have to defend the subtleties and nuances of the pulp and the newsprint markets that your balance sheet might even get too stretched?

Free cash flow from operations was about $65 million and that was about what we spent on Cal tall spending. From so from that standpoint, we did cover the capital spending. You know, depending -- I mean, it's kind of a jump ball question. You tell me what prices and lines are going to be, and I think you can paint it as black or as a white a picture as you want.

You're defending the balance sheet which is what you should be doing. But the dividend is something that you've said you will not change. That will definitely save some money. I'm looking for whatever means you could possibly use to appease the interest of the rating agencies. Is it a concern of yours?

Well, we have announced that we have a significant cost reduction program that we're going to announce this -- in the fourth quarter. Which in the numbers we've even described conceptually will have a lot more impact on us than any movement on the dividend, frankly.

In the quarter that's $65 million of operating cash flow, did that include the tax refund?

Yes.

Okay. So true cash operations was lower by the $40 million tax refund?

That's correct.

So you would have increased that had you not eaten into that -- you would have increased debt had it not been for that. What was the debt level at the end of the quarter?

2.27. I think -- I think those -- I think from our point of view, the actions we're taking, combined with the fact that we are seeing product pricing improvement and again we don't want to overplay this, but a $10 improvement in product pricing across our board is over $55 million of cash flow to us.

Right.

So we are looking at four of our products, we have been at 20-year lows and two of them have moufd the lows in the quarter. So we think when we look at the whole package, you have to step back and look at the whole framework.

Okay. Thank you very much.

Thank you. Again, I'd like to end the call now. We are available for questions, and we again thank you for your interest in Bowater.

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