Resolute Forest Products Inc (RFP) 2004 Q2 法說會逐字稿

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

Thank you. Welcome to Bowater's second-quarter conference call. I'm Bill Harvey, Vice President and Treasurer, and on the call with me today are Arnie Nemirow, Chairman and Chief Executive Officer; David Maffucci, our Executive Vice President and Chief Financial Officer; and Duane Owens, our Director of Investor Relations and Finance.

I will cover a few preliminary items and then Arnie and Dave will briefly discuss the second quarter and the outlook for the third quarter. 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 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 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 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 will turn call over to Arnie Nemirow.

Good morning and thank you for joining us. Our second quarter loss was $1.3 million, or 2 cents per share. Net of special items, the loss was 26 cents per share. I am pleased that we have now returned to positive cash flow. I believe we have made substantial progress in returning our Company to profitability. During the second quarter, product pricing increased in all of our grades, operating income turned positive for the first time since the third quarter of 2001, and we had positive cash flow. Although our bottom line is still unacceptable, I am confident that we have turned the corner and will continue to improve throughout the year.

In Newsprint, advertising is looking better and better. In runover press ad lineage, year-to-year comparisons have been positive each month this year. (technical difficulty) is up 2.1 percent year-to-date through June.

Publisher profits continue to improve, as evidenced by some recently reported record earnings. Their advertising revenues have snapped back strongly, a 10 percent increase in many cases. Classified advertising, including employment ads, is also up 10 percent in many cases. As good businessmen, our customers will continue to conserve newsprint consumption, but I believe the pace of growth in advertising lineage will exceed these conversion measures.

A recent trend in advertising that benefits Bowater is a shift by advertisers towards flyers and inserts rather than ROP advertising. Our specialty shipments increased by 36,000 tons in the quarter, an increase of about 23 percent. This shift to higher-margin production on our newsprint machines is one of the advantages of our flexible manufacturing platform.

Pricing in offshore markets has increased and is continuing to do so in the third quarter. Demand in these markets has been good. Our shipments to export markets have been stable.

In spite of the absence of newsprint consumption growth in the U.S., we have implemented four price increases during the past two years, and we have just announced a fifth price increase for September of $50 per ton. With North American industry operating rates at about 95 percent, our order book is in good shape, with backlogs of over 30 days of newsprint.

Coated groundwood markets continue to be very strong. Year-to-date, North American demand is up 9 percent. The demand increase has been driven by strong growth in catalogs. Magazine ad pages have also turned positive, up almost 5 percent in May, and 3 plus percent in June. These are healthy growth increases and are confirmation of the advertising recovery. Imports are down 7 percent, due to both stronger European demand and currency.

Our order book in coated papers has improved dramatically with backlogs of 47 days. The $60 price increased announced in June became fully effective in July, and we are now announcing an additional price increase for coated, supercalendered and uncoated specialty grades, effective September 1st.

Market pulp prices rose again in the second quarter, driven by record worldwide shipments of pulp, up almost 8 percent year-to-date. The industry operating rate is 95 percent. Worldwide inventories in hardwood remain somewhat high. We expect a stable market through the summer, followed by further improvement in the fall, driven by recovery in paper markets.

Lumber markets were very tight in the second quarter; housing starts were strong; average lumber prices rose quarter-to-quarter by 16 percent. Lumber pricing declined late in the quarter; overall industry inventories are low; and pricing has firmed in July. We expect reasonably good lumber pricing throughout the third quarter.

The preliminary report issued in June indicates that the duties on Canadian lumber could likely be reduced to 13 percent or lower. The final decision will be expected about year end, but the report is good news, although we do continue to pay and (indiscernible) duties at the 27 percent level. To date, we have deposited almost $15 million U.S. under this tariff.

Finally, our liquidity remains excellent at over $400 million in availability, and as paper markets strengthen, we expect to generate substantial cash flow, which will be used directly to reduce debt, which is our top priority. On that note, I will turn it over to our CFO, Dave Maffucci.

Thanks Arnie and good morning everyone. As Arnie mentioned, we were free cash flow positive during the quarter. Our EBITDA, which is defined here as operating income, plus depreciation, amortization and cost of timber harvested, came out to be 105 million. And this represents a 67 percent improvement over the first quarter. This underscores the fact that operating leverage really does work in both ways. The results remain weak, but I am encouraged with the pricing momentum, and we will continue to be very disciplined with all of our controllables.

In the second quarter, as we anticipated, there were pressures on recycled fiber cost. We will see these pressures continuing into the third quarter, and energy costs were volatile and we expect they will remain so. As we reported and announced in our first-quarter press release, we had major annual cold mill outages at two of our largest facilities. These outages reduced newsprint production by 17,000 metric tons and reduced market pulp production by 19,000 metric tons. This cost us about $11 million of repair costs, and just as a reminder, we had two major mill outages at Thunder Bay and Grenada, and then at Calhoun, we also had one that we take every other year at Calhoun; so the next time we will take a major outage like that at Calhoun will be 2006.

For the third quarter, we have a planned 7-day outage at our Coosa Pines pulp mill. We will lose about 5300 metric tons of pulp production and the repair costs are estimated to be around 4 to $5 million. In the fourth quarter, we expect to have two other outages at a couple of our other mills in the fourth quarter -- craft mills (ph).

During the second quarter, we had to idle our Thunder Bay sawmill for six weeks really to maximize the order availability to our paper mill. We had a lot of wet weather early in the quarter in the Thunder Bay area, and we also have some third-party sawmills curtail operations. So we had to maximize chips (ph) to the facility and we closed down that pulp mill -- not the pulp mill, the sawmill -- excuse me.

In the third quarter, we did restart the sawmill, but we have continued to keep idle a smaller sawmill in the area. The wood availability remains tight in the region, and cost pressures will continue there.

The Canadian dollar averaged 73.6 cents in the second quarter and it's currently trading at about 75, 76 cents. I remind you that we hedge approximately 60 percent of our Canadian-denominated cost in our rolling 24 month hedging program. Remember that for every one penny change in the Canadian dollar, our annual costs change by approximately 5 million net of hedging.

In addition to the maintenance-related downtime I mentioned to you just a minute ago, we continued to curtail approximately 36,000 metric tons of newsprint at our Thunder Bay mill, and the Number 3 paper machine has been idled. We do not expect to restart this machine until we see more measurable improvement in consumption.

Or distribution costs rose in the quarter, as some of you could expect. Lumber duties are accounted for as a distribution expense, so as the prices go up, the duties go up and the duties raise our distribution costs. We also had fuel surcharges and some transportation rate increases.

Selling & administration was a little lower than the first quarter; however, we expect to track first-quarter levels for the balance of the year. During the quarter, we had some small asset sales of about 5 million, or 33.2(PH) million net of tax. We also had some foreign exchange gains that were 10.4 million net of tax. Net of all of these items, our loss for the quarter was about $15 million.

Our effective tax rate on our reported earnings was 91 percent in the quarter. I will point you to the reconciliation that is included in our release that calculates the effective tax rate at about 50 percent when you remove the land sales and the effective currency changes. For the remainder of the year, the 50 percent number is a good estimate of our effective tax rate to use. Capital spending, $20 million for the quarter, is in line with our guidance of approximately 100 million for the year.

Our debt decreased by 21 million during the quarter. We also put in place a 435 million revolving credit facility in the second quarter. It's a three-year facility which expires in 2007. At the end of the quarter, there was 30 million drawn against this facility, and there were also about $88 million worth of letters of credits reserved against this facility. As Arnie mentioned, between this facility and our accounts receivable securitization at the end of the quarter, we had approximately 400 million of available credit.

Based on Arnie's comments about the outlook for our markets, we expect the third-quarter results will be better than the second and the Company to approach breakeven net of special items. We are optimistic that we will return to profitability in the fourth quarter. Those are our prepared remarks. With that, I will turn the call back over to the operator to open the line for questions.

(OPERATOR INSTRUCTIONS) George Staphos, Bank of America.

Good morning. Dave, first question for you, how many tons did you say you are going to lose in the third quarter in Coosa Pines?

In Coosa Pines, it was 5300 metric tons of pulp.

You mentioned the newsprint backlog. What would be normal? You said you're at 30 days. What would normal be for you at this juncture in the year?

Normal would be slightly under that. We are not at the seasonally strong period. As you know, October and November is a more seasonally strong period for newsprint.

A couple questions of manufacturing. On CSP, you did a great job sequentially in cost per ton. Obviously, last year was a tough year. How much more do you think there is left to go in terms of manufacturing cost per ton in that segment?

Again, the startup of the Catawba machine has been outstanding, and we did get a big pickup through the year. That is winding down, from the point of view of we have achieved a lot of those efficiencies. We expect a slight improvement as going forward, but not to the level that you saw last year.

And within News, realizing that you have foregone a lot of production, were you happy with the manufacturing there or were there some other issues in terms of manufacturing? Cost per ton was a little bit higher than what I was expecting.

Only the point of view David mentioned that 11 million of repairs of almost half -- over half of that, actually, slightly over half was in news. We had the Calhoun site that was on an outage we take once every two years. That is a newsprint mill, and we had a lot of repair spending there. But we were happy --the actual sites performed very well outside of the planned downtime.

Thanks. Got you.

Karen Gilseman with Merrill Lynch.

I just had a couple of questions on pricing. Your coated paper prices were down a bit in the quarter. Was there any impact at all from this June price increase in the second quarter numbers, or will we see all of that in the third quarter?

The first part of your question, our coated paper price -- coated and specialty papers actually were up in the second quarter.

I apologize.

And we expect some carryover of that into the third, because the price increase, as you remember, was a June 1 price increase.

Right. So did you see some of that in the June quarter?

We saw some of it.

A third of it.

About a third? On newsprint prices, which were up -- I am reading that one correctly -- could you give us some sense of how international prices are doing versus the U.S.? And that price increase, I think, goes through in the U.S. or in North America -- was all of that reflected in the quarter? That is all behind us now, right? Will there be any incremental price in newsprint in Q3 versus Q2 until we get to the September 1 price increase?

Pretty much the domestic News price is reflected in what you see through June 30. And as far as the offshore markets, other than the UK, there was substantial movement in the second quarter, pretty much tracking the domestic improvement in News. Brazil and Latin America had ranges from 28 to $35 increases in the second quarter. India, $21 improvement. Korea was a bit flat, but we expect to make up for that in the third quarter, frankly. And Southeast Asia, other than the Korea situation, was about $26 of improvement in the second quarter. So, overall, it pretty much tracked the domestic improvement.

Okay. Great. Thank you very much.

Mark Connelly, Credit Suisse First Boston.

Thanks. Just a couple of things. I wonder if you could give us an update on the Nuway coated newsprint market, what is happening in volumes, your outlook. And secondly, can you give us a sense of what you are expecting in working capital? Will the volume pickups that you're anticipating, is that going to turn working capital negative in the third quarter?

On Nuway, we're starting to see the price improvement, of course, as the announcements have kicked through into the order book on coated specialty, so we will see in the third quarter continuous improvement in Nuway. We are still running at 50 percent production, but we will obviously take a look at that as we see prices gradually improve in that product line.

On working capital, the second quarter is usually our biggest quarter for cash interest payments. So, even thought we might see some rise in accounts receivable, an increase in working capital, but that may be offset by the reduction in interest payments.

Okay.

The other thing, while I have you on the phone, I just wanted to clarify one thing. In your flash report, and speaking about free cash flow, you say in your last sentence, referring to free cash flow, that at least they covered the dividend but not the dividend and interest. I think that is incorrect. If you look at our free cash flow, it is after we have already paid our interest, and that comes up to about $11 million. And then I think when you add in 5 million for asset sales and another 5 million uses of cash, that is how we get our debt down to by about $20 million.

You're right. We weren't entirely clear about that. We look at it a little bit differently, but that is technically correct.

Thanks.

Rick Schneider with UBS.

After the first quarter conference call, around the first quarter conference call, you had indicated that you were going to have, I think, about 28,000 tons of maintenance downtime, and it worked out to about 36,000 tons in the second quarter. Yet, your guidance of a $11 million hit stayed the same, and I was wondering if you can talk through that? Why the maintenance downtime was a little greater and why that $11 million figure stayed pretty much the same, even though you had more downtime?

Two things happened. We actually took a small outage at Catawba we moved forward from the third quarter. And the 11 million was not related to the fixed cost. That is actually cash spending on repair material at those sites. So, the actual outages we took at plant were in line with the dollars spent. We did take a little more maintenance downtime, but that was basically a shift from the third quarter into the second.

Okay. Just looking at that $14 rise in coated and specialty papers, could you break that out between what the rise was in the uncoated groundwood and what the rise was in coated groundwood?

We typically do not break that out. But they were more or less in the same order of magnitude.

I was wondering if you could talk about what you touched on before, the shift of newsprint into enhanced newsprint or uncoated groundwood. And do you believe that part of the reason the consumption numbers that we have seen reported on newsprint is not better than we are seeing is because there has clearly been this shift by the newspapers to more inserts and the use of more enhanced newsprint. Could you talk about that trend?

I think you're right. It is about that. We have been proactive and capitalizing on that shift. It does reflect, I think, somewhat in the newsprint consumption numbers. Calhoun is where we're focusing on that. We've got two machines that are running on those specialty grades; obviously higher margin than newsprint, and we're managing through that. I think the trend will continue, and obviously it's good for us. We have a flexible platform. We will continue to try to capture that business as it improves and increases, and it is a shift for various reasons from the publisher side.

How much capability do you have to further shift into that area?

We've got a lot of flexibility. I think if you look at Calhoun, I think right now, we have got two machines running fully on specialties. So there are 5 machines at that site, so there are some other opportunities at that site. And there may be some at Thunder Bay. But where we're doing most of the specialty work is at Calhoun.

As you do that, theoretically, that should be helping tighten up the newsprint market, or is that sort of the way you look at it?

We're tightening up the newsprint market, but we're also basically looking at a contribution per hour by the various products, and we're trying to maximize the contribution per hour across the machines, and going to the uncoated specialties is the way to go.

And just last question. Listening to the newspapers report their second quarter numbers, it was sort of mixed outlook from Gannett being a little more positive to the New York Times being less optimistic. Basically, the comments were things are getting better, but not as much as we had thought. So, that is the way they painted the second half. What is your view on the second half and the advertising outlook?

I think it's going to continue to gain momentum. I think the advertising activity is becoming very strong at various levels. My conversations with our major customers in recent days all support that to varying degrees. And I think the issue thus far has been that some of the major metropolitan newspapers have been hurting somewhat from lack of a retail ROT advertising, hence some of the shift on their part to the inserts and ways to make up the revenue from that. But some of this is part of the quantity (ph) retail advertising, but they're finding ways to make up for it. As we said earlier, we're capturing that shift as well.

I think also it is a lag question. The advertising has been, as I said, been very heavy and hot, and it will only be a matter of time before this will be reflected in better newsprint consumption as well. It's a question of region and the type of newspaper, but inevitably, the newspapers make money by more advertising, and they will eventually be buying more newsprint to make that money.

Thanks.

Edings Thibault with Morgan Stanley.

Good morning, gentlemen. A capital of questions on some of the issues on the lumber side. Arnie, I was hoping you could talk about some of the downtime you were taking and that you mentioned a large sawmill -- or Dave, a large sawmill up in the Thunder Bay area and that was down for six weeks and it just restarted, and I gather it's a smaller sawmill. Can you talk about the volume differential there? What kind of pickup should we expect now that the larger mill is back online in the third quarter?

We did take our new Thunder Bay Sawmill down to, as we said earlier, to support the fiber flow into the paper mill next door at Thunder Bay paper mill. I think we will continue to see that mill now operate as wood flows have stabilized, lumber prices have improved. I don't have the metric.

We would probably pick up 10 million board feet or something in the third quarter, just from the change. We took down a big sawmill and we started -- and we restarted that, and we have a small sawmill down up there.

Okay. The bigger sawmill, was that started -- it was a little unclear to me in your comments -- so it was just restarted. Does that really literally mean it just came up last week or is that (multiple speakers)?

We meant in July -- sorry -- in the beginning of the third quarter.

Thanks for that. As you look at the curtailment of production you took in Newsprint, it sounds as if that was rather than sort of temporary downtime, that was a real machine idling. And can you talk about what the full quarter impact may be or what the rated capacity of the machine you put (ph) down?

Let me just clarify a couple of things. The maintenance downtime eliminated 17,000 metric tons of newsprint. But we also have a machine idled at Thunder Bay, the Number 3 newsprint machine, and that has the ability to manufacture about 36,000 metric tons per quarter.

And that was down all of the second quarter?

Yes, that has been down at Thunder Bay probably for over a year now.

Okay. I guess when you're talking about that production curtailment, that was a year-over-year comment? Because it wouldn't have impacted if it was down in the first quarter. I'm just trying to understand that comment, but it sounds as if 36,000 tons per quarter was out in the first quarter and it will continue to be out until market conditions (multiple speakers)?

That is correct.

A final question to follow up some of these issues on specialty versus newsprint. I guess there had been some hypothesis as well that the rise in newsprint pricing versus that of some of these specialty grades had been greater over the last six quarters or so. But we're now beginning to see where the increases in the supercalender and other specialty areas is starting to outpace that of newsprint. Would you expect there to be some switching back and forth? How should we think about that? Will there be any real impact amongst the publishers and the advertisers?

Well, it's a little hard to predict, but I think the trend will continue to have more specialties, more inserts on the part of publishers. From our point of view, we are going to look at it as a profit issue, and as long as we can capture that growth, we will continue the trend that we're on.

As we said earlier, it will be the function of the newsprint market and how tight that is, but I think the trend you're seeing from our mill point of view will continue. The publisher's on the margin base, which is back a little bit, but I think the net trend is going to be more and more inserts.

Edings, we agree that the first four price increases that were put into newsprint were basically newsprint alone, with very little price increases in complementary grades. And it's a much healthier environment when you have seen prices moving up in all grades. And I think you're right, in the other grades, it is actually accelerating faster than newsprint right now.

And as you switch to specialty -- I think you said -- you spoke (indiscernible), but is it 23,000 incremental tons on the specialty side -- is that the right number?

36,000.

36,000, but at 23 percent, then, right?

Yes.

Is that a reflection of capacity you have switched or is it a reflection of better-running machines on the specialty side? Or incremental demand (multiple speakers)?

It's probably a little bit of both. As we start transitioning out of newsprint into some of these specialty grades, there is a bit of a learning curve. So it's a combination of transitioning more tons and getting better at running those tons.

But fundamentally, those are newsprint machines now making specialty products. And if you looked at Bowater one year ago, those machines were making newsprint.

You mentioned a bit of a learning curve there. Could you estimate, get a sense of maybe the sort of startup or learning costs in the quarter as part of that switching? And is there a near-term cost of switching that?

There probably is, but I don't think it's very big.

Thanks very much. Good luck in the quarter, gentlemen.

Chip Dillon with Smith Barney.

Good morning and congratulations for getting back in the black on a cash-flow basis. The question I had is you mentioned your export prices were up, that the export demand is steady. Yet, the industry data in the last two months showed pretty sizable drops, more than -- certainly in double digits in both May and June, each of those months. I didn't know if you would just comment on maybe what the differences is in the industry numbers and what you are seeing.

We really can only speak for Bowater. We did see those numbers. Part of it is just the price, and domestic price has been relatively good. And with an industry operating rate at 95 percent, there is no tons available. We could sell more export ourselves right now if we had the capacity. We are not ready to make any changes to idle capacity.

Would you argue with maybe the assertion that there might be others out there in North America that tend to be a bit more opportunistic, and that they no longer see as much opportunity price-wise outside the U.S., and so therefore, North America, so they are putting more tons in North America?

I wouldn't extrapolate that conclusion. I think it is more what Bill said.

Okay. Could you update us -- as we look into '05, you have talked about keeping CapEx -- a very tight rein on CapEx. Let's say that one is a bit more optimistic than you are, that you have hit the black comfortably in the third quarter and it is onward and upward. What kind of range of CapEx do you see for next year and even into '06. Are there projects that you think your mills need in the next two to three years that may not have been done as you have been focusing on the Catawba conversion and otherwise trying to survive the downcycle in a healthy manner?

Next year, we're building our capital budget around a level of $150 million. That is consistent with the guidance that we have given several other quarters. So that will be up around 50 million over next year. We didn't sacrifice any quality or cost issues at our mills when we constrained our capital spending. What we did is we probably have a pipeline of a number of high return projects that we will start spending some money on. We had begun to identify some of those now. And I think when we look out into 2006, depending on what you project for free cash flow and earnings, you could see the 150 maybe move up to closer to 200 million. Still well below depreciation of 340.

Okay. And when you look at the debt level and the capital structure -- again, I'm sort of dreaming a little bit here in a way that you all would like to hear -- but let's say as your balanced (ph) cash flows really cascade in, if that happens, at what level -- whether it's a debt-to-cap measure or if it's just at an absolute level of net debt -- do you see yourself being free to either A, pursue acquisitions, and/or B, a dividend increase and/or buyback?

Our goal is to move the debt absolute number back down from where it is now to about 1.7, 1.8 million. So, when we get to that level, it will be a nice problem to have excess cash and to figure out what we are going to do with it.

Okay. Thank you very much.

Peter Ruschmeier with Lehman Brothers.

Thanks and good morning. Just a couple of questions. Just to clarify on the two machines at Calhoun that shifted from newsprint to specialty, what kind of capacity are we talking about?

Approximately 120,000 tons each. About 250,000 tons in total.

Those are both running full on specialty today?

Yes, right.

And what was the mix last year roughly between specialty and newsprint on those two machines?

In a quarter -- and this is by memory, Pete, but I think it's about a 40 to 50,000 ton increase in one quarter, quarter-to-quarter.

Okay.

If you go back a year, Pete, one of those machines always ran specialties. And you probably go back a year ago, and the second machine was probably mostly newsprint. So it's really been a change for one big machine.

And that is the two running dedicated. We actually are having more specialties than that at the site, on the third machine, too. But it is not dedicated.

Okay. That's helpful. Thanks. Then maybe a question for Dave, if you get help us to better understand the cash interest payments through the year. You mentioned the second quarter is usually heavy. Can you elaborate on what you typically expense in 2Q versus 3Q, 4Q?

Yes, I think cash -- from a cash-flow standpoint, it runs around 2075 (ph), 2075 through the year by quarter.

Okay. Great. I want to come back to the coated groundwood business. I think, Arnie, you mentioned 47 days of backlog. That sounds pretty high. I was curious if you could put that in context for us over time?

Probably double, at least maybe 25 to 30 days might have been what we were looking at year end last year.

Year end last year was just under 30 days, so it's been a very big increase.

Are you approaching record levels with that 47 day backlog?

I don't know. I am not sure, but it's very good.

I think you mentioned that of the $60 price hike for June, you got about a third of that in the quarter, and presumably -- maybe you can elaborate on whether you think you've gotten the rest of that price increase. And I guess part of that question related to that is the nature of contracts, and should we expect that a similar pattern unfolds for the September hike if we assume that markets remain tight?

I think when you look at what's happening in coated, we are getting the other two-thirds of that price increase now -- actually snapped in pretty quickly in July, July 1st. There was some tonnage that had some protection or some contracts extended through the end of June. And I would probably phase in the next coated price increase in the same manner.

Okay. Lastly, if I could, in the pulp business, can you remind us how much of your capacity is fluff pulp and any indication as to what the change in your fluff pulp prices were versus paper pulp prices?

I think about 20 to 25 percent of our capacity is fluff pulp. It's one site and it's -- on an annual basis, it is about 240,000 metric tons. There was a price increase in the second quarter of $30. I cannot remember if it was May 1 or June 1, but we did have some upward movement in the quarter.

Is it fair to suggest that the fluff pulp prices are lagging the paper pulp prices, and therefore there's a little more to come in the third quarter there relative to the paper pulp?

A little more, yes.

It trades close to NBSK.

Okay. All right. That's very helpful. Thanks, guys.

Mark Wilde with Deutsche Bank.

Good morning. I had a few questions. One, I wondered if you could just help us, first of all, on the Newsprint side, understand that $20 quarter-to-quarter gain in terms of pricing, and kind of compare that with what we might see in some of the trade papers and also kind of comparing domestic and export prices.

Mark, well, the trade papers do their our own forecast in their own numbers. The $20 reflects a pretty full implementation of the price increase. There will be a little bit more coming in, as Arnie mentioned earlier, a little bit more in the third quarter from it, but very little.

Another question. On pulp prices, it sounds like we may have a little more flow-in on a fluff pulp prices. I'm just trying to understand, also on pulp pricing though, how much carry-through their is yet from kind of a rising pricing environment in the second quarter, and then balance that against some of these reports that we're seeing of a little bit of discounting Asia and Europe, which sounds like it's weighted much more toward hardwood, but maybe cropping up a little bit in softwood as well.

It's primarily in hard -- again, we're mainly a domestic -- we mainly supply the domestic market. But the weakness has been more hardwood and offshore. So if you net everything together, the improvement in the third quarter pulp pricing would be quite very small. If nothing else changes.

Okay. Next, I wondered if you could talk a little bit about what you paid in duties, cumulatively to this point -- if you look back over the last 24 months. I think you mentioned $50 million in the first half.

That is the accumulation of all of our duties. (multiple speakers) new arrangement, which was --.

A year and a half, two years.

That's the 50 million cumulative, Mark, U.S.

Got it. If we turn to Thunder Bay, I'm just curious -- that machine now has been out for a while. Do you have any thoughts kind of going forward if we don't see a big pickup in newsprint demand about permanently shuttering the machine versus maybe converting it to specialties? If you had to close that machine, would have much of an effect on the cost structure up at Thunder Bay?

I will start back with Dave's comment, which is we will take a significant improvement in newsprint consumption and implicitly price to start up that Number 3 machine at Thunder Bay. Beyond that, in the realm of speculation, there are all kinds of possibilities as we look at our various markets and product lines and see where that idle capacity might serve us well -- looking at all kinds of situations, from wood cost to energy to currency situation. Obviously, it would be premature to start to publicly speculate about that, but we have got our eye on that.

We like the coated groundwood market. We have invested in that heavily. Obviously, that is one question mark as to whether that machine might go there eventually or some other machine might go there. But it is way too early to really head down the path and any kind of discussion here.

Arnie, does having that out, does it have a big effect on just the unit cost structure up at Thunder Bay?

It has some effect. We have some fixed cost absorption and other things. So there is some effect on the unit cost, but of course, the site's done a tremendous job of removing fixed costs and managing that situation.

I don't want to chase this too far down the line, but being up North there, presumably, if you wanted to make coated paper up there, you would be better able to make some of these lighter weights at Thunder Bay than you can at Catawba -- is that correct?

Right.

In Catawba right now, on the old blue machine that got converted, can you give us the breakout of LWC versus other grades that the machine is running? Particularly with this pickup we've seen in LWC volumes?

It is all LWC, Mark.

So you have really moved that into the coated paper market more quickly than I think you were anticipating six months ago?

Yes.

Okay. And the last question is just on this maintenance. The 11 to $12 million, that is just the cash expense for the actual maintenance itself. How do you handle the cost of lost volume? Do you spread that out for the year or is that also a hit in the quarter?

That is just a hit in the quarter on unit costs. So the lost volume impact or the fixed cost affects us in the quarter.

So in reality, there are kind of two elements then to the downtime cost. There is that $11 million, which I think you said is just direct maintenance. But then what you didn't talk about is sort of the effect it has on unit cost -- is that correct?

That is correct.

Thank you.

We have time for one more question.

Steve Chercover with D.A. Davidson & Co.

Good morning. Just a couple questions, please, on the special items and the tax. First of all, with the Canadian dollar moving higher in Q3, is it possible that you will have foreign exchange loss as opposed to gain that would kind of reverse what happened in the second quarter?

Actually, Steve, the taxes and the anomaly that it creates in the effective tax rate is caused by translating some intercompany debt at the end of each quarter. So, although the exchange rate on average for the quarter was only around 73 cents, the liability got revalued at the quarter end rate, which was closer to 75, 76. So if the Canadian dollar strengthens again, above that, you won't see a reverse; you will see it go up even higher.

Okay. But assuming it remains flat in around 75 cents, then that is a nonissue in the current quarter?

That is correct.

Finally, the 50.9 percent tax rate, why is it at that level, and should we use that for the remainder of the year, please?

It that that level because we have got some permanent deductions, some tax strategies that we put in place, that the closer you get to a breakeven, the larger the effect it has on your effective tax rate. Right now, we think, looking through to our projections, that 50 percent or thereabouts -- 51 percent -- is probably a good rate to use for the balance of the year.

Thanks. Good luck.

I would like to conclude call by thanking all the participants on the call for the interest in Bowater, and thank you again.

Ladies and gentlemen, this conference will be available for replay after 1:30 PM today through August 6, 2004 at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 738638. International participants may dial 320-365-3844. Those numbers once again, 1-800-475-6701 and 320-365-3844, with the access code 738638.

That does conclude our conference for today. Thank you for your anticipation and for using AT&T Executive Teleconference. You may now disconnect.