Resolute Forest Products Inc (RFP) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Bowater second quarter 2003 earnings release. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. If you still require assistance during the call, please press star then 0, and 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.

Thank you. Welcome to Bowater's second quarter conference call. I am Bill Harvey, VP and Treasurer and on the call today are Arnie Nemirow, Chairman and CEO, David Maffucci, our EVP and CFO, and Julie Hofemann, our Investor Relations Manager.

I'll cover a few preliminary items, and then Arnie will provide an overview of business conditions and David will review some financial information. Following that, we will take questions. The call is scheduled for about 45 minutes.

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. Financial and statistical information, as well as reconciliation's of non-GAAP financial measures used on the call can be found on our Web site. The call is available to all shareholders via live Web cast and replay on Bowater's Web site www.bowater.com. The conference is also open to the press. Please note that while any member of the press who attends our call is free to quote the company speakers, other participants in the call should not be quoted without their permission.

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

Good morning. Thank you for joining us. Our second quarter was again very difficult. We lost $25.7 million, or 45 cents per share. Net of special items, the loss was 86 cents, a slight improvement from first quarter levels, but the results are very unsatisfactory. Pricing improved in all of our grades, however, in the quarter, our costs were impacted by a strong Canadian dollar, reduced production due to wood supply disruptions and lower market pulp shipments.

Newsprint consumption is gradually improving, with consumption for U.S. dailies up .7% year-to-date through June. We continue to match production to newsprint demand. We curtailed production by 53,000 tons in the second quarter. Total North American newsprint inventories remains significantly below historical averages. Bowater's domestic inventories are at very low levels.

We implemented a $35 price increase for domestic newsprint customers in the second quarter, and have announced another $50 price increase effective August 1st. Pricing in international markets has also moved up, and spot market prices are beginning to exceed pricing of normal contract tonnage, a sign of a tightening market. Our newsprint production costs were flat quarter to quarter in spite of the impact of a stronger Canadian dollar and higher fiber costs.

In market pulp, demand softened, we believe partially by an inventory drawdown by buyers. Norscan shipments declined 13% in the second quarter from record first quarter levels. Although there was significant industry maintenance downtime, Norscan inventories rose to 1.7 million tons.

Our average transaction price rose by $47 in the second quarter. Price erosions in the quarter were limited to offshore markets but domestic prices weakened in July. The good news is that it appears that the Chinese have returned to the pulp market and we have not seen any significant summer slowdown in pulp purchasing. We expect Norscan inventories to be stable throughout the summer.

Our results in market pulp were impacted by a reduced production because of wood fiber availability issues, strong Canadian dollar, and the impact of somewhat softer demand on our shipments. Prospectively, fiber costs remain impacted by wet weather and a limited supply of sawmill residual chips. We do not expect further fiber supply disruptions, however.

The Catawba startup of the new fiber line and the July shut of the Thunder Bay operations will impact production and cost in pulp in the third quarter. However, we expect shipments to be significantly better than second quarter levels. Shifting to coated and specialty grades, the demand recovery in coated Groundwood has continued. Through May, North American coated Groundwood demand is up over 10%. Particularly noteworthy, magazine ad pages through July are up 6.6%. We achieved in the second quarter about half of the $40 per ton coated Groundwood price increase.

The last part of the year is historically a seasonally strong period for coated Groundwood, as the catalog season kicks in. Our order book has been improving and we expect this to continue for the balance of the year. Our costs in coated Groundwood and specialties declined by 4% in the second quarter. The startup of our Catawba lightweight coated machine continues to be ahead of schedule both in quality and productivity.

The strong Canadian dollar and the closure of the paper machine at Donnacona, Quebec negatively impacted our specialty paper cost. We expect our costs to come down during the balance of the year as the Catawba machine continues to outperform and as we complete the workforce reduction at the Donnacona mill.

Finally, Lumber markets remain weak although residential housing starts are strong. In the second quarter, the significant amount of industry-wide sawmill curtailments did bring the market more in balance and improved pricing somewhat. The soft wood lumber trade dispute between the U.S. and Canada is still a big problem. Recently, the NAFTA panel made public its decision on the anti-dumping duty. This decision ordered the U.S. Commerce Department to recalculate the duty. The overall soft wood lumber dispute remains unresolved, however.

It appears likely that an interim solution or negotiate solution will involve some kind of a lumber quota. This should provide some relief on the lumber tariff picture for us. However, at this point, it's premature to predict the out come. A great deal of work has been done by the Canadian provinces to develop a framework for settlement, but a solution is yet to be finalized. In its conclusion, the first half of this year has been very difficult obviously. We have seen the slow recovery continue in our grades and pricing has moved upwards.

These positives, however, have been dampened by higher energy prices, stronger Canadian dollar and higher fiber cost. This has been an unusual confluence of events, which have increased our costs for now. We do expect a gradual improvement in our results in the second half of this year. Although these pressures have mitigated much of the improvement, the second quarter included some very positive events for us.

We completed our sale of southeast timberlands for $122 million. We raised $400 million of long-term debt, enhancing our liquidity. Our cost reduction efforts continue to lower controllable cost. The small paper machine at Donnacona Quebec was permanently closed.

The startup of the Catawba paper machine has been successful and we continue to be disciplined in the marketplace in achieving price improvements. We expect further price improvements in the third and fourth quarters, and as I just said, cost pressure should abate. We anticipate moderate quarter-to-quarter improvements in operating results. We will remain focused on controllables, and we have reduced our capital spending estimates for this year by another $20 million to approximately $230 million of CAPEX.

I'll now ask Dave Maffucci, our CFO, to provide further financial information.

Thanks, Arnie, and good morning, everyone. The second quarter was very disappointing. In our net income before special items, basically only marginally improved over the first quarter levels. Our reported loss for the quarter was $25.7 million after tax, or about 45 cents per share, and it included three special items.

One was a gain on our land sales of about $65 million or $1.13 per share. We had foreign currency charges of nearly $28 million after tax or 48 cents per share, and also higher severance in the quarter to the tune of about $13 or $14 million or 24 cents per share after tax. Before these special items, our net loss for the quarter was $49 million after tax, or 86 cents per share, and this compares with about 90 cents on the same basis in the first quarter, so as I said, a marginal improvement over the first quarter levels. Since it was such a significant item this quarter, let me spend a little time on the foreign currency exchange charge of $28 million or 48 cents a share.

Just to set the background, you know, the Canadian dollar did move quite a bit during the quarter for income statement translation purposes, the average exchange rate went up about 5 cents quarter to quarter, while the balance sheet, which is translated at the end of each quarter, those exchange rate rose about 6 cents. At the end of each quarter, our Canadian balance sheet is revalued, and in this case, a net gain was recorded on the individual Canadian legal entities, and taxes was provided as a result of the strengthening Canadian dollar.

Upon consolidation, however, there is a number of pre-tax currency gain on inter company items that are eliminated on a pre-tax basis, but the accounting rules do not allow us to adjust taxes so the statutory taxes that are provided on the Canadian books remain.

As a result, we wound up with a next pre-tax charge of about $5.6 million, which was basically a higher U.S. dollar equivalent of Canadian-deferred taxes as a result of the increase in the exchange rate of 6 cents, and then we also had tax provisions at the local level of about $21 million, so this generated a net income impact of about $28 million.

It's important to note that given a flat quarter to quarter change in exchange rate, we probably won't see much movement, and really to put that in context now, the quarter for balance sheet purposes was closed out at a little over 74 cents for translation purposes, and I believe the Canadian dollar is trading somewhere north of just 71 cents. So if we see it hold in at these levels, we should see some improvements next quarter.

The tax rate for the quarter after special items was a little over 40%, and for the balance of the year, we expect an effective tax rate of approximately 40%. As a result of our work force reductions and related pension curtailment rules that kicked in, we recognized a charge a little over $20 million, $20.8 million pre-tax, or 13.5% after tax. Basically we've accomplished nearly all of the work force reductions that we have announced near 600. There will be some to come in the latter part of this year. That alone represents probably half of our cost reduction program, which, of course, we announced at 75 but we think will go slightly north of that.

Interest expense during the quarter went up by $2.3 million, basically because we did do, as Arnie said, our $400 million high yield issue during the quarter, and we used those proceeds to pay off lower interest rate bank debt. We expect interest expense will increase by about $3 million per quarter for the remainder of 2003 because of the refinancing.

Before special items, when you look through at operating income improved by about $10 million over the first quarter as prices in all products and production improvements, particularly from the startup of the number 3 machine at Catawba, overcame a difficult quarter in costs. The reason we don't see an 11 or 12-cent improvement in EPS at the bottom line is because this operating income improvement was offset in part by a lower effective tax benefit that was booked in the quarter.

On the operating side, as I said, significant improvements in production from the newly converted machine at Catawba were offset slightly by production issues at other locations during the quarter. As previously announced, we curtailed production at Thunder Bay from June 28 through July 7. Additionally, there was unscheduled downtime primarily in pulp at our southern mills due to weather and power-related issues, and because of the constant storms in the south over the last few weeks, we have seen some of these disruptions continue I think at our Calhoun mill a week or so ago, there was a lightning strike that knocked out water pumps to the mill and we were down for 12 hours, so we're still being plagued a bit by the violent weather in the southeast.

In total, the company curtailed approximately 53,000 metric tons of newsprint production and 25,000 metrics tons of pulp production in the second quarter. Pulp production is expected to be reduced by about 30,000 metrics tons in the third quarter due to the continuation of the Thunder Bay shut into the third quarter, and also I'll remind you that we will be starting up a new fiber line at our Catawba mill in September, so that will cause production to be off a bit. Additionally, we plan to curtail production in the third quarter by approximately 50,000 tons of newsprint due to the Thunder Bay shut, and also we're going to continue to match our production to orders.

Our results were impacted $12 million net of hedging in the quarter due to the strengthening Canadian dollar. For every 1cent change in the Canadian dollar at today's level, our operating level is impacted by about $9 million per year net of hedging. Capital spending in the quarter was almost $54 million, and it was on target. As Arnie mentioned, we have aggressively reviewed our capital spending budget for the remainder of 2003 and expect to cut it by another $20 million, so the target now for the end of this year is about $230 million in capital spending against a backdrop of depreciation of about $340 million.

In the third quarter, we're going to go ahead and refinance an existing lease on the New Way Covington Tennessee facility. This will increase debt by about $50 million. That $50 million increase, you have seen anyway because of the change in the accounting rules, we would have had to bring that in quick lease on balance sheet, but we went ahead and refinanced it anyway.

In June, we issued the $400,000,000 6.5% 10 year debt and in addition to the lease financing that I just mentioned, we have used the proceeds to repay all of the amounts outstanding under our revolving credit facilities, and a portion of the three-year term loan. At the present time, we have about $100 million outstanding under the term facility, and there are no amounts drawn under our $500 million revolving credit facility.

As of the end of the quarter, after giving consideration to restricted covenants contained in our bank agreements, we still have over $450 million of available liquidity. Yesterday, we announced our quarterly cash dividend of 20 cents per common share, and have no intentions on changing our dividend. This dividend provides approximately a 2% yield, and given the size of our company, represents a prudent long term distribution level of cash.

Finally, I want to emphasize that we remain focused on enhancing our liquidity, reducing capital spending, and cutting costs be and, we are cooperating, implementing the pricing increases. We're very cautious in our outlook for the third quarter. Price improvements will have a positive impact. However, cost pressures will alleviate slowly. We are in a slow growth economy and we do not bank on strong demand to improve our results very substantially in the short term. This concludes our prepared remarks, we'll open the floor for questions.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star, 1 on your touch-tone phone. You will hear a tone indicating that you've been placed in the queue, and you may remove yourself from queue at any time by pressing the pound key. If you're using a speakerphone, please pick up your handset before pressing the number. Once again, if you have a question or a comment, please press star 1 at this time. And our first question will come from the line of Don Roberts from CIBC. Please go ahead.

Thank you. Arnie, you had specified the amount of pulp and Newsprint down in Q3. Could you give us any numbers for the other grades, the Groundwood specialties?

As far as downtime?

Yeah.

We have no planned downtime in specialty.

OK. Second question is that you had mentioned year-to-date newsprint consumption numbers were up, and yet the June numbers were down, and it looks like the bulk of it was done on the commercial printers. You've got a good perspective on that since you supply a full range of products. Were you seeing, perhaps, substitution by the commercial printers out of newsprint into your -- the lower coated Groundwood specialty grades?

Hi Don, its still Arnie, there is some commercial printers -there is always substitution as you know. I think one of the June number basically was down very slightly quarter month to month, but we do see activity in the commercial printer market where there always is that substitution, and it flows from month to month.

But the year-over-year was down, you know, a higher percentage, and I was just wondering if you're concerned on that relative price signal that's being sent out there and maybe a need for downtime.

I guess the other aspect of it is the pricing in those specialty products is moving up as we speak, so it has been moving up through the second quarter and continues to move up.

OK. Lastly, could you just -- any comments on sort of the current status and outlook on the O&P market?

Don, the O&P market has been relatively stable in the quarter with the exception of Korea, offshore markets have moved around a lot more and there has been some upward pressure on O & Pin the Ffar Eeast. But in North America, relatively stable.

And do you see the outlook for the Korean prices, any observations there?

Korean newsprint price has been somewhat softer than it's been. It's still a very attractive price the market has got good growth characteristics, and because of that, the price has been relatively good in worldwide is one of the better prices.

OK. Thank you.

Thank you. Our next question will come from the line of Mark Wilde from Deutsche Banc. Please go ahead.

Good morning. I had a few questions. Arnie, I wondered if you could give us any more color. You mentioned that spot newsprint prices were starting to move up a little bit. Is that domestically or off shore?

Offshore. Don't have the metrics on it, Mark, but it's there's a good sign, as you know that, we've seen that occurrence on more than one occasion recently here off shore.

Mark Wilde And I noticed on --I heard the other day that one of the other big producers has announced price increases in Latin America and in a number of markets in Asia. Have you done the same?

We have. We have price increase announcements throughout our export markets $25-plus dollars in Asia, 20, $25 in Latin America, $25 in Brazil and so on. We see July through September some solid price increases in most of our export markets in newsprint.

OK. And then can you talk about in newsprint downtime right now, just given kind of fiber issues and exchange rates and everything, where you would be likely -- most likely to take downtime across your system right now?

Well -

U.S. versus Canada or -

Dave mentioned we're scheduled 50,000 tons of newsprint downtime in the third quarter. That will be in Canada between Thunder Bay and Donnacona.

OK. So even with the recent weakening in the Canadian dollar, that wouldn't have any effect on that?

Relatively speaking, that's still the place for us to take the down time.

OK. And then finally, what's the CAPEX number look like for 2004?

2004, we're focusing at about $150 million for CAPEX.

OK. Thanks, Dave.

Thank you. Our next question will come from the line of Steve Chercover from D. A. Davidson. Please go ahead.

Good morning. Could you just refresh us where your land sales took place? I don't recall.

Sure. That was 88,000 acres that took place in the south, basically in north Georgia along I-75, north of Atlanta.

Thanks. And how much acreage do you still have that's freehold?

Steve, we have about 1.4 million acres freehold, of which 400,000 is in the U.S.O. Thanks.

Thank you. Our next question will come from the line of Rich Schneider from UBS. Please go ahead.

Mr. Schneider your line is open.

Rich.

Yes? Hello?

You're on, Rich.

Yeah. Great. In terms of the coated paper operation, the improvement in the loss from $28 million to $19 million seem to be much less than, you know, would have been anticipated when you look at, you know, Catawba, I think, cost you about $12 million in the first quarter in terms of the conversion costs, and that should have been largely absent in the second quarter, plus your realizations were up in coated Groundwood. When you put all that together, the loss position, I would have anticipated, would have been a lot less than the $19 million. Did you go through what happened in that operation?

Hi, Richard, it's Bill Harvey. Just, I think your logic is fine. The other point of course is specialty operations include some two mills in Canada where the Canadian dollar were stronger, as well as with the closure of our Donnacona paper machine, that course increases the fixed costs of that operation until we reduce and the labor is coming out through the balance of the year, but at this point, the fixed costs are higher until the labor comes out.

OK. Are you able to pick up or reduce the cost or eliminate the cost of the Catawba, the $12 million that you -- that occurred in the first quarter?

Yes, the Catawba startup is ahead of schedule. It's been a wonderful startup. In that site alone, the costs came down very dramatically.

OK. As you look at, you know, the balance of the year, obviously costs are going to impact you in the third quarter. Could you give us an idea of how you see, you know, overall costs in the third quarter? Are they going to be relatively about the same as this quarter from the standpoint that the downtime seems to be very similar?

Yeah, I think we'll see, it will be relatively the same, maybe slightly better, but I would say relatively the same.

And then what's your outlook for the fourth quarter in terms of the cost?

We should see a little bit of improvement in the fourth quarter. We'll be by our startup of our Catawba facility, we'll have a new pulp mill in place, and we should see our costs come down there.

Shouldn't we at some point see a fairly large improvement in your cost position since, you know, we've gone through two quarters where things have gone, you know, fairly negative on the cost side and the third quarter doesn't look particularly great on the cost side. When do we start to really see a dramatic change?

I think you'll start to see it in the fourth quarter.

OK. And just in terms of downtime costs, could you give us an idea what the impact of the 25,000 tons of downtime had for you in the quarter on the pulp side?

Yes, Rich, there's two components of that. The fixed cost absorption, interest and repairs, but it is in the order of about $5-$8 million.

OK. Thanks a lot.

Thank you. Our next question is coming from Chip Dillon from Salomon Smith Barney. Please go ahead.

Yes, good morning. When I look at the newsprint transaction prices that you have, that you sent out, it's interesting, it looks like your low point in '02 was around 4.45, which is what pulp and paper week has, and yet for the second quarter, I don't see your realizations up near the 5.05, which they're pretty much posting, and I wonder, does that present a potential upside surprise opportunity in the third quarter, or is there some other explanation, you know, in addition to the export market that would explain the discrepancy that we didn't have last year but that we do see now?

The export market is a big component of that. About 30% of our production is export. So I think the biggest component is export, and I can't really comment on the pulp and paper price, but that's our average price was 4.78 in the quarter.

And so that would, of course, suggest that the export prices have been really lagging, the North American prices, but then hopefully that goes away or gets mitigated by these price increases you talked about.

That's correct, with the exception of Europe, where the prices are higher than North America.

OK. Maybe I missed something, but it seems like, and please correct me if I'm wrong, that you might have adjusted -- did you restate any of the segment operating income by product numbers for the first quarter?

Yes, we did, but only to the point of view of putting the hedging -- we have a hedge component or the Canadian dollar hedges and we've just adjusted the operating income by product. We have not had that done by the first quarter, but we hedged the costs, and that reflects the impact of the hedges per product line, and that's the Canadian dollar hedge.

Chip, just to emphasize there, when you look at a statutory P&L, the higher costs that come through as a result of translation hit cost of goods sold and benefits of our hedging program flow through SG&A, so really to correctly state the product line information, we took that benefits of the hedging and SG&A and spread it by product, so that's where you see that restatement bringing the costs down.

OK. And then last question, you mentioned earlier that you had -- you still have 400,000 acres of southern timberland, and could you just tell us a little bit about how much of it you would see as strategic, or even if it's strategic, I know you can sell and lease it back, but sort of what the character is. I know that you had some terrific land that you sold recently, as you said, along I-75. Is this land sort of similar or is it hodgepodge or how would you were characterize it?

It's a mixed situation, Chip. It's not on average as valuable as the recent transaction, unfortunately. It's mixed hardwoods, it's in the middle south, and some of it has been damaged by beetles, and so it's something that -- you say it's not strategic but it's not carrying the highest value either. At some point, we might see monetizing that, but it's not critical to be monetizing that right now. Not as much as the 88,000 acres we just sold.

OK. And then last question is, looking at the lumber number, it was interesting, one of your big newsprint competitors that reported this week actually had a loss in lumber even if you added back the entire $20 million in tariffs it pays, and I know you all might actually -- I forget, what is your tariff per quarter?

Approximately $4-$5 million.

So actually, you'd be in the same boat and near cash-break-even. As we've seen lumber start to roll over down once again in the last few weeks, at least looking at the trade press, again, is there some kind of point where you feel like there might be one or two facilities that I guess are the weaker links in the chain that you might have to bite the bullet on because everyone seems to say that, well, you know, if prices go to X, then we'd make all this money, but if no one shuts down anything and certainly if these interest rates that have already started to go up impact housing, you know, it's never going to happen.

Your question really relates to the fact that if the price of lumber doesn't bounce back, is your question more about curtailments?

Or permanent closures?.

On the temporary basis, of course, our operating basis is really in the mid 70's in lumber, 75%.

Certainly that would be something we need to look at. Right now, wWe are monitoring the situation week by week and taking down mills on a temporary basis. But if this looks like it's going to be a protracted downturn, we'll have to reconsider that.

All right. Thank you.

Thank you. Our next question is from the line of Lise a Shonfield (ph) from J.P. Morgan. Please go ahead.

I just wanted to come back to Thunder Bay and the downtime costs there. I'm a little bit confused. I think you said that the costs of downtime there cost 5- to $8 million in the quarter. I had pencilledpenciled in on the source of the guidance you gave in the 2nd quarter $11 million. I just wanted to clarify that issue. I also wanted to understand as we move into the third quarter, we're still taking downtime there, is the downtime cost expected to be in the $5-$8 million range, lower, higher? If you could give , some clarity on that, please?

I did check the number. It's really about $8.8 million, but that's pulp alone, and that relates to the mating and spending of the fixed cost absorption for pulp alone. We talked earlier about the Thunder May side being down its really two different issues One, it was down in May related to a power outage which affected both newsprint and pulp, and when I was talking early earlier, that related to just the pulp product line alone.

Is it more like $9 million in total and lower than that just for pulp?

$9 million is just for pulp. The pulp product line, which includes Thunder Bay primarily. I mean, almost all of that is Thunder Bay, but there's a little bit at some other facilities.

And then the continued sort of outages, should we see an improvement in costs then as we move into the third quarter? Because you just got into the ongoing downtime you don't have a big full outage?

We've got two things happening. You've got six days at Thunder Bay that lapped over into July, and we also have the downtime associated with the startup of the new fiber line at Catawba. So there will be some offsetting penalties there, and as we said on average, costs will improve very marginally and will be pretty consistent with this past quarter.

OK.

That would be in pulp.

What was that last comment in pulp?..

The improvement we're talking, the costs would improve, again, we're referring to the pulp side of the business.

OK. So most businesses will be similar, but pulp, we may see some improvement. And then just looking at wood fiber and energy costs on a sequential basis, do we get any improvement at all on a sequential basis on the cost of either wood or energy?

Prospectively, we would think the wood fiber costs would start to alleviate, although it's still been very wet in the U.S. south, and fiber costs at this point have not improved significantly in the U.S.

And you didn't get much of a benefit in the second quarter?

No, we did not.

OK. And on the energy side?

The benefit we got was usage in the second quarter, slight benefit there.

OK. That's my only questions. Thank you.

Thank you. Our next question is from the line of Bill Hoffman from UBS. Please go ahead.

Yeah, just a question on the ramp-up of at Catawba. Just want to get a sense on your expected volume ramp-up in the third and fourth quarters relative to where you were in the second

Just to clarify the question, Bill, that ramp-up is on the coated and specialty paper side of the business?

Correct.

We would think we would continue to show a 20,000-ton or so of improvement in the third quarter because of the ramp-up.

OK. And then just switching to the newsprint side, you indicated here that sort of on the average got about $18 per ton improvement in the second quarter. I'm assuming we'll see some flow-through into the third quarter from the prior price increase, and then I want to get a sense, one, how much of that we might see on a flow-through basis and then secondly, with regards to the August price increase, you know, when, if anything, that might start to hit whether you think it gets implemented right away August 1st or can you give a little color on that?

Bill, just on the flow-through, there's very little flow-through from quarter to quarter primarily because we had implemented 50 for a period in the second quarter, so the average you see for the quarter is not reflective of an upward trend, it's just more of a flat trend through the second quarter.

OK.

And then if you look historically at us last year, for instance, we got for an August price increase about $5 in the third quarter. You might see a little more than that, but I think you just have to look to the past to make your judgment.

OK. And then finally, you talked about your cost reduction programs, you know, impacted target of about $75 million, yet we continue to see all these other offsets. Can you give us any indication of where you are actually on that program as part of what kind of -- how much benefit we've seen on an annualized basis so far? in

I think from a run rate, we're probably over this stage, we're probably well past 50% of the $75 million.

And does the rest of that blow in sort of Q3, Q4 time frame?

Yes.

OK. Thanks very much.

Thank you. Our next question will come from the line of Bruce Klein from CSFB. Please go ahead.

Hi, Good morning. Couple of questions. I guess the charges, can you just help us in housekeeping where those are in terms of the severance and the FX? I didn't see that. I might have missed it.

I'm sorry, I don't to follow the question. Sorry, Bruce.

Where they're located in the income statement, the severance and the FX charges.

The severance is in the cost of goods sold.

OK.

And it's in the product cost. The translation -- affects translation costs of I think we said $12 million net.

Yeah, I think 13.5.

Is also in product costs. What's flowing through also in product cost that appears in the P&L is the hedging gains that we put in product costs, and what basically hits us, as I said, the nearly 48 cents a share is basically in SG&A for about $5.8 million, and there's another 20-plus in taxes as a result of the movement in the Canadian dollar.

All right. I did make a mistake. It was 27.6 from FX, and you're telling me I think 5.8 SG&A and the rest is in taxes. Is that right?

Yes.

OK. And then is there any other asset sales that you're considering monetizing or would it just be the remaining timber, which is, I guess you said, potentially down the road 400,000 acres, or is there anything else that would--

Nothing else right now, Bruce. Just what you said.

OK. And then in term of the newsprint, in terms of this hike sticking on in terms of August do you think things need to change with respect to either more downtime or demand change or anything in order to affect this hike?

Well, it certainly would be easier if we had stronger demand. You know, you saw the statistics. They're modest improvements. There are some more cost incentives right now to hang in and get that $50 price increase more so than even last quarter or three quarters ago, so certainly the currency issue and all these cost-related problems is a real big motivation to stick with the $50

And the 1 cent change in the dollar translating to $9 million, that's excluding any impact from hedging? I wasn't clear on what you said. Was that including the impact of hedging?

That is net of hedging. That includes the impact of hedging.

What would it be without it? Do you know?

We hedge about 50% of the exposure.

OK. I don't know what that would translate into if you didn't have that. Have you figured out that number or no?

It would be in the $15 to $18 million range.

OK. And the amortization in terms of debt maturities in the next three years, pro- forma for the high yield note?

We have the one -- the term facility, the $100 million outstanding of the term facility and the amortizations other than that are approximately $10 million a year in syncing funds.

The amortization of $100 million is what in in what?

The $100million It's due in 2005, May 2005. The balance of it is in just some small singing fund payments every year of about $10 million.

$10 million total?

Yes.

OK.

Bruce, just to back up, the foreign exchange loss of $5.6 million is a separate line on the P&L. There's also a reconciliation of GAAP to non-GAAP in the footnotes that you can track through and see what's happening to the foreign exchange.

I see -- OK. So the 5.6 of FX, I do see below the line, so that's not in SG&A, right?

Correct.

And the other piece you're saying is in the taxes still?

That's correct.

OK. And then last question was just the bank covenants. What is the test and where you stand versus the test?.

We have had two tests in our bank agreements, Bruce. One of them is to have a debt ratio of 60%, and we're currently at 56%. And the second is to maintain shareholders' equity in excess of $1.625 billion and we're currently at $1.74 billion.

Did the debt to cap test change?

I didn't hear you.

Does the debt to cap test change during the period that the banks are outstanding?

It was always 60%.

Thanks, guys.

Thank you. Our next question will come from the line of Scott Mervis with Bear Stearns. Please go ahead.

Hi, guys. Just on the cash flow, I guess I was trying to look at the quarter before. And just help me with my math if I'm wrong. The second quarter, it looks like the first quarter, you had operating cash flow of $49 million and through six months, it was $41 million. What was the big change there? Was that just in net income or was it working capital?

Working capital, if you remember, in the first quarter, we've got about $75 million of tax refunds in the first quarter, so that's what helped that quarter's working capital.

OK. So the second quarter was negative $8 million from operating activities, and you say CAPEX was about $54 million in the quarter?

Yes.

So just cash flow after CAPEX was negative 62. And did you guys mention when you thought you'd be free-cash-flow positive? I know last quarter, I think you were thinking possibly third quarter.

I think that was before we saw the run-up in the Canadian dollar, and also the fall-off in pulp prices that we saw happen during the quarter have rolled into the third quarter. So I think on balance, we might be able to get there by the end of the fourth quarter.

To be free-cash-flow positive?

Free-cash-flow positive.

At the CAPEX.

(inaudible). Operator, we have time for one more question.

The last question will come from the line of Alex Madow (ph) from UBS. Please go ahead.

Hello, Alex? Operator, I don't think we hear anything.

OK. Sir, Mr. AlexMadow your line is open. OK. We willould take the last question from Peter Ruschmeier from Lehman Brothers. Please go ahead.

Thanks. Good morning. Most of my questions are answered. I just want to come back to the synthetic lease, bring it back on balance sheet. Can you just share your thought process on that?

Change in the accounting rules. If we didn't do anything, we would have to consolidate that special purpose entity and bring it on balance sheet anyway, and when we took a look at when that was going to mature and the funds we raised from the $400 million high yield facility, we decided to just take out the synthetic lease. But the net effect would have been the same anyway.

OK. So -- but you still have other operating leases that you're utilizing, correct?

Very small amount. We have a note in our statements, and if you look at it, we're talking very tiny amounts.

Most of them might be timberland leases.

OK. Coming back to Catawba, can you just elaborate-- , you've mentioned that the machine is going up its learning curve nicely. Can you just elaborate more on the marketing side of how you've prepared the market for this product, what the market acceptance is, you know, what niche you're filling there? Can you just elaborate on that side of the equation?

Hi, Pete. It's Arnie. Market improvement continues in the whole coated Groundwood sector, as you know. Some of the statistics look pretty good in terms of consumption and demand growth quarter-over-quarter, as we had hoped. The quality of the customer acceptance is very high. We have been blending various grades into market so we haven't created any supply issues, and that was our plan from the start. So in our view, everything is going as well as expected or better than expected in that whole coated ground wood strategy and machine conversion and the grades that we're introducing in the marketplace. What we could take, of course, is some stronger pricing. A little bit disappointing. We were up about half of the $40 that we were shooting for in the second quarter. Didn't get there, but I think you'll see gradual improvement throughout the year on the pricing side. That's the only thing that really has been short of plan.

OK. And are you placing the tons with existing customers primarily or are you really getting into some new channels and finding some new customers?

I think it's mostly going to existing customers.

OK. And is the product to the point where, you know, obviously it's saleable product. Should we expect any improvement in price realizations as you get further through the learning curve, or not?

No, most of the coated we've been able to take off of that machine has been first quality and has been sold as first quality. We had very little off quality tonnage as a result of the startup. –true Market improvement.

OK and maybe, Arnie, is it possible to take a step back and share with us your thoughts on the new way strategy? We've been a couple years into this. You know, kind of how that's going versus your expectations, and I assume that you've kind of hit the brakes a little bit on some of the conversions going forward.

Well, we have got to the point where we're very satisfied with the productivity out of the two new way operations and the quality. Productivity and quality have been -- expectations -- have exceeded expectations in recent months. The problem continues to be the market and the pricing in the market for the New Way products, and too to a certain extent, we've enjoyed newsprint price improvements working on the third one now in the last 12 months of newsprint pricing, which is a cost basis at new way, of course, because it's taking a new way, a newsprint based sheet and converting it.

So the newsprint momentum is ahead of the specialty segment in terms of price improvements. So we have had pricing short falls although the productivity and quality is ahead of plan. Therefore, our margins are negative, we're frankly burning some cash, we have been all year at New Way. To alleviate that somewhat, we have switched to about a 50% production rate at the two new way plants for the next few months to reduce the cash situation, cash burn situation, looking for stronger markets. When those markets improve as we expect them to do in the next couple quarters, we should get to our expected levels in new way markets.

OK. Great. Super. That's all I had. Thanks a lot.

We'd like to again thank you all for your interest in Bowater, and please feel free to give us a call with any follow-up questions. Thank you very much.

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