Resolute Forest Products Inc (RFP) 2003 Q1 法說會逐字稿

All participants, please stand by. Your meeting will begin momentarily. Again, please continue to stand by. We thank you for your patience. All participants, please stand by, your meeting is ready to begin. Good afternoon, ladies and gentlemen, welcome to the Abitibi-Consolidated first quarter 2003 results conference call. I would now like to turn the meeting over to Mr. Lorne Gorber manager, investor relations, please go ahead Mr. Gorber.

Thank you, operator. Good afternoon, everybody. We're going to change our format today to maximize Q and A time. Given that the release we put out this morning contains statements and a full NGA, as well as the usual summary slide presentation of the quarter's results which was posted on our website this morning. So there's no need for us to take time for us repeating anything something you've read, we'd rather take time to respond to your questions. Specific reminder that any forward-looking statements on today's call are based on information that's believed to be current. However, any number of risks and uncertainties can affect what we say causing results to be materially different from those expressed or implied. I'm going to turn it over to Pierre to make a few key points on the financial results, and than to John to make some short remarks on the market .Basically what we feel are the key take aways from the quarter and. than we will go right to questions. Pierre?

Thanks, Lorne.[inaudible] starting with the fact that we recorded Q1 net earnings of $181m, or 41 cents a share this morning. As you saw in Table 1 of our NBA the results include the following items, net of income taxes At $239m gain on a translation of foreign currencies and a positive tax adjustment of $32m. Without these items, the result, which is not a recognized GAAP measure would be a loss of $90m, or 20 cents per share. Our operating loss from continuing operations in Q1 was $35m, compared to an operating profit from continuing operation of $41m for the same period last year. The newsprint segment posted an operating loss of $18m versus a loss of $4m in Q1 of 2002. What's important to know is that natural gas prices doubled in March year over year and excluding the $14m in energy impact in newsprint, the operating results are basically flat year over year, despite a much stronger Canadian dollar. On the cost side in North America the benefits of our focus down time strategy, as well as a stronger Canadian dollar essentially offset these energy cost increases. But in Asia higher OMP and energy costs could not be negated that's why you see the bump up in the newsprint costs.[inaudible] impacted by lower prices and a stronger Canadian dollar resulting in that segment operating profit declining from $36m in the first quarter of last year to $3m in Q1 of 2003. Lumber prices hit decade lows in November of last year and that's not much move since. The segment lost $20m on the quarter, including $19m paid in duties versus a profit of $9m in the same quarter of last year which included $14m in duty provisions.

Interest expense at an annualized basis as gone down by almost $100m over the last two years. Look back to Q3 of 2000, when they were running at over half a billion dollars annually. Or even Q1 last year, when interest expense was $14m more than this past quarter. That says we've been managing the debt well. However, the Canadian dollar appreciation versus the U.S. currency we've seen since the beginning of the year [inaudible] by about $35m at the operating profit level in the first quarter versus last year. Regarding the debt, you'll notice it was down slightly in the first quarter with a huge gain from currency translation which should translate into [inaudible] first seasonality. Q1 is usually much more demanding on cash. But more importantly, our option to purchase our partner share of the Alabama river for a nominal amount is now exercisable.[inaudible] accounting regulations dictate that we must account for Alabama's complete financial results including the addition of US [inaudible] even though this debt is still no recourse to us. John?

Thanks, Pierre, and good afternoon. First, the newsprint market. The price increase we had announced for March 1st has been implemented. Our customers are now paying U.S. $50 per ton more. Industry-wide the price increase seems to go to be progressing with all major indicators and publications showing half the price increase has already been implemented. I believe if you ask anyone, you will find that the major producers have implemented a $50 price increase.[inaudible].

Europe has seen the 2003 contracted prices gone down to about 475 Euros or what would be the equivalent of about U.S. $515. Latin American markets, particularly Brazil, are suffering, and it's reflected in the price. However, we expect that over time prices will follow North American price trends. Asia also saw weakening prices in the first quarter. Pan Asia has resulted in weaker prices as well as increased fiber and energy costs, and they reported EBITDA of U.S. $43m in the first quarter on sales of U.S. $200m. This global uncertainty has temporarily put the brakes on what was a comeback in add lineage. Now that the situation in Iraq is resolving, we're optimistic that we'll see a solid rebound in ad spending and consequently in consumption. This is partly evidenced in our customers' first quarter results.

Most of which are reporting ad lineage either above or in line with expectations. Lumber front or wood products as it's now renamed, prices slipped by 14% in Q1 of 2003 with volumes remaining essentially flat. Visibility is scarce in this sector so long as the soft wood lumber duties hang over the industry's head. We again paid $19m in soft wood duties during the first quarter. However, our push to add value to this business continues. We recently announced investments in the same prim in and la Dora ad Mills to increase the remanufacturing capacity, particularly off finger jointed products. Yesterday was also the official opening of our joint venture with Louisiana Pacific to produce high joists. These demonstrate our commitment to add value to this business. And as always, we remain committed to our 2003 priorities of focusing on cash, productivity, and world class customer service. Next to questions, Lorne.

Just a quick reminder that the call will be archived on the website or listen to the replay until April 30th by dialing 416-695-5800 and the pass code is 1316575. Let's start with questions from the investment community and then conclude with the business media. Any follow up with the investor side can directed to me at 514-394-2360, and media can follow up with Mark Osborn at 514-394-2340. Operator, we can ask questions now from the investment community.

Thank you Mr. Gorger. If you're from the analyst community press one on your telephone key pad. If you're using a speakerphone lift the hand set and than press one. If at any time you wish to cancel your question please press the pound sign. Please press one at this time if you do have a question. There will be a brief pause, while participants register for questions, thank you for your patience. Our first question, Bruce Klein, Credit Suisse First Boston. Please go ahead.

Hi. Yeah Could you just touch on the bank covenants and tell us where we stand?

Well, we don't comment on bank covenants. We never have [inaudible]. We always say and we're willing to say again they don't give us concern.

I'm sorry, there was static, you say they do not give you concerns?

That's right.

And your cap ex for the year?

John Weaver Cap ex for the year we're targeting to come in less than 50% of depreciation and around $300m.

Okay. If the markets don't pick up, do you foresee cutting that?

That's all always a possibility. But I think that we should be in the range of 250 to 300 million .

Okay. I’ll pass now, thanks, guy .

Thank you, Mr. Klein. Our next question, will come from Chip Dillon, from Salomon Smith Barney, please go ahead.

Yes, good afternoon. I was just couple question first of all on the newsprint situation, you mentioned the pricing in Europe. Do you find it that at the pulp and paper price of 500 -- I guess first of all I should ask you do you think that will eventually move up to the full amount which I think would take it to 525?

Oh, in North America you're talking about?

Yes, I'm sorry.

Okay. Yes, I think we're -- in fact what we're saying is that our price is near that -- our price is up 50. .And if you go, and if you’re relating to pulp and paper week, where they are saying up 25 brings it to 500, we're up 50 so we're above that.

Let me ask you this, what sort of point of differential with Europe where you're in different -- I know it costs more to ship it over there and I believe there used to be duties. I don't know if they're still involved, if -- if you go over a certain amount going into Europe. But what's the price differential at which your mill nets are in pretty much different between shipping in the North American market and shipping in Europe?

Well, the -- there's no longer a duty in Europe. I believe that's expired. And our shipments to Europe are pretty much based on long-term customer relationships but I think you can say the freight differential between shipping to North America and shipping to Europe is somewhere around 20 to $25 a ton, I would say.

Okay. And then the last question, you know, your sentiments on the lumber market have been certainly echoed so far during this reporting season by just lack of visibility. Given that, given that among the wood products lumber really hasn't recovered that much, is there any thought to, you know, how long this situation can be tolerated, say your company without any permanent shutdowns or are you still positive cash flow and that's not a problem for you?

If you look at the things we're trying to do in the -- on the lumber side of the business, is first of all of course we're trying to find the settlement with the -- on the soft wood lumber dudes.. Through meetings both on the Canadian side and hopefully with the U.S. coalition soon. Second, we're converting more of our operations to remanufacturing products, re man products such -- all the way from bed frames to I joists. And the third thing is we're optimizing our overall production both to limit inventory build and also just to provide the chips necessary for our paper operations.

So in other words at today's prices you could hang on in all your facilities for quite awhile, for a year or more?

Well, we have one of our facilities closed for the first two months of this year. We will take some down time traditionally in July.– But other than that, and the fact that we've converted two saw mills to re man in the last several months we plan to probably run the majority of our saw mills.

Okay. Thank you

Thank you, Mr. Dillon. Our next question will come from Mark Connelly Credit Suisse First Boston. Please go ahead.

Thank you. John, a couple of things First, when you look at your mill inventories up 66,000, is that going to correct itself or do you have to take down time to fix that now? Newsprint inventory.

Yeah, most of the inventory we have is built for international tonnage and I can't remember the exact amount but let's saw just say 50 or 55,000-- how much?

35,000.

35 to 40,000 tons of that was delayed because of weather conditions in -- especially in eastern Canada. We had a really bad ice situation in Newfoundland and up the saint Lawrence river and we fell behind on boats. That and the combination with some delays were related to the war in Iraq. So we will recover that, say, 35 to 40,000 tons naturally as we catch up with shipments through, I would say, about June, it usually takes till about then to catch up. And so our inventories continue to be quite low.

Okay. And next question. Could you give us an update of what's happening with your value added grades, what happened in the quarter, any progress on that?

Well, the main thing that happened in the quarter year over year and even from the fourth quarter, as we saw a decline in pricing driven by a combination of actual transaction price going down and also the fact that we sell almost all our value added grades into the U.S. market. And the second thing, of course, is we have the same energy and fiber high costs for the value added division that we have for the newsprint division in which we will hopefully say go back down as the year goes on. And we have announced a price increase in SCA and we think the free sheet producers keep trying to implement a price increase so hopefully this if this one goes through we'll be able to follow with our alternative offset and equal offset grades.

Right. Can you give us a sense of what's happening to the fix mix there, John? You noted that the volumes were down. I'm just curious if there was anything important in the mix there?

Volume was actually up a little bit, I think. I’m not sure.

Oh, I'm sorry, you're right I'm looking at the PPC piece.

Volume was up and there's really no significant change in mix. Our quarter over -- from the fourth quarter, from a year ago, we do have, as we said, an increase in SCA from our Lufkin machine, about 26% increase, I don't know the exact tons but -- and also the Abby offset grades equal in alternative are up by about 35%.

Okay. Perfect. Thank you, John .

Thank you, Mr. Connelly. Our next question will come from Bill Hofmann (ph)from UBS Warnerg,(ph) please go ahead.

Good afternoon. John, a little bit of clarification, you're talking about the full price increase going through and you and I just wanted to get a sense whether that was all your customers and whether that's fully implemented or whether that is only partially through and then I have a follow-up.

Now, the price increase is implemented, so I -- that means everybody.

Okay .

You know, I don't -- I guess I can't be much -- I think you can ask about anybody and they'll tell you Abby's price is up by 50.

And just a question for Pierre. With regards to the debt allocation from the Alabama, was there any indication of cash flow or revenue from those operations as well or how does that work?

Well, we now account for the full sales and [inaudible] Alabama river and before we accounted for half of it.

Can you give us any idea where that -- how much EBITDA that is in the first quarter?

No, no, that's not numbers which we publish mill by mill bill, .

From a debt standpoint, does that mean that you roll the debt on to the balance sheet under the –

That's right. Yeah, that's right. Like if you were to look at what -- like I said, we -- it means we add about $17m U.S. of debt to the balance sheet at the end of this quarter. It is there right now on the balance sheet that you're looking at.

Right. Okay. And then finally, just with regards to the newsprint sales mix can you remind us again how much goes to North America versus Europe? Of your newsprint business?

About 60% goes I don't know if it's North America or the United States. Let's say 60-65% goes to -- goes to North America. Europe is about 18% and let's say 15% to Europe and 15% to Asia. You can find that in the annual report, by the way.

Bill Hofmann Yeah, no, I was just wondering if it changed at all.

No significant change.

Okay. Thank you.

Thank you, Mr.. Hofmann. Our next question will come from Mark Wilde from Deutsche Bank, please go ahead.

Good afternoon, John, good afternoon, Pierre.

Hello

Hello.

I wonder if we can talk a little bit about the Canadian dollar appreciating and I have kind of two separate issues here. One, I'd like it if Pierre could remind us of your hedging strategy on U.S. dollar/ Canadian dollar and John, you can talk a little bit about whether you think the strengthening Canadian dollar will put a little more resolve into some of the smaller Canadian producers of newsprint. Their cost position is clearly going up vis-à-vis some other players now.

I'll obviously take care of the first part of the question, the -- our policy regarding hedging, the way we would look at it is we hedge our Canadian dollar costs, because we see our business as a U.S. dollar business. You know, we -- as a company, we tend to generate U.S. dollars. So the risk to our business is our Canadian dollar cost, really, so we add a portion of that market, of that exposure and we tend to hedge 12 months forward, around 30% of that.

Okay. But just 30% of that Canadian dollar exposure, then?

Yes, 30 to maybe -- well, between 30-60%. It will vary over time.

Okay. And if the Canadian dollar is trending up, then, let's say over the next year or two, over time your -- the strike price on that edge is going to go up as well, right?

No, what we do, Mark, is we use zero cost options, callers.

Okay.

So right now these -- and we've been doing that for a little while, so these are right now in the money meaning that that we are benefiting from that so the dollar keeps on strengthening and we keep doing that as long as the dollars go up these callers will tend to be all right.

John, what sort of impact do you think in terms of market dynamics?

Pierre will speak to -- for our competitors, but just to say overall what happens is, you know, of course the Canadian -- you really – Canadian dollar cost stay is unchanged it's just that the revenue side of it tends to change a little bit and therefore, they have less -- we all have a little bit less revenue. On the cost basis, one of the good things about Abitibi Consolidated because of our mix of mills, we have the 10 lowest cost mills, even if the unbelievable would happen and it went to over a 70-cent dollar we would still have the 10 lowest cost mills.

Out of 15

Out of 15. We'd just be a different -- different ones because of our U.S. mills are -- have a very competitive cost basis versus our -- our various U.S. competitors.

Do you think generally though if the Canadian dollar keeps appreciation this will increase the pressure on producers to try to get prices up?

[inaudible]

Okay. I had another question just about your newsprint volumes which were up about 8.8% on a year over year basis which is more than the domestic consumption numbers it's actual more than the PPC offshore shipments show. And I wondered if that's a partly a function of you guys maybe having carried a little more than your share of the load last year and now getting back a little more this year? Or whether there's something else going on here.

Well, just a little overriding comment and then I'll let Pierre -- you have to remember that as the market recovers, we're one of the few [inaudible] that has additional volume to sell and so as we see recovery in the market we always see our prices improve, we see our volumes improve and of course as volume improve, costs also goes down. I think one of the particulars may be related to ARN.

Mark, if you noticed the last three quarters of last year our volume was up year over year and every in every quarter our volume was up higher than the industry was up year and year. That goes to what John was saying before, one of the characteristics during down time, so as volume comes back. we grab most of that volume coming back.

I guess I –

In this quarter, keep in mind that we now account for Alabama river for, you know, fully versus last year only 50%. And that probably added between 25 and 30,000 tons of shipments year over year.

Okay. All right. I think that covers me for right now.

Thank you, Mr. Wilde. Our next question will come from Jared Muroff (ph)from Prudential Financials, please go ahead.

Good afternoon. Thanks. First I was wondering if you could give us some indication on your energy, you indicated that energy was a negative impact of 24 million, I guess it was against the year ago quarter. I was wondering if you could give us a sense of how that broke out among your segments and then the same for the Canadian dollar impact which you pegged at 35 million in margin squeeze, just wondering if you could lay that out or give us a sense of which was -- which segments were impacted most.

Well, newsprint by size was impacted most. It's about, I would say, 40% in VNP and 60% in newsprint just to make round numbers on the energy cost. Basically you take the 24 million, 40% goes to VNP and 60% goes to newsprint.

And none of the wood products wasn't really affected by that?

No, not really. They’re all mostly in this -- in this province and no.

Okay .And then the Canadian dollar?

Well, the Canadian dollar is a function of sales and costs, so, you know, again, that's -- that's a bit more difficult to assess but I would say probably, you know, probably very close to the same level.

Okay. On energy, given your hedging and your self-generation, can you give us a sense if natural gas prices were to stay where they are now what you might see as a benefit second quarter versus first quarter in energy spend?

I don't know if we can do that off the top of my head off the top of our head. I think that what do you say gas is at now?

5 1/2.

575.

5 and a half and it was nine. So the biggest change for us will be in our Lufkin mill which is heavily focused on gas. We'll see a big swing in lower costs in that value added area. So that would be the most dramatic impact that we would see overall on our operations. I don't know if I can quantify that exactly Maybe if you call back and speak with Lorne we can give you that information.

Will you have a similar level of hedges as you did in the first quarter, 30%?

On our -- on the dollar?

No, on the -- on natural gas. You indicated that you hedge approximately 30% of your natural gas purchase.

I think we continue to hedge but I don't know that we're in the process of renegotiating a couple of contracts, especially the Canadian one, we'll see what happens there.

Okay

we (inaudible) our target at the end of the day.

I'm sorry?

I don't know that we said we hedged 30% because I think it was somewhat -- oh, yeah, okay.

Jared Muroff Yeah, it's in the press release.

Yeah .

If someone could get back to me, if you guys know that, that would be great, if you can disclose that. The final question I have is: you announced the price increase as of March 1, but it doesn't look like you got any benefit at all in the first quarter. Is that fair, was there a 30-day lag between acceptance and you're starting to see it now in the April -- in April?

No, we got benefit in -- I'll let Pierre break it down.

No, we did get some benefit in the first quarter. The -- from what -- from what data do you derive that?

Your fourth quarter real realization looked to be about 414 U.S. and your first quarter looked to be about 416. $2—

Okay. That’s -- you mean overall?

On newsprint, yeah, it's overall .

Keep in mind -- keep in mind that Q4 of last year prices in Europe were a lot higher than Q1 of this year.[inaudible] Euros.

You faded in and out through that whole –

Sorry. Keep in mind that the prices in Europe in Q4 of last year were much higher than in Q1 of this year. Okay.

Uh-huh

And so that's part of that mill net which you see in U.S. dollars So if the mill net in U.S. dollars went up overall by $2 while the European prices went down by more than 10%, there's got to be some improvement in mill net somewhere else in U.S. dollars which is what you would see in the -- you know, in the [inaudible] market.

Okay. Thank you.

Thank you. Our next question will come from Steve Chercover from D.A. Davidson, please go ahead.

Good afternoon. First of all, can you disclose what the nominal value that you paid for the other half of Alabama river was?

We haven't -- we haven't bought it yet.

Oh, you haven't.

No. What we said was we have an option to purchase for a nominal amount but we have not exercised the option.

So it goes without saying that you will though, however?

Well, eventually.

I see. And, I mean, you've made it crystal clear that you're charging the additional $50 per ton. Have you seen anyone pull their orders? And if that's the case, will we see your volumes decline in the second quarter?

We have lost some orders and we've gained some orders. I think we -- our volumes for the second quarter will be more or less in line -- I think what usually happens with us is we lose orders in the first month or two and then we end up recovering in subsequent months and so I think that the case -- it would be -- hold through again in the second quarter. So we -- and it should be approximately the same, the same time same amount of down time we did in the second quarter as we did in the first quarter.

Do you have the sense that all of your -- I know you don't want to comment on your competitors. Do they all have the same cohonies (ph) as you guys do or do you think someone will cheat and try to undercut you on price.

Do my competitors try to undercut me on price? Yeah, I think that's they probably do I mean, that's business, right? But I think that the major producers have implemented the price increase, is my understanding of what I hear in the marketplace.

Okay, thank you very much.

Thank you. Our next question will come from Don Roberts from CIBC World Markets, please go ahead.

Thank you. John, question for you first, I think in the release they mentioned the cap ex 42 million in Q1 but your annual is still around 300, correct?

Yes .

So it was pretty -- we're going to see a pretty heavy load towards the back end. Is there a particular quarter where it's going to really wrap up, in fact is it possible to give us a quarter-by-quarter breakdown, would you think?

We have only our budget to go on. What you're going to see, though, is a lot of the first quarter is the secondary treatment project in the in the Lufkin, Texas mill and what you're going to see as the year goes on is the ramp up of the announced Alma project which is going to be run around 80 to 85 billion this year. And so we haven't got any significant spending on that project yet. You'll see it ramp up as the year goes on. That's where the back loading's going to come from.

Okay. And John you've been good enough before with regard to the Shelton to give us observation of where you thought newsprint prices had to be for it to get started I think about 550. Implicit is some kind of assumptions on both the OMP and the gas prices which are pretty key for that facility. Could you give us some sense on what those would have to be to be consistent with that 550 for that mill to come back?

I think the main criteria would be of course the selling price and the fact that we have some kind of volume commitment .And then we would look at the rest of it and make sure we were going to still make money based on that kind of selling price and the -- and having the volume available. And if we -- if it looked like gas and OMP prices had for some reason gone up significantly we'd have to raise our target operating price. No need to restart it and lose money.

Yeah.As it stands it looks like the snowflake mill is the one mostly filling in the vacuum that was there,?

It's a combination of, you know, we started up the one -- the newsprint machine in Lufkin and we're shipping into Texas, we've maintained our market share of the whole southwest region and combination of [inaudible] in Lufkin plus Snowflake in Alabama.

Lastly, just one question for Pierre. Pierre, could you give us a sense of how much would be left in sort of your -- sort of unused on your credit lines?

It's around 450. Which is unused.

Unused? Okay.

Yeah. And keep in mind we also have this scrutinizing program which is obviously not fully used.

And could you just again refresh how much is –

Yeah, we mentioned that we're using about 470, 480 under Canadian under that program and the program is for 500 U.S.

So 480 Canadian and 500 U.S. available.

No, the full program is for 500 U.S. [inaudible].

Gee, I'm afraid you're fading in and out there Pierre.

I'm sorry. The full program is for $500m US. and we are using up about 480 Canadian at this point.

Yeah.So that's in addition, that difference there, after exchange rate plus your 450 still unused on your lines.

Absolutely.

So we've got -- fair to say that we got well into the middle five whether before there would be any issues even if you stayed where you are now?

Pierre Rougeau Well, that's making a forecast but we have we feel we have plenty of liquidity.

Thank you.

Thank you Mr. Roberts. Our next question will come from Frederic Beausoleil from RBC Capital Markets, please go ahead.

Good afternoon. Just a couple quick questions. Asian newsprint prices, I see your sales came down about 10% at Papco. Was that a function of seasonality in shipments, was it a function of lower prices or both, I've been hearing Chinese newsprint prices fell sharply in the first quarter, can you talk about that and what you see going forward in the Chinese market?

Well, first on the Chinese market, there was a little bit of a drop in -- in pricing in China last year and that was primarily due to the fact that there were a couple new machines that started up in China last year. We expect to see that level out as demand, you know, picks up to fill up for that. We don't really think that's going to be a big problem. But it probably will lead to slightly lower prices in China which was in fact one of the best pricing markets in the world last year. And as far as the mill nets in pan Asia are down and pricing is up but I don't have the exact numbers, Pierre you have –

Fred, part of the reason there is keep in mind a good chunk of their paper is sold in Korea [inaudible], so the price in Korean one might not fluctuate when pan Asia reports back in U.S. dollars. The price might look like it's varying because of the fluctuation of the wan versus the U.S. dollars.

And the fluctuation is much lower in Canadian terms anyway.

Yeah, that's right.

Just one more question, if I may, on natural gas, 30% hedged this quarter, you talked about what you're planning to do going forward but could you just talk about what the energy impact was sequentially I think in the press release you're talking about 26 million year over year, do you have a sequential number that you could provide us?

Energy change from the fourth to the first quarter was approximately the same.

So 26 million?

Well, we said 24, Fred, it was about around -- around 23 sequentially.

Thank you .

Thank you, Mr. Beausoleil. Our next question will come from Nicholas Detmer from Goldman Sachs & Company. Please go ahead.

Yes, thank you good afternoon. Just one follow-up questions my apologies if you covered this we hear that advertising on the margin is getting better at the publishers in April. To what extent are you seeing this improvement in your order flow and could you give us your expectations for the next couple of months?

I think, as we said, we expect now that -- coming out after the Iraqi war, we expect to see advertising pick back up again. It had picked up for several months in a row prior to it and in fact it remained about flat for the month of March and so we expect to see some positive add lineage growth and that normally leads to consumption growth. So our forecast is for improvement in consumption in the next several months.

Okay. Thank you.

Thank you, Mr. Detmer. Our next question will come from Mark Bishop from Raymond James. Please go ahead .

Thank you. Most of my questions has been answered but I did have a follow-up on your equal and alternative asset. John, it looks like –

We lost you.

Mr. Bishop, if you can please press one. Please go ahead, Mr. Bishop.

Yeah, can you hear me now, operator?

Yes.

Yeah, no, it looks like we saw decline in free sheet pricing during the quarter, John I just wanted to follow up on your equal offset. Did you see any sort of decline in equal and alternative offset pricing or was that stable through the quarter?

Our equal offset in the -- the offset -- our Abby offset which competes with free sheet generally followed free sheet pricing so they were down slightly in the quarter.

Okay, thank you.

Thank you. Our next question is a follow-up question from Mark Connelly from Credit Suisse First Boston. Please go ahead.

Thank you. Two things, first, a quick one, Pierre, you've talked in the past of potentially switching to U.S. dollar reporting. Is that something you're still thinking about?

It is something we are still thinking about and we're looking at it. We're not making promises, but it's something that we are looking at.

Okay. And a question for you, John, you know, this price hike seems to be developing the same way the last one did. But what has to happen differently from here to avoid a repeat of last time where, you know, we thought we had 50, we thought we had 50, and then suddenly we acknowledged a two-tier market and we only really only had 35? Can you help us just understand what's got to happen in the next month or so to really solidify that this?

Well, I think you look at some of the statistics, what we've seen, that, you know, the operating rate, for instance, in March was 91%, but if you back out the idle capacity, the capacity that your producers have set said is temporarily idle, means we're operating at around a 97% operating rate. So I think we have the operating rate there. Abitibi and some other producers have the $50, what we need to see is smaller producers need to implement the second half of the price increase.

Do the smaller producers really have the leeway to make a push? You know, are their operating rates high enough, is demand really tight enough? Obviously for them to use an order is a bigger deal than for you to lose one?

[inaudible] running full, so I -- the other thing is given the operating rates we're at and the different time of the year we're going into, April will be -- it's a Easter month and some other things, I think we'll see an improvement in coming consumption and so I don't think that, you know, I think paper is tighter than people think.

Okay. Hope so. Thank you.

Thank you, Mr. Connelly. .Our next question will come from Mr. Mark Wilde from Deutsche Bank, please go ahead.

I too have a couple follow-ups One of them is just on that U.S. reporting issue. Pierre, could you just give us some idea what of what you think the issues are in terms of switching over to U.S. reporting and when we might expect a decision?

Well, the issues are, you know, there are several issues. One is that obviously from a pure management point of view we would have to pretty well change all of our systems to U.S. dollars. Which is not impossible but, you know, it's something which we need -- which takes time on its own. The second thing is that going to U.S. dollars would -- would take away this debt, call it debt or currency -- well, currency fluctuation due to U.S. dollar debt, but what you would see is we also have some Canadian debt, including our pension fund, liabilities and other debt which you would -- so you would still have a line in our P and L which would be foreign currency, currency gain or loss. That line would likely be way smaller than it is today but it would be more difficult to explain it to forecast on a quarterly basis.

Okay. But nonetheless, I mean, you know, what should -- commodity you're selling is mostly a U.S. dollar based commodity, right?

Yes, yes Mark..

Okay. The other question I had just involved the old newsprint market because a lot of the newsprint here and even more so in Asia is made from OMP. And I notice that a lot of communities around the U.S. seem to be pulling their recycling programs. And I wonder if you guys have any thoughts on whether that might matter in the market over time.

I think that we're still seeing a continuing increase in total [inaudible] recycled in both the United States and Canada and in most of the western world. The paper industry has set a new target of [inaudible] recovery [inaudible].

I'm sorry, John, you've –

I think what you are seeing is that some of the major cities forgot why they went into the recycle business which was to alleviate landfill costs and all they're thinking about now is the collection cost and so they're -- it's mostly only one or two major cities that are backing out of the recycle business. On a whole, it tends to grow still.

Okay, all right, thanks.

Thank you, Mr. Wilde. At this time we will now take questions from the business media community. If you do have a question, please press one on your telephone key pad. If you are using a speakerphone, please lift the hand set and then press one. There will be a brief pause while participants register for questions. Thank you for your patience. Once again, if you are from the business media community, please press one on your telephone key pad .At this time there are no questions registered. I would now like to turn the meeting back over to Mr. Lorne Gorger. Please go ahead.

Thank you, operator. Thanks everybody for joining us and we'll see you back on July 23rd.