Resolute Forest Products Inc (RFP) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Bowater Fourth Quarter 2004 Earnings Release Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer question, instructions will be given at that time. If you should require assistance during the call, please press "star" then "zero." As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Duane Owens, Director of Finance and Investor Relations. Please go ahead.

Thank you, Linda, and good morning, everyone. With me on the call today are Arnie Nemirow, Bill Harvey, Dave Maffucci, and Don Newman. Before we begin, I'll cover a few preliminary items. Following our prepared remark, we will take questions. The call is scheduled for about 45 minutes.

I need to call your attention to the cautionary forward-looking statement language that is contained in our 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, due to the uncertainties inherent in such statements, actual results will differ, and any such statements are not guarantees of future performance.

Additional financial and statistical information, as well as reconciliation of non-GAAP financial measures used on the call can be found on our website. The call is available to all shareholders via live web cast and replay on our website, at "bowater.com." The call 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.

I'll, now, turn the call over to Arnie Nemirow.

Good morning, and thank you for joining us again. Before we discuss the fourth quarter results, I would like to talk about some of the organizational changes we have made recently.

As you know, most of our senior management team has been in place for about the past 10 years. A few in their 60's have retired recently. And we took advantage of these retirements to develop further our bench strength and broaden our management experience.

Art Fuller, who is President of the Newsprint Division for the past 10 years, announced his retirement in early December; he has been succeeded by Dave Maffucci, who has been our Chief Financial Officer for almost 10 years and on the call today. Pat Duffy, who was the Head of our Coated and Specialties Division, announced his retirement last spring, and William Morris, who is one of our most experienced international executives, spent most of the past year with Pat and now succeeds him as Head of the Coated and Specialty Division.

As a result of Dave Maffucci's move, Bill Harvey, who was our Treasurer for the past six years yesterday was elected by our Board as Senior Vice President and Chief Financial Officer of Bowater. Don Newman, our Chief Operating Officer now has direct responsibility for our Thunder Bay operations, as well as management oversight for our coated, pulp, and lumber businesses. So we have promoted senior managers to even broader responsibilities, and our management team is stronger than ever and well positioned to lead this company into the future.

Regarding operations and the results, our fourth quarter loss net of special items was $24.7 million or 43 cents per share. For the quarter, we generated positive free cash flow, and even though 2004 was a difficult year, it was a substantial improvement over 2003, including some net debt reduction.

Pricing for newsprint, which is about 42% of sales and coated and specialty papers, which is about 28% of sales, continued to recover during the fourth quarter. Our overall average price of newsprint increased by $19 per metric ton compared to the third quarter. Our average price of coated and specialties increased by $32 per short ton compared to the third quarter. Pulp prices declined by $19. For all of 2004, our pulp and paper grades increased about 10%.

The newsprint operating rate in North America was at 96% in December. In the first quarter of '05, our order book is solid, and we have announced $35 price increase in North America from March 1. Coated mechanical demand in North America was at record levels, ending up the year at 8%. We are experiencing a very, very tight coated market this quarter.

Global market pulp shipments were at record levels in 2004. Inventories are tight, and we have announced price increases across all grades of pulp for January and February. Lumber markets ended the year very strong with December housing starts just over 2 million and pricing also is moving up right now.

In view of their new responsibilities, I have asked Dave Maffucci and Don Newman to participate in today's call. They will now cover some more highlights. Let me say that I am optimistic that 2005 will be a much better year than 2004. Fundamentals point to improve pricing in all of our major products, and a solid return to profitability.

I'll ask Dave now to provide further details on the newsprint business.

Thanks, Arnie, and good morning, everyone. I'll spend a few minutes on the newsprint business. The pricing environment in newsprint remains very favorable. The improvement over the third quarter in newsprint pricing was seen really in all of our markets, domestic, Canadian, export, and Korean. The operating rate -- we also finished the year at a very good operating rate, December at around 94%. Also, we are seeing some very positive signs of increased activity and improved pricing trends in the export markets.

Non-North American newsprint pricing has continued to increase in the first quarter, and the level and frequency of inquiries for additional tonnage has risen substantially. Looking specifically at newsprint pricing for the quarter, average prices all market, all grades, came in at 5.51 per ton, an increase of about 3.5%. Shipments ran above in the quarter by about 9,000 tons over the third quarter.

In December, look at the stats, both total consumption and the consumption of newsprint by dailies declined by 2.9 and 2.8% respectively. For 2004, total consumption and consumption by US dailies declined by 1.7 and 1.5% respectively. Total inventories are about 1.3 million tons. US daily inventories increased 3,000 tons, and mill inventories declined 9,000 ton. Remaining more than 113,000 tons below the five-year average. Day supply at the dailies increased 1 day to 43 days. To address this, our actions have been focused on increasing our ability to meet the demands of other high margin grades, and we are in turn shipping less newsprint now than we did a year ago.

Newsprint downtime in the fourth quarter was 57,000 tons, and in the first quarter our number three newsprint machine at Thunder Bay will remain idle. Shipments in the first quarter are expected to fall back to third quarter levels due mainly to fewer days in the quarter. Partially offset by some improved newsprint productions at two of our mills. Inventories measured in tons will remain in the 85 to 90,000 ton range, and this inventory level represents about 12 days of production.

In summary, the newsprint consumption was down in 2004. North American production declined even more resulting in a rise in operating rates. We expect operating rates to remain high, and our order book supports a March price increase.

I'll now turn it over to Don Newman, who'll cover our other businesses with you.

Thank you, Dave. Good morning. Starting with coated mechanical paper, North American market fundamentals are strong, driven in part by growth of magazine ad pages and catalogs. Our backlog for coated mechanical orders is extremely solid for this time of the year. We expect the coated paper market to continue to strengthen throughout 2005.

Uncoated mechanical paper demand excluding SC grades also have shown some solid growth in 2004, as November year-to-date demand increasing 13% over the same period in 2003.

Our coated and specialty paper assets performed very well for us in the fourth quarter. In particular, our Catawba facility has set both daily, monthly, and annual production records, greatly contributing to the 15% increase in coated and specialty papers shipments that we've experienced in 2004.

The recent modernization of Catawba has positioned it as one of the lowest cost, most efficient coated mechanical producers in the world. The conversion of newsprint machine to LWC was well timed to contribute maximum benefit from the strengthening coated mechanical markets and we are enjoying that today.

Turning to our pulp business, the market strengthened in the fourth quarter after having eased late in the third quarter. Market fundamentals have been aided by increasing paper demand and high purchases by China, up some 28% year-over-year, and to a lesser extent by recent mill closures.

And 2004 has been the best year on record for industry shipments in the pulp division. Pricing began to recover in December and continues to improve in the first quarter. Our inventories ended the year at a low level of some 50,000 tons.

And now Bill Harvey will now address the financial results for our fourth quarter. Bill?

Thank you, Don. And good morning, everyone. Our reported loss for the quarter was $33 million or 58 cents per share. After special items, our net loss was 43 cents per share. These special items consist of severance costs, gains on asset sales, and foreign currency charges. No four of our press release provides a reconciliation between the reported loss and the loss net of special items.

We incurred 10 million in severance charges in the fourth quarter, primarily from the indefinite closure of the groundwood pulp mill at the Thunder Bay facility, and the streamlining of the forest products division. Effective Jan. 1, we consolidated the US forest products division into the other divisions.

Also in the fourth quarter, SG&A was negatively impacted by a $3 million expense for stock-based compensation relating to equity participation rights. As Arnie mentioned, during the fourth quarter, pricing improved in newsprint, coating and specialty papers.

However, compared to the third quarter, pricing was lower in pulp and lumber. Manufacturing costs were higher, primarily due to the stronger Canadian dollar, maintenance outages, and higher energy and wood fiber costs.

The average Canadian dollar exchange rate increased by six cents in the fourth compared to the third quarter. We have approximately 50% of our Canadian dollar exposure hedged through 2005. In the fourth quarter, our production of market pulp was reduced by 31,000 metric tons due to maintenance outages and capital projects. In the first quarter of 2005, we have an annual maintenance outage at the Catawba pulp mill.

Our pulp annual maintenance outages across the company in 2005 will be lower than 2004. We are planning to take the majority of the outages in the second and fourth quarter, approximately evenly split between the two. We continue to be negatively impacted by the duties on Canadian lumber. In the fourth quarter, we paid $10 million of duties. This brings the total amount we have deposited to $71 million. The combined duty rate was reduced from 28% to 21% in December. We are hopeful for a resolution on this dispute in 2005.

Our tax benefit rate of 38% was lower than expected in the fourth quarter. This rate will fluctuate as our earnings picture improves. For the full year 2005, we expect a tax rate of approximately 38%, less a $16 million benefit derived from a financing strategy. Capital spending was $24 million in the fourth quarter. Capital in total was $84 million in 2004. In 2005, we expect to spend approximately $170 million or 50% of depreciation. At the end of the quarter, we had $38 million drawn against our bank lines and $35 million drawn against our account receivables securitization program.

Including cash, we have liquidity of above $470 million at the end of the quarter. Our account receivables securitization facility was renewed in December for an additional year. In the first quarter, we expect significantly stronger average pricing in market pulp. We also expect our first quarter unit manufacturing costs from market pulp to be lower due to less maintenance downtime. Costs in our paper grades are expected to be flat to slightly higher than the fourth quarter. Overall, we expect a significant improvement of financial performance in the first quarter.

And with that, I'll turn the call back to the operator and open the lines for questions.

Thank you. And ladies and gentlemen, if you wish to ask a question, please press "star" then "one" on your touch-tone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from queue at any time by pressing the "pound" key. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press "star" "one" at this time. One moment, please, for the first question.

Our first question will come from the line of Edings Thibault from Morgan Stanley. Please go ahead.

Thank you and good morning, gentlemen, and congratulations as well to everyone over there. Just a quick question on the coated mechanical markets. You mentioned the very strong fundamentals in that market and clearly the market would seem to be benefiting from a strike action. Can you talk about what we should look for and whether or not that Bowater is moving to take advantage of that tightness in terms of pricing?

Well, we do expect price improvement throughout the year given the backlogs that Don cited and the overall industry demand growth in catalog and magazine and related grades. We are very bullish about '05's pricing momentum. That's really all I could say at this moment on pricing.

So there -- I would gather from that that there are no current pricing initiatives in place.

We have not announced anything yet for 2005.

Okay. And as you look across the newsprint side and you mentioned the increase in export strength, is that across the board? Are there particular areas of strength? I know it's not the biggest market for you guys, but can you add some additional color to that comment?

Well, I think, Edings, this is Dave Maffucci. I think we're seeing that the cost -- the prices are higher in all of our markets and they're continuing to move higher. I think we're seeing inquiries from Asia and the Middle East and as well as South America looking for additional tonnage.

Got it. And just, you know, in terms of the maintenance downtime at Catawba, can you quantify the expected outages?

Hi Edings, this is Bill Harvey. It's a smaller outage than the fourth quarter. It will impact us, but it's significantly smaller than what we saw in the fourth quarter.

Okay. And will that be the only maintenance outage in those areas? You mentioned, I think, the outages in -- on the pulp side and then at Catawba. Should we expect in the coated and specialty grades, what kind of outages and -- through the course of the year?

There's nothing of that material that you would notice quarter to quarter. We really focused on the pulp side because that's the one that has the largest impact on us. The impact of the outage in Catawba will have some impact on coated paper costs because it's a pulp mill at this site, but again, it's not that meaningful relative to the whole company.

Great. Thanks very much.

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

Bill, I'll not to be nitpicking, but if you had 31,000 tons of downtime in pulp, is that going to be pretty close to zero in the first quarter?

In the fourth -- first quarter, it will be about 5,000.

Okay. And then you had 57,000 in newsprint and part of that is the 36,000 tons coming from machine that's been down indefinitely. You see reduction from that 21,000-ton level, the difference between 36 and 57?

I think there -- Rich, I think we have got 3,000 or 4,000 tons of scheduled downtime in the quarter for maintenance.

Okay.

So it's very small.

So in other words, yes, you should be down well over 40,000 tons total for the Company in the first quarter versus the fourth?

All grades, pulp and paper.

Okay. Dave, you had said, as you mentioned, and it's in stats here, inventories in newsprint are around 90,000 tons. Now, that is up from where you were in the fourth quarter a year ago. Are you comfortable with these levels now of 85,000 to 90,000 tons or is that going to force you at some point to have to reduce it further?

Well, as I said, that's around 12 days of production, which is not too high for us. We did have some problems near the end of the quarter shipping some tonnage just because of the weather and whatnot, but I don't feel uncomfortable with that level.

Okay.

And Rich, when we say shipping, we mean out of export mills. So these were out of two export mills had some ships that actually were shipped in the first quarter.

Are you expecting as a result of your comments on the export market to be shipping more in 2005 into the export market than 2004?

Yes, one of my goals is to raise -- taking a look at our domestic mills in particular as to raise exports out of there by about 20%.

So what would be in terms of tons?

About 30,000 to 35,000s tons.

Okay. And these inquiries, is it because demand is good in those markets or we're having the effect of a weaker dollar and more competitive newsprint pricing here?

A demand is actually very good. We're seeing money being spent in India, which I think is the third largest circulation market in the world. Investments going into pressrooms there, we've got about 70,000 tons that go to India, so they're a big customer of ours. We're also hearing a number of very, very large pressrooms going in Russia, so that will take any Russian newsprints that currently coming into the export markets from Russia, it will take some of that off. So there is activity in pressrooms and in investment in presses to increase demand.

And I imagine that helps you with negotiations with your domestic customers, if you can put more into the export market?

Yes, I think it will.

Okay. Just last capital spending $170 million. You had previously said $150 million. I imagine that's -- that you didn't get up to the $100 million in 2004, so that's carry-over? Is that the way to look at it?

It's carry-over and the ability to put in place some high return projects.

Okay. And last, Arnie, I was -- a very difficult year. You saw improvement, but obviously, you're a long way to get to the kind of returns or balance sheet is like. Is there anything else you need or are looking at in term of much further cost reduction or restructuring efforts at the company?

Well, of course, we have done a lot and severance charges and kind of the proxy for all that we have done recently in terms of streamlining the organization and taking out operating costs, shutting down those kinds of facilities that are higher cost.

As you know, our day-to-day culture has been for many years continuing to look at that part of our incentive. Pay programs are driven by cost reduction goals and opportunities. We'll continue to do that. We don't have a formal number that we're throwing out there primarily, because we do it in all corners of the Company.

We'll continue to do it, throughout '05. And we'll also look at the level of capacity as we look at the markets across the Company and geographically. We'll have to examine our highest cost operations and we are intensely looking at ways to move to value added grades and to deal with what we're assuming to be a slow growth or no growth domestic newsprint picture. And as we move into those opportunities, I think our costs will go down, our productivity and margin wills go up.

Thank you.

Next question will come from the line of George Staphos from Banc of America Securities. Please go ahead.

Thank, operator. Hey guys, good morning. I just wanted a feedback little bit on the export question. Now, I can understand pressrooms going up in Russia being a source of demand for consumption, but last time we checked, there is a fair amount of capacity still in Europe for newsprint that would seem to be better situated to supply to Russia. So what's helping you get into that market is it just really currency?

George, this is Dave. I wasn't commenting on our participating in the Russian market. I was just trying to respond to the question about whether we're seeing real activity in demand in some of these export markets and certainly we're starting to see in it Russia.

We - as I said we've been getting inquiries from tonnage in some of the major markets that we operate in. Prices are continuing to move up. They are still below the North American market and the (inaudible) right now is attractive. But if this demand continues, we could see the Indian environmental pricing being very attractive for us in the export markets.

I mean as we think about it, should we think that South America is probably a better place for you and maybe longer term, better place for demand, or do you think Asia will be better in term of exports? Again, there is a lot of capacity over in Asia in terms of ...

I think we're looking at both of those. We're looking at growths in both of those markets, both in South America and in Asia. We have big position in South America. And, as I said, we're growing our positions in Asia. We do have, as I said, the 70,000 tons in India, and good customer there is we're going to grow with.

From a cost standpoint, and we'll focus, let's say, on news and coated and specialty, obviously, you can't project paid in dollar and there are some variable costs that are clearly out of your control, but for the costs that you can control, you know, fixed, labor, what kind of trends should we expect over the next couple or next three years? Inflation of a few percentage points where you bring those costs down structurally?

Hi George. It's Bill Harvey.

Hi Bill.

Typically, we do have the normal cost pressures of pension and labor increases. We typically offset at least a half of that. So, from an inflation point of view, if you've ignored, I agree with you. We've taken the Canadian dollar and putting it aside, we offset just through normal productivity -- and normal productivity at least half of what we experience in general inflation. Ignoring specifics such as energy, which we, of course, disclosed to you as much as we can when that moves or old newsprint, recycled newsprint, which is a commodity that tends to fluctuate.

I guess the last question maybe for Arnie. Arnie, when you look at consumption trend newsprint in North America and, you know, what is at a minimum a continuing decline and maybe an accelerating decline, do you think that the pricing actions of the major suppliers, yourself included, are contributing to that or do you think the rate of decline would basically be the rate of decline no matter what?

I think the rate of decline is a function of the newspaper business and the alternative of news sourcing and generational issues in North America. Let me say quickly, by contrast, global demand is improving very nicely, and I think we're looking at 4% demand growth of newsprint consumption outside of North America. But inside North America, we see and expect and plan for a steady, flat to slightly declining consumption, driven not by the actions of Bowater Inc. or, presumably, by the competitors either, but by the reduced usage of newspapers...

Right.

...and substitutes. And again, the pricing is a function of supply and demand, not just demand. And that's what we've been busy doing is managing the supply side of the business to keep our order book in balance and the pricing momentum that we have continued for the last two years, meaning averaging two decent price increases each of the past two-plus years. So, I think we're doing the best we can, and it pays for us to be aggressive on the pricing as best we can in this kind of situation.

Well, I guess that's the point, Arnie. I mean, it's a paraphrase, if you're saying that really it's structural and pricing hasn't had an effect on consumption, consumption would be doing whatever it would be doing, why wouldn't the industry -- why wouldn't you look to be even more aggressive on pricing than you have been?

We plan to be very aggressive this year. More aggressive, less aggressive, I guess that's an endless debate, but we're going to be as aggressive as we think is appropriate to succeed with price improvement. There are, of course, countermeasures that publishers are able to take and have taken in terms of using less newsprint and going to 50-inch widths and other kinds of things.

On the other hand, they are running a business and don't succeed by shrinking newspapers indefinitely. So, I think that, although, there is some reaction to conservation efforts by publishers, we think the pricing momentum is in our favor the way we're managing the business. We have to account for declining demand and declining consumption. And we do it through reorganizing, restructuring our asset base, and yet moving prices up. And we've been able to succeed in getting prices and we'll continue to do so.

Okay. Thanks very much.

Thanks.

Our next question will come from the line of Karen Gilsenan from Merrill Lynch. Please go ahead.

Thank you, and good morning.

Good morning.

Good morning.

I was wondering if you could talk a little bit more about your hedging program for the Canadian dollar. I know some of those hedges are rolling off this year. But they've been extremely helpful, I think; perhaps you could fill us in a little bit more on what you're doing there and the impact?

And then, secondly, if you could, maybe, quantify a little bit more what you're thinking about the impact of energy, both in the fourth quarter as well as we roll into the first quarter in terms of usage as well as price?

Karen, it's Bill Harvey. The hedging program, we've hedged approximately 50% of our exposure, a little over 50% through 2005 and into halfway through 2006. After that it diminishes and it's really a result of as the dollar approached 80 cents and -- into the 80 cents the Canadian dollar, we are not actively putting in new hedges.

Again, you can, as a background, of course, you can take a look at our 10-Q and 10-K and get somewhat further details on that. Energy, in particular was higher than we had anticipated in the fourth quarter by a few million dollars.

We don't expect any rapid improvement in the first quarter or for that matter anything necessarily much worse in the first quarter. It will, of course, get better after that into 2005 through the usage unless we're having some northern mills in the first quarter and then the fourth quarter of every year, they have higher energy usage.

And how about any early look on pension for '05? Pension expense?

Yes. Pension expense will be up in '05. It's -- by about likely in the $10 million range. Contributions will be up about the same amount. We think, as you can tell from interest rates and other things, we're probably at the top of the pension expense number. And we'll just keep it from moving.

Great. Thank you.

Our next question will come from the line of Peter Ruschmeier from Lehman Brothers. Please go ahead.

Pete, one thing I just mentioned pension expense, when I said $10 million I really was thinking contributions. Pension expense will be up less than that of, half of that in 2005, and this is really directed to Karen. I had a number incorrect.

Thanks and good morning. A couple of questions on the minority interest expense line. I apologize, I joined the call a little late, but minority interest expense was a little bit better than I expected, so your newsprint profits were better than we expected, but yet your contribution minority interest expense was lower than we expected. Could you just elaborate on that?

It's the actual sites themselves, with the minority interest is really three sites, two of them export mills. And export pricing, although improving, has been lagging North America.

And as well, we had at our Calhoun, Tennessee mill; we started up a recycle plant in the fourth quarter, and experienced some costs in our partnership there. So, it was a combination of things. Number one, the export mills pricing that we achieved in the export mill. And second, just a startup of recycled plant at one of the partnerships.

Okay. And maybe on a related note, you mentioned that there was some shipments that slipped into the first quarter from the fourth quarter. Was that on newsprint or was that on pulp?

That was newsprint.

And is it possible to quantify what kind of tons we're talking about?

There were two ships that probably in the 10,000 ton range, would be, I'm assuming. I don't know the details, Pete, but you could use that as a ballpark.

10,000 tons on a combined basis?

Yes.

Okay. And then combing back to maintenance, you mentioned the maintenance you expect would be a little bit less in '05 than '04. Is there any way to quantify order of magnitude, how big '04 was relative to what you expect in '05 on the maintenance side?

On a tons basis, it is probably be -- and we spoke specifically about the pulp business. That's what we were talking about. It's probably going to be 10 to 15% less on tons.

Okay. And similar in your other product lines?

Other product lines, I'd say about the same.

Okay. And maybe a question for Arnie. You know just coming back to -- how you think about connecting the dots on newsprint demand being weak, and yet you have got strong demand in specialties, and other areas, and you got some potential conversions that you may or may not decide to go forward with. Can you help us to understand kind of your thought process on whether you decide to go forward with some of these opportunities or not? Specifically, Calhoun and Bay.

Yes, the opportunities that we have discussed before are at our craft mill sites, Thunder Bay and Calhoun. The opportunity, where we're making significant amounts of newsprint and have been for years, and we're intensively examining the opportunities to continue to reduce our newsprint output, which, by the way, has decreased at Bowater by about 23% since 2001.

So we're down just over 40% of our sales including newsprint. And our thought process is to continue that trend, so that at some point we'll probably be in the low 30's. Perhaps a third of our output will be in coated, and specialties, and a similar amount in newsprint, as we're addressing this flat and declining consumption picture in newsprint. As far as execution, I think, your question earlier revolves on how, and when do we execute these strategies. It's, of course, our balance sheet has been under pressure, as we all know too well. It's going to improve and continue to improve.

And that's the driver we need to address our debt load first. We expect to make a significant dent in our debt load in '05. As that happens, we'll be looking more seriously, and sooner than later at these opportunities. There may be other ways to accelerate those projects that we're not in a position to talk about at this time, but all in all, those are high priority opportunities. There are ways to do this that can be win-win for shareholders of Bowater.

We look at it as a demand driven issue both in terms of the picture of newsprint, as well as the opportunities. And we're learning a lot about the various subsets of coated and specialty grades.

And we're finding our thinking as to which grades we really want to move into. Calhoun, for example, produces a variety of specialty grades and almost half of our machine capacity there for the past year and we talked about that. Thunder bay is a unique site and having a large craft operation making mostly newsprint.

And there with the -- its fiber base and infrastructure, we have opportunities to make even different grades there than what we might at Calhoun. That's what's on the radar screen. We have to focus on our balance sheet and as we go through this year, we'll have -- probably more to talk about and more execution to announce.

Okay. Great. Just lastly, if I could, Arnie, when you mentioned that you expect additional price increases and the strong rebound in earnings. Is it fair to assume that you are referring to all your product lines or just certain product lines? Can you elaborate on at least your initial expectation?

Our outlook is positive price movement in all of our pulp and paper grades.

Very good. Thanks very much.

Thank you, Pete.

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

Good morning and congratulations on the various promotions down there. I have a few questions. One, I wondered, Bill, if you could help us a little bit with the jump up in cap-X just to give us a sense of where the incremental capital dollar is going to be going into '05.

Sure. Mark, part of that is just we did not spend -- we had some projects that just fell into '05 that were originally scheduled for '04. The actual additional is basically some high return projects spread around the company, but focused on specific sites that -- really small projects around the company in essence.

Is this like energy related stuff or like some of the conversion of the remaining newsprint down at Calhoun? I'm just trying to get --

No, this is primarily cost reduction where energy projects are a high priority, so yes, it is -- some of it is energy projects. And in essence, it's all cost reduction.

On that energy side, is there any -- you guys have any water rights anywhere that you could tap into yet? A lot of the Canadian producers have water rights for their mills.

Mark, you mean hydro--

Yes. Exactly, exactly.

No, we don't have anything in that -- we don't have any of those.

OK. Second question, on the lightweight coated market being very tight right now, is that having an effect over Nuway?

Yes. Mark, this is Don Newman. Since the last price increase in coated mechanically, economics are looking a lot better around the Nuway equation, but it's also notices that the new print process has also risen and I guess, what would drive us to increase output at Nuway is an improvement in the spread actually between the price of newsprint and coated mechanical. So we're watching that very carefully.

At this point, you are still just what running, one line at Benton Harbor and then facility at Covington, is that right?

That's correct. We are about 50% of capacity.

Okay. All right. And then Bill, if you could, can you just help us in addition to the less maintenance in the first quarter, think about the other kind of key variables which may change going from fourth quarter to first quarter?

Okay. Fundamentally, there is -- make your price forecasts, of course, and market pulp has been price movements, already, we've announced for February 1, volume - there -- there will be some pickup in volume because of the less, less maintenance. Energy, to make your own assumption, but it probably would not be a meaningful plus or minus. And really, Mark, that's the change from quarter-to-quarter. I can't think of anything in particular other than those items.

Okay. All right. I think that helps a lot. Finally, I just wanted to, they can make a note, with this question about newsprint pricing came up, and how much that's the increase in prices might be doing (ph) to drag publishers to narrow webs and things. It does strike me, if you look at your the prices either in nominal or real terms over the last 15 years, they have been quite deflationary. Do you have any sense for, how deflationary you think, they have been?

No. We just don't think of it in those terms, Mark. We understand the question. We just don't have a good answer for you.

I kind of read these articles, screaming about high newsprint prices and I think, we're still well below, where we were in the much of the 1980's of nominal term. Okay. Thanks.

Operator, we have time for one more question.

All right. And our last question will be from the line of Chip Dillon from Smith Barney. Please go ahead.

Yes. Good morning. I had a question about, when you look at the North American system for newsprint, how much is the virgin fiber and how much is recycled fiber and how much flexibility do you have, in particular, if you wanted to reduce the recycled as much as possible, how low could that number go?

Chip, our mix in North America production is about 30% to 35% recycled content and all of our tons. And we do have the ability at one or two sites to ratchet down the use of recycled fiber in favor of virgin fiber depending on where the costs are going.

Okay. And then switching to that just a quick question on the hedging, I know, Bill, you mentioned that you were 50% hedged on the Canadian dollar going through the middle of 2006, if I heard you right now. Just to be specific, that means you are obviously making some -- that is on the revenues. So you're making some assumption as to what your revenues will be, or is that just based on costs and cash?

Sorry, Chip. I should have been -- that is on costs. We hedge it relative to the Canadian dollar costs.

Got it. And all right. And then in terms of the -- your facilities, could you tell us how long this Thunder, I think, it's been about a year, but how long the number three machine at Thunder Bay has been down?

Been down about a year and a half.

Year and a half, okay. And at some point do you have to sort make of -- I guess, that - what's you're saying as it -- you'd have to decide to convert that or likely you will either convert that or shut that permanently. Is that fair?

It will take a substantial change in circumstances for us to reactivate that machine.

Got you. Okay. Thank you.

Thanks Chip. I would like to end the call by thanking each of you for your interest in Bowater.

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