Resolute Forest Products Inc (RFP) 2004 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Bowater first quarter 2004 earnings release. [OPERATOR Instruction] Now I'd like to turn the conference over to our host, Mr. Bill Harvey. Please go ahead.

Thank you. Welcome to Bowater's first quarter conference call. I'm Bill Harvey, Vice President, Treasurer, and on the call today are Arnie Nemirow, Chairman and Chief Executive Officer, David Maffucci, our Executive Vice President and Chief Financial Officer, and Julie Hofemann (ph), our Investor Relations manager. I'll cover a few preliminary items, then Arnie and David will briefly discuss the fourth quarter and the first quarter outlook -- sorry, the first quarter and the second quarter 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 that's on our Web site. If you haven't read it, please do so.

We will be discussing such forward-looking matters in 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 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, and thanks for joining us. Our third quarter loss was $32.5 million, 50 cents per share; debt of special items loss was slightly lower. These results are in line with the first quarter expectations communicated in our January conference call; slightly better product pricing was partially offset by higher energy and fiber costs. I am very encouraged by the improving trends in our business. The strong economic recovery in the U.S. is improving, the underlying demand for our products. We now enter the second quarter with higher pricing in newsprint, market pulp special fees and lumber and with a price increase announced for June in our coated grades and in our market pulp grades. In newsprint, assumption by U.S. dailies was slightly down in March. Reason ROP ad lineage numbers are very encouraging. March ad lineage increased 3.3%. Newspaper publishers are seeing a significant recovery in advertising, including job classifieds.

The advertising recovery is gaining momentum, and this should translate to a recovery in newsprint consumption. Export markets are also improving. Prices off shore are rising, and year-to-date export shipments have increased by more than 8%. Customer inventories in North America have risen over the last few months, but new inventories are very low. Total inventories are about the same as last year. We are implementing the domestic newsprint price increase announced during the first quarter. In addition to much improved advertising, other fundamental support biz increased, industry operating rates excluding idle capacity are in the high 90s. There's better offshore demand and price increases are also succeeding in the ground with paper spectrum. So the tone of the newsprint market has improved. We have held firm on the $50 price increase, and we have given up business in certain areas to support this. But our backlogs are better today than they were just a few months ago. Shifting to coated and specialties, demand has improved sharply. Overall, coated ground wood demand was up 7.1% in the first two months of the quarter. Uncoated mechanical up 6.9%, and SC papers up over 5%. Imports of coated papers are declining, and operating rates are improving.

Our order backlog improved by over 10 days since year-end. Today they are well over 30 days. We expect and our customers expect a strong second half of the year. Given these fundamentals, we have announced a $60 per ton price increase for coated products effective June 1. We also continue to enjoy the benefits of exceptional performance at our Catawba side. The converted machine is running well ahead of its start-up curve producing high quality lightweight coated and costs that continue to decrease. We believe Catawba is the lowest cost coated ground wood site in North America. In market, pulp demand was very strong in the first quarter, although world pulp statistics for March 31 have not yet been released, we estimate that industry shipments will be over 9 million tons in the first quarter, a record, and world producer inventories will be down to an estimated 32 day supply.

Bowater ended the quarter with very low pulp inventories at 14 days. At the beginning of the quarter, there were pressures in hardwood pulp pricing, but by the end of the first quarter, strong demand had resulted in price increases for all grades, even hardwoods. Three consecutive increases were implemented from February to April. The improvement in underlying paper market support continued improvement in pulp markets. So we've just announced a price increase of $30 per ton in the U.S. effective June 1. In lumber, housing starts remain strong. Sales of new homes surged in March, the highest since June 2003. This underlying demand combined with some rail car shortages has tightened lumber markets dramatically. In the first quarter, we also took advantage of strong capital markets. We issued $250 million of floating rate notes and repaid our bank debt.

In April, we established new bank lines. Our liquidity is excellent. Looking forward to the balance of this year, we expect the current positive trends for our products to continue. We remain focused on reducing controllable costs and limiting capital spending, and free cash flow will be directed to debt reduction. I'll now ask David Maffucci, our CFO, to provide further details on the first quarter results.

Thanks, Arnie. Good morning, everyone. As Arnie mentioned, the first quarter was in line with the expectations we communicated on our January conference call. However, I think we should note that nonetheless, the first quarter operating environment was difficult. As you know, there was an extremely cold weather in North America during the beginning of the first quarter, which caused energy usage at a number of our mills to be higher than what we expected. Then you take this and combine it also with higher energy and wood costs that contributed to a difficult quarter. Energy costs increased about $8 million versus the fourth quarter, which was, as I said, somewhat worse than we anticipated, and I our wood costs were higher by about $6 million. That being said, I think both the energy and the wood cost issues have begun to abate and should possibly return to more normal levels.

When you take a look at the tax rate excluding special items, our first quarter tax rate, which by the way is a benefit, was 49%. This is higher than we had initially anticipated. For the remainder of the year, however, our current view is that the 49% is a good effective tax rate to use, but obviously as succeeding periods after 2004 of higher profits occur, that effective tax rate should drop back to dip around the 38% level. The market curtailment for newsprint during the period was about 36,000 metric tons. This was all due to a shutdown of an idle machine at Thunder Bay, and we expect this to be idle the entire year. Of course, that will be entirely dependent upon where the market conditions go as to whether or not that machine gets started up.

But in our current view right now, it's idled for the year. During the first quarter, we had a 21-day outage at our Donnacona Quebec specialty mill. That outage was a result of the major machine modification to improve quality. It actually lasted a little longer than we had initially planned, and the full impact to the first quarter was about -- a cost of about $3 million. Looking at Selling, General and Administrative expenses, no surprises there, I think they were in line with last year. In the first quarter, our capital spending was $19 million, which is in the target range as we had given guidance for in the past of about $100 million for the year. We expect to hold the quarterly capital spending in the $25-30 million range this year, and again, just to remind you, that's roughly a third of our depreciation.

Our net debt net of cash increase in the quarter by $50 million, and that comes from three sources. One is the $19 million of capital spending. We also had a tax payment that we made during the quarter of about $19 million, so that's about $40 million, and about another $11 million for dividends rounds out to the whole cash usage of about $50 million. In the quarter, net interest expense was $47 million, slightly higher than the fourth. Interest costs are expected to be roughly the same the next quarter. During the first quarter, we issued, as you know, $250 million of senior floating rate notes. We used the proceeds of those notes to pay all amounts outstanding under our revolving credit facilities as well as a portion of what was outstanding under our AR securitization. Also we also completed in April -- we put in place a new revolving credit agreement with our banks totaling $435 million, and it's a three-year facility which will expire in 2007.Our debt to cap at the quarter-end is calculated in accordance with our credit facilities, was 58%, and of course slightly higher than that when you look at it on a GAAP basis.

Looking ahead to the second quarter, I believe that you'll see pricing will substantially improve our operating results. The benefits of the $50 Newsprint price increase will be primarily reflected in the second quarter, and that quarter, will also see the benefits of announcements in coated and uncoated ground wood grades, as well as market pulp, and I think those will also have a significant influence on our second quarter results. Costs due to maintenance downtime will be higher on a quarter-to-quarter basis. In the second quarter, we do have some planned maintenance downtime at three pulp and paper mills, which will temper the cost reductions in wood and energy. These outages include a major maintenance out at our Calhoun facility, which occurs every two years, along with a couple of annual recovery boiler outages at two other locations.

As a result, it looks like we're going to lose about 11,000 tons of Newsprint production, and 17,000 tons of pulp production. This will raise our repair costs by approximately $11 million in the quarter. We're also seeing recycled fiber prices begin to trend higher, so that should factor in to your thinking in the next quarter, but the outlook for lumber price and markets continue to be strong, even as we go into the summer season. As I said, we expect to see a meaningful improvement in the second quarter results compared with the first quarter, and this will set the stage for, I think, a solid progression for the balance of the year on quarter-over-quarter improvements. That's what we're looking forward to. This concludes our prepared remarks, and we'll now open the floor for questions, operator.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Chip Dillon with Smith Barney. Please go ahead.

Hi, guys. This is actually Tim Fine (ph) in place of Chip. First question I had was on the new wave facilities. I think you remarked in the past you were targeting three facilities, is that correct, on the new way projects?

There are two facilities. There are three lines in total but there are two facilities.

Okay, okay. Also on the, can you comment on, you mentioned or you spoke on the recycled fiber costs. Can you just update us on your fiber orientation in North America and then overseas? I imagine like in Korea, is that entirely recycle based or -?

Yes. From a newsprint standpoint, it also produces pulp there. That newsprint is 100% recycled. As we said, Korea is 100% recycled and we have recycle facilities at Calhoun and several other facilities.

Okay. And then just finally, with the ground wood market seeming to firm up a bit. Are you seeing any shifting down to newsprint from some of the other specialty ground wood grades into newsprint, or is it a little early for that?

We haven't seen any evidence of that yet in the commercial printing market, when you look at the newsprint states, is still weaker than it had been historically. So we haven't seen any concrete signs of any shifting down yet.

Thank you.

Our next question comes from line of Mark Weintraub with Buckingham Research. Your line is open.

Thank you. First as you mentioned there have been a series of pulp price increase, I was just wondering if you could us give a sense where your pulp prices are now relative to the first quarter average.

Compared to the first quarter average mark, the pulp price will be almost $50 higher across the board.

Okay. And then that reflects pretty much the three increases, and then you have the next one that's just been announced, is that correct?

It reflects all the increases that have been implemented.

Okay and on newsprint, you mentioned your backlogs were better. Can you tell us what your backlogs are?

Backlogs are over 30 days now. That's up five or six days from just beginning of the year, so it's up about 20%.

Okay, great. Quick question on your forward contract, Canadian dollar forward contracts. Looking at the annual, it looks like you've got 572 million of notional amount that was going to come due in 2004. How does that play through the year-end and how does that impact the P&L? I imagine that the costs go up as you basically are going to roll over these forward contracts.

Mark, hello it's Bill Harvey. The forward contracts that we put in place this year would there be very fewer of them to zero of them for this year. Those contracts are spaced through the year, are relatively stable, are relatively constant amount through this year, and through next year. As you saw in the note, the actual rate for this year, you could pretty well assume that impacts us equally quarter to quarter. I think we have to keep in mind the Canadian dollar has weakened since over the last month or so. Of course that means we will get less benefit from the hedging point of view but we obtain a better bottom line benefit across the company just from lower costs.

Okay. So that affected the first quarter and that was part of the reason why your cost per ton would have gone up, is the forward contracts rolling off?

No, the first quarter average Canadian dollar rate compared to the fourth quarter was almost the same. And the amount of contracts in the two quarters was relatively close.

Okay. And then lastly, you'd walked through the cash flow, and I guess I hadn't fully understood the math you used. I understand how the 19 plus 19 plus 11 adds up to 50, but I guess if I looked at your EBITDA in the first quarter and then I take off the Capex and the dividend and the tax payment, I still would have come up to a much higher number. It seems like the cash from operations, that minus 21, it seems like there was something else that was -- did you have working capital bills or something else that was going on?

We did have some working capital bills, accounts receivable went up slightly, and payables went down slightly and would they mentioned the tax payment, that would be a working capital use. The $19 million. Okay. I'll follow up with you later. Maybe I'm getting it wrong.

Okay.

Thank you. Our next question will come from the line of Karen Gliesinin (ph) with Merrill Lynch.

Thanks, good morning. I noticed your Newsprint average price was only up about $4 sequentially, and I was wondering if you could comment on how that increase may have panned out between U.S. and international and comment generally on international pricing trends in Newsprint. And are you actually billing for the full $50 February 1 price increase for your customers at the current time?

Good morning, Karen. The $4 was mostly domestic Newsprint, and of course as Dave said, we expect to get substantially more of that in the second quarter as we've had some existing pricing arrangements particularly with partners that delays our increase, but as Dave said, the second quarter should be a substantial increase towards the $50. We are billing the $50 and we are holding line firm on $50, and as I said in my prepared remarks, we've actually foregone so some business in the first quarter to maintain our $50 position, and that's what we're planning to do. We are billing the 50.

And international trends?

We're moving up about $25-50 in the second quarter across various export markets. Not much of that was in the first quarter, but we expect to implement all of that in the second quarter across Asia, South America, and other Latin American markets.

Great. And then I just missed the number. What do you think the tax rate is going to be for the year? Did you say it would stay at this 49% level?

Yes, Karen.

Okay. Thank you very much.

Our next question will come from the line of Edings Tibault (ph) with Morgan Stanley.

Good morning. I was wondering if you could comment on the differential we're seeing between the pulp and paper weak Newsprint price and the fact that you guys are holding the line at $50. Are you seeing significant -- and yet your shipment numbers seem to be holding in there, in fact, doing quite well. Can you just kind of square the peg, if you will, in terms of, you know, the shipments you guys are foregoing and just how widespread the resistance has been?

Edings the pulp and paper weak, that's a survey. We don't participate in the survey. I don't know which other producers do participate, so we really can't comment on that. We can comment that as Arnie had mentioned, our volumes have held up pretty well. In the domestic market, they are year to year only down very slightly and we're just holding the line.

Got it. Okay. And on the lumber side, I think we also didn't see some of the price realization that perhaps we had expected given industry pricing publications. I was wondering if you could comment on where your lumber prices are relative to your quarterly average.

They're significantly ahead of the quarterly average. Part of the reason is, if you remember in lumber how it picked up in January or towards the end of January as we entered February, and there were shipping issues so there was a timing differential, but definitely in the second quarter, we see a higher lumber price at this point than in the first quarter average.

Would you say that your lumber pricing is at least -- your current lumber pricing is in line with kind of the industry publications?

It depends because industry publication, of course, is benchmarks, so I think the direct change of or the differential would be in line, but you have to look at -

Our mix is different. We do have some yellow pine in there.

Absolutely, but directionally, that would be accurate?

Directionally, it is accurate, yes.

Okay, great. Thanks very much.

Our next question is from Mark Connelly with Credit Suisse First Boston.

Thanks. Couple of things. You told us in the last couple of quarters how new way was relative to your capacity and what your targets. I'm wondering if you can give us a sense of where it is now and what your targets might be through the year as you start to see better demand. And second, on the fiber side, obviously everybody's costs are up. We're hearing uneven things about availability in transportation. I wonder if you could address your fiber supply and any issues you're having there?

I guess, Mark, back on the new way targets, I'm not sure what you mean by your question. I mean have we changed the way we're operating it?

No, I'm just curious how much relative to new ways capacity, how much you're actually producing at this point?

50% of new way capacity at this point.

Okay. So that hasn't changed very much. Do you expect that to ramp up much this year?

It's going to depend on market conditions. Certainly the coated price increase is encouraging in that regard but at this point, we're still running one line each at Benton Harbor and Covington, Tennessee, but market conditions hopefully will improve that picture.

Okay. Fair enough. And on the fiber issue, any issues related to availability or transportation?

There were issues earlier in the quarter, especially with the cold weather, and I think you put your finger on it. It depends on the location, but really, we've worked through most of those issues right now. There's nothing really pressing.

Okay. And then just last question, as we try to fine-tune free cash flow, is there anything related to the outages that's going to flip around working capital differently than we're used to, or is there anything else big that we might not be expecting in Q2 free cash?

The only thing to keep in mind, and it's not different than normal but, of course, Q2, if you look at our interest payment schedule, we pay interest primarily in the second and fourth quarter, but other than that, I can't think of anything.

Okay. Thanks very much.

Our next question will come from the line of Rich Schneider with UBS.

Just back on the Newsprint move of $4 in the quarter, I guess that would work out to something like $6 if the equivalent on the domestic side. Is that - should we just interpret that as you've gotten 6 or roughly something like that out of the $50 in the quarter, or is there any mix impact, impacting that average price in the first quarter?

One thing I would point out, that's an average price, you're quite right. And on our first quality price, if you want to call that, was slightly higher than that. So we had a first quality price that was slightly higher, and there is - I think the export markets all in were not that much different, although the local Canadian market, of course, where we do ship some Canadian dollar actually lowered those realizations.

Okay.

But I think you should take it, as we said on the call in January, that we got most of the benefit of the price increase will be in the second quarter.

In terms of the profitability of your Newsprint operations, it looked like, you know, if you go from the fourth quarter to the first quarter, you lost almost $14 million, a little over $13 million in profits going from almost a $10 million loss to a -- $10 million profits in the fourth quarter to a $3.5 million loss in the first quarter. And that's despite Newsprint prices up a little bit, but I guess the offsets - and I'm just trying to reconcile it - are reduced volume, and then would you say of the $14 million hit that you've taken on energy and wood, that maybe about 10 of that is related to Newsprint? I mean, is that the biggest delta going from the fourth to the first, the energy and wood and the Newsprint operation?

I think that's right, Rich. What we saw is, obviously we had pulp - in the fourth quarter that we didn't have in the first quarter, so that helped the pulp product line, and when you look at Newsprint, it's a high consumer of electricity and other energy, so that coupled with some operational issues caused that to go into a loss position.

Okay. And on the tax rate that you're talking about of 49%, could you give us an idea why, you know, or the tax benefit of 49%, why it's higher than 40% roughly that you've been running at or 42 last year?

Well, you know, every time we -- at the close of every quarter, we forecast what we think our effective tax rate will be for the year. You'll recall that there are a couple of large permanent differences that - permit benefits, if you will, that are in our tax calculation, and as your losses get lower, that benefit tends to go up. And that's what caused the quarter-over-quarter change.

So if you have a quarter later this year where you'll profitable, at this point, you'd still be looking to use 49% for the who year, is that right?

Yes, unless we thought our forecast for the year was going to change, we should use 49% for each of those quarters.

Okay. And just last, if you look at energy and wood costs in the same quarter, you said that could be down. Could you give us an idea, we're not going to wipe out the full $14 million that you got hit with in the first quarter, I imagine, but something lower than that?

Yeah, it will be something lower than that. Probably half or less.

Okay. And then offsetting that is the additional downtime that you're going to be taking?

Yes. That's the major maintenance expense.

Right. Okay. Thanks a lot.

Okay.

Our next question will come from the line of George Stafles (ph) with Bank of America.

Thanks. Hi, guys. Good morning. In coating and specialty, your manufacturing costs were sequentially lower, quite a bit. Can you break that down between the volume between Catawba running better and between other factors? And I had a couple follow-ups.

I think the primary reason, George, is Catawba running better -- not so much it wasn't running good in the fourth quarter. It just continues to exceed expectations. It's been a tremendous startup and it's just lowering costs. We of course had a Donnacona outage that Dave covered in the first quarter, so net-net, just a great performance from Catawba.

Back to that point, why did Donnacona cost an extra three million bucks in the quarter?

We mentioned in the first quarter we had a major modification to do there, and that was just simply the cost of that modification. It was a quality thing, and it was spending done in February and the mill was down for 20 days.

Gotcha. Dave, on Capex, you're talking about $100 million of Capex in line with your guidance from earlier, and I realize it's pretty lumpy, but the first quarter is down pretty sharply. I mean, should we expect an acceleration in the next two quarters to catch up to $100 million, or could the Capex come in even below $100 million at this juncture?

I think it's going to be $100 million, and I think you'll see it ramp up quarter-over-quarter so it will be back-end-loaded probably. But you'll see an increase in the second quarter, then probably a larger increase in the third and the fourth.

Okay. Last two questions, how long do you think it's going to take the full $50 in Newsprint implemented, and what's the earliest you think you're going to be break-even from an earnings standpoint? Could you potentially do both in the second quarter or are you looking more at the third quarter at this juncture? Thanks.

We're billing $50 and our position with our customer base is that we're charging $50 for shipments as we speak. We're not going to give any specific guidance on when we're going to break even and whether or not it's going to be in the second quarter, but I think as you work through your model, you can come up with a scenario that approaches that anyway.

Fair enough, guys. Good luck in the quarter.

Thank you.

Our next question will come from the line of Mark Wilde with Deutsche Banc.

Good morning. I have a few questions. First I noticed that the distribution costs jumped about $15 million year-over-year, and so that's about 23 or 24%. I assume that some of that is just you did more volume in lumber and in some of the other businesses. Some of it may be that you exported more, sold less domestically, but it still seems like an awfully big jump. Can you walk us through what might have been going on there?

Mark, one thing to point out, of course, Catawba was down in the first quarter of last year as we did the machine modification, so -- and in fact, a lot of it is due to the fact that we had Catawba down for a big portion of last year in the first quarter.

And another point to a lesser extent, but the duties on lumber shipments are classified as distribution costs, so to the extent that the duties went up as prices went up, so, too, would the distribution costs.

Okay. So do you have any idea, Dave, on just sort of an apples to apples basis how much of a move there might be in just, you know, freight costs tied to energy, things like that?

I don't think we have that answer here. We can get back to you on that.

I mean, is it material?

I don't know. I don't think it is, but I don't want to go on record as saying -

Okay. All right. We can come back to that one. Second thing I wanted to follow up on, Arnie mentioned that coated and specialty prices were likely to be up in the second quarter, and lightweight coated increases is out there for June 1, so I'm just trying to get a sense of, you know, is this just a portion of that hike you expect to be realizing in June, or are there some mix issues that would be in the pot as well?

I think we expect to get the price increase, but also of course we did have specialties products that did move up in April. So when we say specialties of high grades a lot of higher grades were expected to move up and did in April. So there is some mix mark as well as the coated with price increase.

And Bill, do you have any sense if we just -- you know, we through the threw the lightweight coated mix out -- how much that would change on the whole, average price?

Five or $10 by that alone.

Okay. Another issue, you guys have outlined in the release and in your comments the $11 million in maintenance, and I just wondered if you could help us set that against any benefit that you might get from kind of a seasonal pickup in your Newsprint volumes. First quarter is seasonally a much worse quarter in terms of newsprint volume, so you should be getting, I would think, some volume impact in the second quarter.

We might get a moderate volume impact, but we of course don't have a lot of inventory either and we're trying to keep the inventory -- we are keeping the inventory at very low levels. So I don't think we'll get much of a volume impact. In other words, we will actually the outages will actually affect shipments, if that's what you're going to.

Also, Mark, I think we've talked about it in the past that we are at some locations rotating out of newsprint production at the pro into specialty production, where it makes sense and we're able to do it, so it's not inconceivable that you won't see any pickup and maybe even a slight decline in Newsprint shipments, but you'll see an increase in coated and specialty shipments.

Okay. And then in the volume side also in the second quarter, we're off to such a great start in lumber that I would assume, you know, you'd be pushing as much lumber out the door as you could in the second quarter. Can you give us some sense of what volume might do there relative to the first?

It will go up slightly, Mark. Again, January, of course, was difficult to ship, but we will probably get some improvement there. But we're running as much as we can.

Okay. And then the last question, on the waste paper front, you talked about kind of Coosa pines, Korea and a bit at Calhoun. In aggregate, how much waste paper do you use a quarter, and do you have any sense just as it appears right now, what the quarter to quarter move might be in kind of a cost per ton basis?

Yes, we buy around one million tons a year, Mark, maybe a little bit more than that, so it's somewhere between 250 and 300,000 tons a quarter. That happens to also - just to remind you, that lines up with also our pulp shipments, and as you know, pulp and other sources of fiber are moving exactly lockstep, that being said, you know, a 10% increase in the price of pulp far outweighs a 10% increase in the cost of recycled fiber. I think we'll see recycled fiber up $10?

Ten to $15.

Ten to $15.

Okay. Very good. Thanks a lot.

Our next question comes from the line of Peter Ruschmeier with Lehman Brothers. Your line is open.

Thanks. Good morning. Just a couple questions. On the capital-spending front, can you give us a sense of - on a longer-term basis, help us to understand the kind of capital requirements you have? Clearly you're under spending at the moment. Presumably that has to go up, even above a $100 million run rate, but what are the types of projects that really need to happen over a multi-year period to give us a sense of the more sustainable capital spending number?

Well -- Pete, this is Dave. We don't have any major capital out in front of us. Everything is behind us, the big projects at Catawba and things of that nature. So if you said are there any recovery boilers or major machinery re-builds or anything that's out in front of us, I would say no. That being said, I think from an operating standpoint, normal capital spending should be somewhere between $120 and $150 million annually, and I think we've targeted next year to spend around $150 million. So absent a significant special projects, that 120, 150 million allows us to maintain safety, quality, productivity and also generate some returns on some of those projects.

Okay. Coming back to Newsprint, I was curious if you could help to quantify the volume of Newsprint and perhaps the kind of price discount for the off spec tonnage that was sold in the quarter.

Pete, I don't think there was any big difference than any normal quarter. There's always a little bit of that, but it really depends on the site. It really depends on so many things. I don't have that day data.

Okay. All right. Then I was curious, Arnie, maybe if you could comment on your experience in Korea, you know, taking a view over the last five or six years, I guess, since you made the investment, you know, how is it performing versus your expectations, and maybe elaborate a little bit more if you could on the domestic Korean demand trends, import/export trends in Korea and price levels there, I believe, have been reasonably good within Korea relative to other markets. Can you comment on the pricing trends in Korea?

Korea has, as you know, Pete, been one of our best performing mills. It continues to be that way. The Korean economy, after somewhat of a dip, is projecting to have higher growth rates again, we're hearing forecasting of anywhere from 3.5 to 6%GDP growth for the next 12 to 18 months. Selling prices were flat for a while, but they're continuing to rise and we expect them to be at the top of the heap in terms of world Newsprint pricing as it has been historically. There are significant growth developments in the newspaper business in Korea.

Our sales volume has held up fairly well. Operations after somewhat of a dip at the mill after we became unionized a while ago our steadily improving and getting back to more normal productivity levels. So all in all, we're very pleased with the Korean investment and the operations, and it has as good an outlook profit wise for Bowater as any of our sites.

And can you comment on the import/export trends in Korea? To the rest of the Asian market?

We continue to -- in terms of Newsprint, we continue to maintain that as primarily a domestic mill supplying the Korean markets, although we do ship maybe 20-30% of that off shore to other parts of Asia, and since the Korean market has been so strong, we will continue that ratio right now.

Okay. All right, great. May be just lastly, I know you've revised your convenient number -- your covenants a number of times to get some flexibility. Can you just update us on where you are versus your, say, debt to cap test and your network test?

Pete, just to let you know where we stand, I think under our new credit agreement, the minimum net worth has been revised from 1.625 down to 1.5, and total debt to total cap has been revised from six down to -- 6%, excuse me, up to 62 and a half%, and I think as you look at where we are relative to those who've got lots of room. There's no issues there.

Okay. And maybe just lastly, I think it's fairly obvious what your priorities of cash flow are in your terms. You've got to get back to earning some money and generating some cash, but can you -- you know, UBD scenario of a more rapid improvement in earnings and cash flow, can you help us tell with 12, 18 months to understand your thought process on priorities of cash flow in a more robust market beyond debt pay down?

Once our debt is paid down to levels where we're comfortable, we intend to resume the kind of patterns that we've had in the past, which is to look for opportunities to invest our capital that will help the bottom line long term. Whether that's a diversification, consolidation move or putting capital into a high return project inside the company, those are things that we look at, and have in the past. So it's a little hard to get any more specific than that, but certainly we have had a track record of investing capital where returns are healthy and stabilize the business or improve long-term profitability. So whether, it's in our Newsprint line or coated and specialties, a little early to tell, but certainly it would be something to grow the business in a way that generates shareholder returns.

Fair enough. Thanks very much.

Operator, I think we have time for one more question.

Thank you. That question will come from the line of Steve Chercover with D.A. Davidson.

Thanks. Good morning. A number of my questions have been answered, but just with respect to the advertising and Newsprint consumption, a lot has been made over the fact that March did see some pretty good numbers year-over-year, but do people consider that last March was basically the prelude to war and so maybe it was an easy comp, or do you really have conviction that things are getting better?

We have a conviction things are getting better. We've heard it from our customers, we've heard it from economists, we've seen all the positive signs of more advertising activity, more spending in that area, spending by consumers, consumer confidence is higher, which leads to more advertising, which leads to more consumer spending, which leads to more Newsprint consumption.

And Steve, I think you have to look at our customers, when they've talked about both the performance in March, they have explicitly stated that last March was not a bad March. The Iraq war started impacting after that, and it's where the strength has been coming from. The strength has been much more broadly based; help wanted is up in big number and help wanted in some of the papers, which of course last year was dead. So when you look into what our customers were saying, they're very positive, and they're pointing to very specific reasons for positive.

Excellent. Thank you very much.

Operator, we'd like to conclude the call. And again, we'd like to thank everybody on the call for your interest in Bowater, and with that, we'll conclude the call.