Resolute Forest Products Inc (RFP) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Bowater third-quarter 2003 earnings release conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Bill Harvey.

Thank you, Operator. Good morning. I'm Bill Harvey, vice president and treasurer. On the call today are Arnie Nemirow, Chairman and Chief Executive Officer, David Maffucci, our Executive Vice President and Chief Financial Officer, Don Newman, our Executive Vice President and Chief Operating Officer, and Julie Hofemann, our Investor Relations manager. I will cover a few preliminary items and then Arnie, Don Newman and David Maffucci will briefly discuss the third quarter and outlook. 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 website. If you have not 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 reconciliations of non-GAAP financial measures used on the call can be found on our website. The call is available to all shareholders via live webcast and replay on Bowater's website, www.Bowater.com. The conference is also open to the press. Please note that while any members of the press who attend our call are free to quote the Company speakers, other participants in the call should not be quoted without their permission. Now I will turn the call over to Arnie Nemirow.

Good morning. Thanks joining us. Our third-quarter loss was $56.7 million or $1 per share. Net of special items, the loss was $51.7 million, or 91 cents per share. These results of course are very unsatisfactory. We have achieved modest price improvements as the economic recovery continues slowly, but these have been mitigated by onetime machine closures and startup costs, the strong Canadian dollar, and at the beginning of the quarter wood availability problem in our Thunder Bay mill. The closures and machine conversions were part of a number of significant operational enhancements. Shutting a high-cost specialty machine at Donnacona Quebec, transferring the production to our lower-cost Calhoun Tennessee mill, starting up a new coated paper machine and pulp line in our Catawba, South Carolina mill, completing a $285 million modernization project to beat cluster rules, reduce costs, and diversify our product lines, transitioning our newsprint market downtime from Calhoun, Tennessee to Thunder Bay, Ontario, and implementing significant workforce reductions at our operations, about 6 to 7 percent reductions.

These initiatives have hurt our 2003 results, however, they will significantly improve our future operating performance. At this point I will ask Don Newman, our Chief Operating Officer, to cover some of the progress we've made in these operational areas.

It has been a challenging period for our operations. We began the third-quarter with our Thunder Bay mill down due to wood fiber shortage. As a result in the third quarter we lost 23,000 tons of production. The wood fiber shortage was caused by third party sawmill curtailments in the Thunder Bay region, due to lumber import duties, low lumber prices and a strong Canadian dollar. We are now using chippers to secure supply. Our cost of fiber at Thunder Bay will remain somewhat elevated in the fourth quarter but we expect them to trend to normal levels in 2004. We have continued to keep a newsprint machine idle and have shifted production from Thunder Bay to our Calhoun mill. As a result, we restarted both the recycled plant and a newsprint machine at Calhoun.

These assets were idle for over a year and the startups negatively impacted our quarterly costs and productivity. The transitions are complete and we are now realizing the benefits of lower-cost production. At the Catawba site, we started up a new fiber line in the third quarter that has proceeded very well. And I'm happy to say that in October we are firmly ahead of the startup (inaudible). This project was initiated to comply with EPA cluster rules, but also lowers the cost and improves the quality of the pulp at the site. The startup of the newsprint machine we converted to LWC at Catawba also has proceeded well. The machine is producing high-quality LWC and I believe it is the lowest cost LWC site in North America.

However, we did experience increased coated paper costs at Catawba in September due to production disruptions and grade shifts on all the machines to optimize site production. In total, third-quarter startup cost the Catawba site approximately $5 million. I believe these issues are behind us and we expect much improved operations in the fourth quarter. During the quarter our Donnacona mill continued to incur demolition and others costs associated with it; completion of the permanent closure of the paper machine. These costs should be about $4 million in the fourth quarter as we complete the transition.

And finally, workforce reductions at our sites are now virtually complete and we have worked through the training and job shifting issues. It has been a difficult period, but we are now positioned to optimize productivity and reduce controllable costs.

Thanks Don. Obviously the last two years have been extremely difficult from all perspectives. On top of poor economic conditions, we implemented several key strategic initiatives including these machine closures and conversions while implementing significant workforce reductions Don has referred to. These were all profit- enhancing steps for the long-term. Our cost structure, productivity, and product mix are all improving, although our quarter results have been hurt by these initiatives, our site structures will have enhanced profit capabilities. Let me shift to the markets now.

Although general economic news is encouraging, particularly today's GDP number of 7.2 percent for the third quarter, the translation of this news to actual demand has been slow. Operating results in most of our grades are reasonable but a stronger demand picture is clearly needed. Although newsprint consumption has been flat year-to-date, our customers point to improving trends in their businesses late in the third quarter. The economic recovery should accelerate advertising spending and newsprint consumption. Inventories remain at check and improvements in demand will improve operating rates. Prices are continually rising.

In this environment, we continue to be disciplined in matching our production to demand. We took approximately 60,000 tons of newsprint downtime in the third quarter and expect to another 40,000 in the fourth quarter. This does not include the 350,000 tons of annual newsprint capacity we have permanently removed this year.

In Coated and Specialties, our outlook for the fourth quarter is cautious. We expect strong demand for Specialties in the fourth quarter due to the holiday season, however, although catalog demand remains strong the magazine ad page recovery has not materialized. Overall demand for coated groundwood has rebounded, but the depressed coated freesheet market negatively places some restraints on the ability to move groundwood prices up. We do expect pricing to gradually improve in the fourth quarter.

Despite these third-quarter results, we are confident that our coated paper strategy positions us to be very competitive with the right combination of lightweight coated and supercalender and specialty grades. In market pulp there were strong Northscan (ph) shipments in the third quarter as demand improved in all regions, especially Asia. Northscan inventories declined by 150,000 tons in September and are in the normal range. Our average transaction price fell by $30 in the third quarter. However, markets have strengthened and we implemented a $15 increase on October 1 and will implement another $15 increase on November 1. October demand for market pulp has been good. We expect that industry maintenance downtime in October will result in lower Northscan inventories.

Looking forward a bit the stronger euro and improving economy makes us optimistic that a pulp upswing is underway. Finally in lumber, housing starts remain strong, however the trade dispute continues between Canada and the U.S. It impacts our business negatively. The beetle epidemic in British Columbia has resulted in additional lumber in an already oversupplied market. The average transaction price improved by 11 percent in the third quarter but we have already seen price erosion this month.

At this point I will ask David Maffucci, our CFO, to talk about the financial results.

Thanks, Arnie. Good morning everyone. I indicated on our July call that we expected the third quarter to be slightly better than the second quarter and we really ended up slightly worse primarily for the reasons that Arnie and Don just covered with you. Our reported loss was $1 per share and included really four special items. We had some small land sale gains that amounted to about 4 cents a share, but we also incurred some foreign currency charges, which were also about 4 cents a share. And then there were some severance costs as you heard during the call during the period that equated to about 5 cents a share, and finally we chose to adopt the FASB FIN number 46. This pronouncement deals with special-purpose entities that were previously handled off-balance sheet and now they are brought on balance sheet. And as a result we consolidated $52 million of assets and liabilities that was a special-purpose entity that formerly held our operating lease at one of our Nuway sites. This adoption resulted in an after-tax charge of about 4 cents a share.

In summary, these special items totaled 9 cents and our loss excluding these items was about 91 cents a share. This was in the range that we indicated in our October press release of 85 to 95 cents. The reported number, however, of $1 was outside our initial range of 80 to 90, and this was higher primarily because of the adoption of FIN number 46 and some small foreign currency charges.

Net interest expense increased to almost $45 million, almost $41 million in the second quarter and this is principally due to the June $600 million note issue that we completed. And also there was less capitalized interest during the quarter as we wound down spending on our capital projects. We expect our net interest expense will increase about 2 to 3 million in the fourth quarter, and excluding any special items, we had had in this quarter an effective tax rate of 42 percent. And for the fourth quarter, we expect to have a rate of around 40 percent.

Operating losses in the quarter after asset sales and the severance was $51 million, as during the quarter we incurred about $5 million associated with the startup cost at Catawba; we lost about 23,000 tons of production in early July due to the wood fiber issues up at our Thunder Bay mill. And our corded paper downtime in the quarter was approximately 27,000 tons.

On the positive side, by the end of this year we will attain an $80 million run rate in our cost reduction program. The work force reduction is almost complete and we have reached about 90 percent of the target of 600 people. In the third quarter, our capital spending was 36.5 million. We expect to spend around 40 million in the fourth quarter. This puts us on target for our annual forecast of 225 million.

Our net cash outflow for the quarter was 58 million, and as I said, we consolidated 52 million of debt due to the inclusion of a previous off-balance sheet operating lease. And as a result, our net debt net of cash rose about 110 million for the second quarter. I am pleased to tell you that during the quarter we amended or U.S. bank facility to exclude the alternative minimum pension liability adjustments to equity from the covenant calculations. At the end of the quarter, our debt to cap on a GAAP basis was 59 percent, but on a covenant basis was 56 percent. And to just remind you the covenant is a debt to cap of 60 percent, so we now are at 56 versus 60 percent. Our network test is set at 1.625 billion and after this amendment our net worth under this calculation will be 1.8 billion or about nearly 200 million above the requirement.

As of September 30, also, our revolving credit facilities were undrawn. Right after the quarter in October we extended our 100 million U.S. dollar 360-day Canadian credit facility out to October 2004. This facility contains the same covenants as the recently amended U.S. facility. Our outlook for the fourth quarter remains cautious. The startups at Catawba are on track and we expect improvements on the cost of productivity site at that site. We also expect that the average pricing in our major products to moderately improve in the quarter. This will likely, however, be offset by deterioration in lumber pricing, the impact of a stronger Canadian dollar, and two fourth-quarter recovery boiler outages. The average Canadian dollar exchange rate for the third quarter was at 72.5 cents. I think right now it is trading at around 76. For every one cent change in the dollar, it impacts our operating income net of our hedging by about $2 million in the fourth quarter.

As I said, we expect price improvements in our major grades, but for a moment if we assume no changes in pricing or no change in the Canadian dollar from third-quarter levels, our operating loss would narrow by 5 to $10 million. This improvement includes $8 million of costs in the fourth quarter associated with the two recovery boiler outages, as well as the 4 million of closure cost Don mentioned at the Donnacona mill. Any additional or significant improvement in profits and cash flow will depend on recovery in print advertising and the resulting impact on demand and pricing for our products.

Again our outlook is cautious but we remain focused on managed, controllable costs. We will keep capital spending very low. Our liquidity is very good and our cost position is expected to improve. The fourth quarter should show some improvement and although we would like the pace of the recovery to improve, the trend in product pricing remains very favorable. Those are the end of our prepared remarks. I'll ask Colin to moderate our Q&A session.

(OPERATOR INSTRUCTIONS) Rich Schneider of UBS.

I was wondering if you could give us -- and I know you have touched on it in various places during your commentary, but a little more details on the things that you consider to be non-recurring/operating problems in the third quarter. The fiber line startup, the reduced coated groundwood production numbers as result of that, could you go through the list of those?

Yes. When you look the Catawba site, we have our startups well in hand. And a matter-of-fact we are ahead of our startup curves there, so we do not expect that $5 million that we incurred in Q3 to repeat.

And that was just the fiber line hit 5 million?

Yes.

Wasn't there also an impact on not being able to produce as much coated groundwood out of the new Catawba machine because of the fiber line issues?

There was -- that 5 million includes primarily the fiber line but there was some repairs in there related to the paper machine.

Okay.

But it is all on the cost side, nothing related to lost tonnage.

Okay, and then the costs related to the Thunder Bay, what was the reconciliation of that because of the wood shortages?

Rick, there's two costs. One is just the about 1 to $2 million that is in that range, and that is again just costs, that does not include any lost tonnage.

Okay, and then the lost tonnage that was 23,000 tons?

Most of that was in Thunder Bay but there was probably smatterings around other areas of the company.

And the startups we had discussed at Calhoun placed about a $2 million nonrepeatable cost.

Okay. So is that the extent to the as you see it, the operating issue that impacted you in the third quarter?

Yes.

One thing that Don mentioned was that we are experiencing closure costs and training and other things at our Donnacona mill which was in the third quarter and will continue in the fourth quarter. Fourth quarter as Don mentioned is about $4 million.

What was it in the third quarter?

About $3 million.

The comment that you took downtime in coated paper in the quarter, was that strictly due to market conditions, or was that also related to the fiber line situation?

I think it was really two parts. Part of it was the fiber line and some additional and a downtime at Catawba, but also we have taken down and are running Nuway operations at about 50 percent of their normal rate, so that reflects also the downtime at Nuway. That was market related.

Okay, and one thing on Catawba. Could you give us an update on where you are right now in the startup of the converted machine, what you produced maybe in the third quarter and what your expectation is for the fourth quarter?

We are ahead of our startup curves on both the Kraft mill and the number three paper machine. The paper machine has been running 245 days to date and we are averaging some 659 tons per day. We are right at 90 percent of our original design rate for that machine this month. The Kraft mill is operating extremely well and we have in fact on a rare day hit our design rate for the Kraft mill throughput. We have obtained over 1600 ton-a-day rate in the last week and a half. So both of those operations are running extremely well.

Much of the positive impact of that is what going to be in the first quarter of next year?

Certainly we will see some improvement in Q4 and following into Q1.

Okay, thanks a lot.

Chip Dillon with Smith Barney.

First just a clarification on the new Catawba machine. I would guess that you are talking about a 900 ton-a-day run rate at design capacity, and so that 659 number is sort of an average over this 245 days. and you are probably much higher than that now, right?

That is correct.

Closer to 800 I would guess?

Yes, actually we are exceeding that.

Okay, so you are exceeding. Now tell us where do you think Nuway will be a year from now? You are running at 50 percent of capacity. It is obviously better for you to sell out your capacity at Catawba's machine. Is that situation improved from where I know you had some hiccups 6 to 9 months ago?

The Nuway operations are performing very well at the moment. They are running at design rate and the quality of those units is very good. Those are flexible manufacturing units and we have in fact taken those units down to 50 percent. And that is all market related and we will continue to adjust the production rates as the market dictates.

While we are on that you mentioned 27,000 tons of coated downtime in the third quarter. What is your guess as to the fourth quarter?

I think its going to be around 21, 22,000 tons, and primarily Nuway.

Okay, and then just a question for Dave. In your statement about the 5 to $10 million improvement with no price change, did that also assume that lumber would not change or I guess you are talking about from the third quarter averages, I guess right?

I am talking about third-quarter averages, yes.

And that would assume no change in lumber as well as the other group?

That is correct.

And then last question would be just in terms of looking at the balance sheet, the asset that offsets the liability that you put on is actually a lease, right, that you have on the Nuway machine?

Once we consolidated it at the beginning of the quarter and then part of our refinancing and our restructuring some of our bank agreements somewhat not, we did pay off that lease. So now it’s actually in our assets as machinery and equipment. So we will be taking depreciation on that.

And given the covenants (ph) that you gave us, it seems like you have got this $200 million cushion. And so even assuming things were not to improve although we certainly expect them to, you probably are still okay with this -- committed to the dividend for at least the next year without blinking. Is that fair?

Without blinking.

That's a good way to put it. Thanks.

Mark Connelly with CSFB.

Just a couple of things. Can you talk a little about what is going on in exports this quarter and what you are looking forward to in the fourth quarter?

Export markets in newsprint continue to improve gradually. We have price announcements in effect in major market areas for us, Latin America and Southeast Asia in particular have newsprint prices moving along in the third quarter. And fourth quarter we expect additional price improvements in those areas in newsprint. Perhaps 15 to $30 per metric ton in those areas. In the UK of course we have annual pricing and those will be up for renegotiation shortly. Overall things are improving, prices are up in the major markets we serve. We do not ship a lot to Europe, as you know.

Any change in the inventory position there? I know it can be lumpy, but is there any lumpiness this quarter? With respect to the exports?

No. No. We keep it above costs as our domestic inventories in newsprint are very low and our export inventories are very stable.

The only place we have any inventory I think is a little bit in the UK.

You have made a lot of progress on cost and the one line that I keep expecting to see do a little better is distribution costs. Can you talk about what is going on in that line? Because it is appreciably ahead of last year. And given all the other progress on cost, I suppose I expected to see more there.

Mark, we do not have all the data here but one of the facts that does hit us early part of the year was fuel surcharges on distribution so we were impacted in that way. I think that some of it of course is your mix of mix with your customers as you take hard lines on prices at times you have to ship further. And so those I think are the two elements that I can think of offhand.

Okay, I got the fuel part but the mix part I had not.

Mark I think you are also going to continue to see that ramp up because we are hearing anecdotally that that their onshore import shipping anyway is going up. And whether or not that will affect exports too we have to keep an eye on.

Right, we are hearing that too, like 5, 6 percent in the fourth quarter in some cases.

I would say Mark we are in a very good position there. We are under long-term contracts for offshore shipments and in our renewals we like to keep it inflation or under and we would hope we could continue that going forward.

One last question on the finance side. Can you give us a sense of what to expect in working capital and deferred taxes next quarter?

Working capital tends to go up obviously because shipments and sales will go up in the seasonally stronger quarter. I have no idea what is going to happen in deferred taxes.

So there's nothing there that you know about in deferred taxes?

Nothing big, no.

And we also tend to get pretty strong shipments, so as Dave says our account receivable will go up but fourth quarter tends to be a pretty good quarter overall.

Thanks very much.

Mark Wilde of Deutsche Bank.

I wondered on the boiler maintenance that is going to go on in the fourth quarter, is this annual maintenance?

Yes, it is.

So it is going to be expensed this quarter rather than accrued for over the course of the year?

That is correct.

And is that pretty much standard procedure for you across all of these types of maintenance costs?

Yes.

Okay. Second question, Dave. I saw that the inventories of specialty paper were up about 6000 tons. It that all Nuway? Is that what is in that category?

No. Specialties would be uncoated groundwood. Specialties would be books, book paper and other hybrids.

Is not a huge number in the grand scheme of things but in that category it’s a pretty big percentage move. Any thoughts on that?

I think Don may want to chime in here, but I think during the book season we tend to carry a little higher inventory, and this is the time of year for that, Don?

Don Newman That is correct.

One thing that you did not mention this quarter is an issue is fiber costs, which I understand are up in some parts of Quebec but also are up across the South, where you have a number of mills. Can you talk about what did or did not happen there in the third quarter?

We knew the costs were going to be higher in the third quarter just because of what went on in Thunder Bay. And we had to go out and instead of buying residual chips we had to do whole tree chipping in the woods and that drove those costs up. We have seen a little bit around the Calhoun area but not appreciably, there has been a small rise in wood costs as the beetle wood has gone off the market, and it's a little more competitive there. But the pressure is around the margin.

So at the other mills, at Catawba at Coosa Pines, at newsprint south you didn't see anything?

Wood costs are maybe 1.5 to $2 million up for the quarter.

Thanks, Dave.

Peter Ruschmeier of Lehman Brothers.

Just a clarification question. The 5 to 10 million improvement keeping things constant, does that exclude the benefit of reduced downtime of about 40,000 tons 3Q to 4Q for newsprint?

That includes just our operating rate for the fourth quarter. I don't think -- your number 40,000 since high, though. It is less than that. It is 20,000 a ton reduction in downtime.

So I thought that downtime was 60,000 tons in the third quarter?

60,000 in the third quarter and 40,000 in the fourth.

Okay. On the coated paper side of the business, can you comment? I mean ad pages have been weak, kind of lagging the economy so far as I guess is usually the case. Can you comment on any anecdotes from your customers in terms of their mood as they look forward? It would seem with a strong economy that we are going to start to see some advertising kicking in. Is there any expectation of that in the conversations with your customers?

Yes. Certainly catalog activity is improving. We hear that anecdotally. I think we will start to see that statistically. And of course that is an important business for us. Year-to-date coated groundwood demand of course is up strongly, but the area that is lagging, frankly, is the magazine situation. We do not ship a lot to directly to magazine publishers, but it does impact us when that area is weak and our competitors are more involved in that end of the business start to come over to our arena. So it is a mixed picture, but I think net-net we are seeing some improved activity from conversations with our catalog customers and some printers.

Okay and do you have any comment on the import pressure of coated paper, which has been significant for a long time? I think one of your competitors was suggesting they thought the import pressure was easing off a little bit. Do you have any evidence of that?

A little bit. Although the numbers are still troublesome, 16 percent September to September increase in coated ground imports. We certainly do not like to see that. And off a low base, it is a real jump year-to-date in imports. So it is still troublesome. I think as we smooth out our operations as a producer, hopefully we are going to be gaining ground on that.

And just last question on that 52 million off-balance sheet that you brought on balance sheet, I assume that there is, I am estimating 6 or 7 million operating lease payments that go away?

I think on a net-net basis the depreciation will be higher than the interest.

Slightly. It is a slight difference, Pete, not big.

Thanks very much.

Jared Muroff with Prudential Financial.

My first question, I was just wondering if you could give a sense in your newsprint realizations how much of that price hike you saw, when it rolled in, and what kind of effect we might see in the fourth quarter from just getting a full quarters worth of the higher prices, and whether or not any of that is built into your fourth quarter estimate of an improvement of about 5 million?

The average that we have for the quarter reflects a mix of all of our markets.

I'm talking in the domestic market for price hike, how much of that price hike you saw and when it starts --

We don't give domestic price. We can tell you it went up 7 dollars across all markets. And that 5 million we talked about was using third-quarter pricing flat, so that 5 to 10 million did not include any change in the newsprint price.

You sell 60 percent of your newsprint here in the U.S.?

70 percent of our newsprint is domestic.

Was also hoping you could give us some idea on what hedging you might have both on the Canadian dollar and whether or not you might have some natural gas hedges?

Hedging that we have on the Canadian dollar, I gave an indication of what the impact would be on a 1 cent change next quarter, typically we hedge our Canadian dollar denominated costs and we pull out of that anything that is basically dollar-based and we are hedged out for two years. We do not hedge specifically on natural gas, but we do negotiate some long-term contracts and we are only really significantly exposed to natural gas at only one mill.

We typically hedge about 50 percent of our natural gas exposure to these contracts.

The Canadian dollar, you say you are hedged out for two years, so from this point forward for two years if the Canadian dollar ran up to a $1 U.S., it would not impact your earnings? What percentage of your Canadian dollar costs are hedged?

We hedge about 60 percent of our Canadian dollar hedge, 60 to 70 percent, in that range. But the number we're giving you on the 1 cent is net of hedging, on the 1 cent movement is net of hedging.

Thank you.

Bruce Klein of Credit Suisse First Boston.

Just so I was clear the hedge - I know you mentioned it and don't want to belabor this, but next year am I right in assuming 1 cent will be $8 million of change? If the fourth quarter is two?

Right.

And then the operation improvement in the fourth quarter of 5 to 10, did I hear that right? That is excluding any change in price or the Canadian dollar?

That is correct.

And if you can help us with -- I know you have a shelf out there. I am just wondering how you think about the shelf and what might drive the decision whether to access that or not? Lastly, just the CAPEX for '04?

The reason we put up the shelf was we were putting up an exchange offer at the same time, because the notes that we went out with in June were 144 A offering, so since we already had money invested with attorneys, etc., we just decided to put up a shelf. We have no intention at present to take advantage of anything. CAPEX for next year we are forecasting at $150 million.

I forgot one more, the location of the $3.1 million severance hit in the income statement is where?

It would be an operating cost.

Operating costs, there is some part of it in SG&A and some part in manufacturing.

Okay, and that is separate from -- I think you had one other line item of $4 million that was a gain, that is a separate issue, right?

Yes.

Thanks.

Ken Cochina (ph) with Mason Capitol.

It looks like you burned a little over $50 million in the quarter and in the last year, you have earned -- when adjusting for the timber sales probably about 200, about 50 a quarter on average. How do you intend to fund those deficits going forward? I know you still have a bunch of timber on the balance sheet to sell, which you have been doing. It is really fortunate that you have had that, and you also have a significant undrawn revolver. How do you expect to fund those deficits going forward and further to that, if they continue, at what point do you either address a dividend or consider an equity offering?

Well as far as funding the deficit, one of the ways we are doing that is obviously we are ramping down CAPEX quite significantly from 225 down to 150 area and maybe even lower than that. So we have got some flexibility there. So I think that is the main place where that will come from. We do have as you said, we are completely undrawn on a $500 million banking facility. So there is opportunity there. We have plenty of room underneath the covenants and we also do have some timberlands that we can consider selling. So we have a variety of options available to us.

So next quarter do you plan on drawing on the bank facility?

You have to estimate that.

I guess point prospectively we are not funding deficits from the past. We are talking about next quarter is the right question and we do have some pricing movements. We look at some pricing increases too.

But realistically speaking you're going to be burning cash, I mean you are getting price increases because you are cutting back production. As you correctly pointed out in your press release, the production is down about commensurately with the price increase, and I don't think anyone would argue that they are demand-driven price increases, so how do you either going to draw on the bank revolver or you are going to sell more assets? Which is it?

We expect the cash burn is going to decline and if we need to temporarily we will draw on obviously the liquidity lines that we have.

Okay, thanks.

Operator, we have time for one more question.

Mark Weintraub with Buckingham Research.

First, Arnie, it seems that you are largely through the latest cost reduction initiative. Where do you expect to focus next in terms of internal improvement?

Well, we are continuing our internal improvement of course in operations. We took a lot on. We had a lot of our plate the last three to six months, as Don indicated. We pretty much have that behind us. There is always continuous improvement in operations. As Dave mentioned, on the cost side we expect to get the 80 million above our target. There is always cost opportunities and we will continue to look at further improvements in costs. I think the combination of operating efficiencies and cost improvements that will help as the economy improves.

Okay, and mostly focused on the cost side still rather than revenue enhancement type of initiatives, would that be fair?

Yes, that's right.

Second, obviously you are cutting CAPEX to 150 million, a pretty big change. How sustainable is that if markets -- hopefully they are getting better but if they don't get better fast, how sustainable is that type of level of spending?

Let me clarify if I could jump in here, Arnie, of that 225, most of that was spent on the two major projects at Catawba. So we spent somewhere between 40 to $50 million on 11 other pulp and paper mills, so we're basically taking that up to 150 million. And that is from input from Don, where we asked him -- we want to maintain our competitive cost position and our quality position, what kind of a run rate we thought we needed to do that.

Keep in mind our acquisitions have been of assets that have been substantially capitalized, capital improvement programs pretty much in place and completed as we acquired the Avenor assets and the Alliance assets, so we have well maintained operations with a lot of fairly recent capital in most of our assets. So for the next few years at least we think we can operate at somewhere in the 30, $40 million per quarter CAPEX budget.

Okay, great. Thank you.

Thank you, operator. And again for everyone on the call, thank you for your interest in Bowater.

Ladies and gentlemen, that does complete our conference call for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.