Resolute Forest Products Inc (RFP) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Abitibi-Consolidated first quarter 2005 results conference call. I would now like to turn the meeting over to Mr. Lorne Gorber, Director of Investor Relations and Financial Communications. Please go ahead, Mr. Gorber.

Thank you, Adam. Good afternoon, everybody. I'm here with John Weaver and Pierre Rougeau, our CEO and CFO respectively, as well as [Jocelyn Pepin, ] Vice President and Corporate Controller. As usual, our prepared remarks will be very short and include John commenting on the in depth operations review, the market, and other company highlights, then Pierre making a few key points on the financial results. Basically, what we feel are the key take-aways. Then we will go right into your questions. Just a quick reminder before I hand it over to John, any forward-looking statement made on today's call are based on information we believe to be current. However, any number of risks and uncertainties can affect what we say, causing results to be materially different from those expressed or implied. John?

Thanks, Lorne. Let me start with a quick comment on the share price. I clearly believe that it is undervalued and I tell people almost daily that fundamentally our business is better today than it was a year ago, or even two years ago. The liquidity story has been beaten to death. We've done all we can to both say and show that the Company has more than adequate liquidity levels, and we're not looking at issuing equity. Our stock market fortunes seem to be uniquely tied to one factor, North American newsprint consumption. While we are highly leveraged to this segment, it represents just one-third of our overall sales and discounts the importance of the commercial printing papers, wood products, and the international businesses. As you will have noted in our presentation package, the growth of uncoated groundwood has more than offset the decline in newsprint consumption. We expect the growth in our printing and writing -- commercial printing papers to continue, and become a proportionately bigger piece of our overall sales pie.

Let's move on now and address the question I think you want to hear about. What have we done in the first quarter with respect to the operations review we initiated in January? We have made a lot of progress. Most of our decisions have been made. And we're ready to share some of them today and where we're headed. In Newfoundland, as to the island restructuring, we are moving to a one island business structure where one administrative service will oversee the two machines at two locations with integrated Woodlands organization. We will implement a labor reduction program across the island, and close the 60,000 ton number 7 machine at Grand Falls, reducing the mill's capacity. In its place, a potential modernization of number 3 machine at the millwood is being studied in order to meet the increasing quality demands of the export market. Critical to the island strategy is finding solutions for [Stevenville] with respect to fiber and energy. Both are critical to Stevenville's future. The long-term resolution for Newfoundland is expected to be fully outlined in Q2.

For Fort William, we have completed the review of this mill and the mill team at Fort William has come up with a plan to substantially improve the profit. However, we believe that the mill can create more immediate value to an outside party and have therefore decided to sell the mill and also a half a million acres of private timberlands near Thunder Bay. 150,000 ton mill with an additional fiber supply in this wood short region is a valuable advantage for this operation. The private timberlands are not associated to the mill but are expected to bring a more attractive package for potential buyers. As to [Kenora,] no decision has yet been made with respect to reducing production costs and mitigating the high energy costs in Ontario. We're working to see if there is any hope of finding a long-term viable solution. Answers must be found in short order if this mill is to survive.

At Lufkin, a potential conversion is being considered for our Lufkin, Texas, mill to produce coated groundwood papers, further enhancing the value proposition we offer our customers. The project attractiveness lies in the fact that we can do it for less than $100 million and that we can be producing paper within 12 months. However, issues remain such as finding a viable energy solution. Here again, we expect a decision on whether or not to move ahead in Q2.

As well, we have decided to invest $15 million in our [Bevel,] Quebec mill for a bleach plan enabling the mill to move from newsprint into higher brightness grades. Before the end of the year, we expect a full 110,000 machine to be switched from newsprint to high bright grades. This is a low cost and timely alternative to produce additional high bright papers for our customers.

Now, let's look at the current state of the North American newsprint market. The March increase has been implemented and an additional $35 per ton is being charged. Looking at the newsprint stats, we should all focus on more than just one number. Year to date, production is down 5.5% and daily consumption is down 4.6%. Mill inventories are low. Therefore, the market remains in balance to fairly tight. And looking at operating rate, it is at 97%. Remember, we will -- we're still working through basis weight shifts and a lot of swings -- swing capacity, which has moved from newsprint to groundwood grades is not correctly reflected in capacity. Uncoated groundwood grades has seen year-over-year demand growth of 12% and the entire uncoated groundwood world looks -- when looked at, including newsprint, has seen consumption on a year-over-year basis, up 1.5%.

On the commercial printing paper side, demand continues to expand at double digit rates. [Alma] has turned out more tons than budgeted and continues to ramp up towards full capacity ahead of schedule. We are still assessing where and when the next AOEO conversion will take place. s far as the price is concerned for our all commercial printing grades, Q1 did see a nice bump as those customers whose price was capped or locked in had to play catch-up as we entered 2005. Additional price increases were on the table for virtually every grade we produce.

Internationally, European newsprint prices have settled at up 6 to 8%. Given the Euro/Canadian dollar relationship, and European demand growth, 2005 should see mill nets on the 700,000 tons or so that we sell in the continent remain favorable. Asian newsprint marks are doing well. The only softness continuing to be in South Korea where the well documented credit card crunch continues. Pan-Asia has nevertheless announced a further 5% increase in its key export markets on April 1.

For wood products, prices are off their record highs of 2004, but the segment remains quite profitable with housing starts expected to remain strong. Regarding the softwood lumber dispute, we're encouraged by the resumption of talks between Canada and U.S. and hopefully 2005 will finally find a resolution through negotiations.

Before turning it over to Pierre, I would like to make a quick summary. First, the in depth operations review is progressing with several more decisions coming down the pipeline in Q2. I expect to hear more on restructuring, rationalization, and asset sales over the coming weeks and months. We have taken the first step at restructuring our Newfoundland operations. We're in the marketing process for Fort William and the private timberlands and proceeds from the sale will be used to pay down debt. Bevel will move up to higher brightness grades gradually exiting one newsprint machine, therefore removing 110,000 tons in 2005. North American production is down 5.5% but consumption is down slightly less at 4.6%. North American operating rates are at 97% including idle capacity. Commercial printing papers are beginning to play catch-up with respect to prices, and more to come in Q2. The strength of lumber prices continues to trend above seasonal norm. With demographics success -- suggesting this could continue. Pierre?

Thank you, John. This morning, we reported the first quarter loss of $51 million, or $0.12 a share. Table 2 of our MDNA and Slide 6 of our presentation breaks down specific items, net of income taxes. This quarter included a $22 million loss on a translation of foreign currencies, a $5 million charge related to an early retirement program, a positive income tax adjustment of $33 million following the completion of prior year audits, and $2 million favorable adjustments mainly from interest income on a tax refund, offset by the premiums we pay to buy back bonds. Without these items, the result which is not a recognized GAAP measure, would be a loss of $59 million, or $0.13 a share. This compares with a loss of $60 million, or $0.14 a share in Q1 of 2004. An operating profit of $18 million was recorded in Q1 compared with an operating loss of $17 million for the same period last year. Tables 1 and 3 of the MDNA provide a detailed summary.

The newsprint segment posted an operating profit of $9 million in Q1. After an $8 million charge for the early retirement program, primarily due to price increases, offset by lower volume. Pan-Asia's overall EBITDA was U.S. $33 million in their first quarter, on sales of U.S. $181 million, excluding purchase and resold tonnage. Fiber and energy costs and lower year-over-year volumes in Korea continue to affect our results. However, all Pan-Asia's export prices have gone up year-over-year and another increase on exports was announced for the beginning of April.

Results in our commercial printing paper segment began to see some improvement in Q1. Revenue, despite being impacted once again by the strength of the Canadian dollar, saw higher year-over-year prices and volume. Our -- grades continue to reflect Alma's ramp-up with shipments up more than 27% year-over-year in Q1. What we expect to see now is the ramp-up in its earnings contribution to this business' overall profitability.

For wood products, prices of various grades were down from record highs last fall, but excluding effect, still remain 18% higher in Q1 of 2005, compared with Q1 of 2004, reflecting continued strong housing starts. Our wood products segment posted an operating profit of $22 million on the current quarter, after a $19 million in lumber duties expense, at the approximate rate of 20%. These results compare with the loss of $1 million in the first three months of 2004, which included $23 million in duties. In the first quarter, the Canadian dollar was fairly flat sequentially, but negatively impacted our companywide operating results by about $63 million after strengthening by about 7.4% versus the first quarter of 2004.

Finally, on March 28, the company issued U.S. $450 million of notes due in 2015. Following the offering, we have repaid U.S. $337 million of notes due to [SARGUS] and U.S. $100 million of notes due at the end of 2006. Let's go right to questions. Lorne?

Thank you, Pierre. Just a reminder that the call will be archived on our website or you can listen to a replay until May 4 by dialing 416-695-5800 and using the pass code 3116543. We're going to start with questions from the investment community and then we'll conclude with business media. Any follow-ups from either the investor side or the business media can be directed to me at 514-394-2360. General media inquiries can be directed to [Denny LeClair] at 514-394-3601.

Thank you very much, sir. We will now take questions from the telephone lines. If you have any questions, please press star one on your telephone key pad. If you are using a speaker phone, please lift the handset and then press star one. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have question. There will be a brief pause while participants register for questions. Thank you for your patience. Our first question comes from Joe Stivaletti, Goldman Sachs. Please go ahead.

Hi, good afternoon. I was just wondering if you could talk about your expectations or a range of expectations for these asset sales you're talking about, particularly the 500,000 acres and the mill?

Of course, we don't want to put a price in the market. I think the best thing is, you know, there is some comparable numbers, especially for private woodlands in Ontario and the Minnesota/Wisconsin area that can be used for comparables, and as far as the mill, we think it is a good value-added asset, and so we expect the process to take over the next three to six months.

So what are those -- what are the most comparable sort of historical transactions in your mind in terms of per acre values that you've seen?

Well, again, I mean it varies depending on the location of the timberland and of the property, how much timber there is actually on the property, and so on. So like John said, we're not -- we don't want to discuss its value at this point because we're just going to start the sales process in the next -- in the coming month, and we don't, -- we are not going to tell people exactly how much we expect at this point out of these sales.

Right. Right. Okay. And are you giving sort of a total 2005 expectation for asset sale proceeds? Or is that --

No, not at this point.

Okay. And just two other quick questions. One was do you have a sort of an updated, any kind of updated CapEx budget for the year, including your Pan-Asia spending, your share?

I think including Pan-Asia, it is in the 350 range. Well, we expect it to come in pretty much right on 350.

Okay. And then the last one was just sort of on the newsprint price increase, the pulp and paper we reflected $25. Is that sort of -- I mean what perspective can you give us in terms of is that -- is that likely to be what is achieved or do you think you can get the other, the remainder, or is that it for now? How are you looking at that? How should we be looking at it?

Well, I think for us, the $35 is in. I think when you look at the public indices and the people who report, to see prices up 25 after one month is compared to more recent efforts a pretty good jump on a percentage basis. Therefore, we expect to see the whole 35.

Okay. Thanks a lot.

Thanks, Joe.

Thank you. Our next question comes from Mark Connelly, Credit Suisse First Boston. Please go ahead.

Thanks. Two things, John. Coming back to Joe's question, do you have a band in terms of how much you're willing to let this cost in terms of, you know, cash outflow? Your slide presentation talks about the money you're going to save on the other side, but when we look at selling Fort Williams and these other projects, you haven't said specifically how much Lufkin is going to cost and how much of that you're going to pay. You had talked about maybe bringing a partner in. Is there a limit to how cash negative you're willing to let this go?

Well, I think we certainly expect to sell Fort William for -- and neighboring private timberlands for more than book so we don't expect to go negative at all there. I think that one of the big issues around Lufkin and finding a possible energy solution and maybe an energy partner with [Cogen] is exactly what the capital expenditure would be, but as I said, we expect to do that for less than 100 million. And the most important thing to keep in mind is no matter what capital we do, we are going to stay within our 350 million envelope. So if we decide to do Lufkin, we will not do something else.

Okay. So you wouldn't go beyond that. Okay.

We will not go beyond that.

And a question for Pierre. Working capital was a bigger negative than we were expecting. Is there something that should reverse next quarter? Or is this just a new development?

No, it is should reverse next quarter. What happened is that -- actually a couple of things. Versus year end, the March sales were of course stronger, and so that -- our receivables picked up there. At the same time, our securitization program was reduced by about $50 million in the quarter. We do expect that to come back. It was reduced simply because at the end of March, what you can have outstanding in the program is based on your February receivables. And February being only a 28-day month, your receivables tend be lower at the end of that month. So it is a normal pattern for that program to be smaller, if you want, at the end of Q1. At the same time, there were other CapEx payable, which were reduced in the quarter. And -- but we do expect to see that reversed in the coming quarter.

Okay. And one last question, again for John, on the AOEO grades, is that a market where the amount of new capacity that you are thinking about and anticipating coming into that market can be readily absorbed with business conditions today? Or is that something that is going to have to be fed into the market slowly and so you would wean yourself off of newsprint?

Well, I think on the high bright grades that we're going to produce at Belgo, most of those high brights will be transfers from Alma and [Vopray] as they ramp up to -- as Alma ramps up to 100% EO capacity. So it is high bright capacity that we're selling today, but we will keep in the fold rather than making newsprint. As far as future AO or EO capacity as in the new -- a new machine, I think the two wheres and whens, the when certainly is dependent on what we see for the free sheet market, and the ability to put those grades in as a substitute for free sheet.

Okay. That's helpful. Thank you.

Thanks, Mark.

Thank you. Our next question comes from Don Roberts, CIBC World Markets. Please go ahead.

Thank you. John, a couple of questions. I wasn't sure if you were meaning it literally or not but when you had mentioned about some announcements in the coming weeks or months I guess I was thinking from your press release we were probably closer to the Q2 call. Did you really mean weeks there?

I don't think that we necessarily are going to hold everything for the end, so to speak. We will see things develop, as I said, we -- most of our decision have been made and it is a question of implementing or communicating those decisions. And so some decisions will be implemented during the quarter.

Okay. And some specific things on the operational program, first of all, at Ground Falls, my sense was that the union was being fairly adversarial there and that the notion was that if were you to put that paper machine down, that they may go on strike. What has been their actual response to your decision now?

Well, I guess the union is -- the union organizations of course are never happy about future job losses, and in the case of Newfoundland, we're looking at both a reorganization of the administrative structures of the two mills, plus Woodlands, and also the closure of number 7, so all those things will be painful for the union, I'm sure, but we are trying -- we are in the process of communicating with them, and the timetable and our expectations, and we expect to move forward.

Okay. Well, I guess I was actually seeing that as a positive move, if they were to go on strike and take another 200,000 out, that would be a positive one but -- on the -- another question, on the Bellgo, you had mentioned the higher brightness grades. Now is that actually an AO? What I'm trying to get at here, is this truly a substitute for UFS that we're looking at or we're looking at something a pretty close substitute to the newsprint?

We're talking about 65 to 70 bright grades, not AO type grades.

So pretty darn close to newsprint then?

Yes.

On the Kenora, when you mentioned about the energy issue with the province, are we essentially talking about Cogen here?

We're looking at several things. Of course, you're probably aware that we do have the -- we're waiting for some clarification on the Ontario government biomass electrical generation issues, and when we better understand that, then we know whether we go Cogen or whether there is a real alternative for the energy issue in Kenora.

Okay. And then lastly, just when we're sitting back and saying, you know, assume things don't go right due to energy costs and the global slow down or whatever, I'm just trying to look back on what are the other moves here in terms of curtailments. Could you give us some sense really on where is the loss of spread? Is it really quite evenly across the operations or are they concentrated in a few that you can sort of cut off if need be?

Well, I think the -- if you want to look at the losses and to say at the EBITDA level, you can pretty well go down the operations under review, and you pretty well have identified any mill that's even -- that's close to a loss, without necessarily saying all our operations are at a loss, but the least profitable are those operations, and our commitment has been through the operational review is we want to end up with our newsprint assets that are $25 per ton lower in cost, and ranked in the first or second quartile. So we will be pushing hard on those, and they're -- I think on the majority, it is probably pretty well accepted that we have some of the lower costs, most efficient, operations in both Canada and the United States, and I think after this review, that will certainly be the case.

So it is fair to say, because one of the things pushing down the stock here is people being worried about the financial distress and so forth and a negative scenario, and it seems one can sort of disspell that to some extent by saying if worse comes to worse, what you're looking at is a smaller company here. If indeed one can just cut these off. Would you agree with that?

Well, I think that, you know, that's part of our operation review. That's what we're pushing toward today. We are not going to wait for a possible downturn if we can't get these operations to an acceptable cost structure, therefore an acceptable margin for us as -- under today's scenario, we're going to take action.

Okay. Thank you.

Thank you. Our next question comes from Bruce Klein, Credit Suisse First Boston. Please go ahead.

Hi, good morning. I don't mean to beat a dead horse on the newsprint consumption number, but what's your take in terms of why you suspect it was down 1Q greater than what your view is for full-year '05 and maybe comment just on is there any circulation gains or inventory adjustments that are being made? And the second question is just on the publishers. Where do you think they are on the curve or how far along in terms of the conservation or how much more is there to go in, et cetera?

I think it is important to look at given the fact that inventory remains at the mill level, continues low, that there is actually not more paper being produced than being -- than is being consumed. And so a lot of paper is making other grades besides newsprint, other groundwood grades. And so that's one factor on the consumption. I mean what's there to be sold is being sold. If we look at why the newspapers are a smaller piece of the pie, I think that we've seen the size of newspapers decrease, and that's taken place, and we're also in the process of seeing adjustment of basis weight from 48 to 45. I think we're somewhere probably 20 to 25% conversion now, and that will progress over the year to lighter basis weights. But that's going to still mean that supply demand will stay in balance, because most people just can only manufacture on a square foot basis. They can't make more tons at a lighter basis weight. And then the other issue is that on conservation side, I think we're -- there is some additional -- always room for some conservation, but I think in the most part, we have seen the -- most of the shrinkage in size and people are still growing their insert business, so that's why groundwood products are growing as fast as they are.

John, does the tabloid, where do you think we are on that? Do you think a lot of publishers are going to continue to gravitate toward that? And what does that specifically mean for the newsprint industry in your view?

Well, I don't know that the broad sheets in North America will necessarily go to tabloid, but I do think we will see additional products like the commuter papers, and the free give-away tabloids, and some other different type tabloid products, but I'm not -- I don't think we should look for a conversion of every broad sheet to tabloid. We will see it maybe get smaller size, but not converted to tabloid.

Okay. And then the SLA agreement that you mentioned that there are two sides are talking more. What is the next step in your view and timing of that?

I think, you know, we're hopeful to have another meeting sometime in May, and hopefully we can continue to move forward on trying to find some kind of common ground. The two governments are facilitating those discussions, so we have some light, you know, I think we will see at least one or two more meetings before we decide whether it is going to work or not.

Okay. And what was the -- Pierre, the revolver ability, I may have missed it, the notes.

The revolver ability was slightly above $700 million or around $700 million at the end of the quarter. Most of the difference between the total revolver which is 815 and what was available, which is 700, was letter of credit. It was hardly anything wrong on it.

Okay. Thanks, guys.

Thank you, Bruce.

Thank you. Our next question comes from Frank Dunau, Adage Capital. Please go ahead.

I had a few questions. Back to Lufkin, I assume if you spend 100 million, you're going to turn into a LWC machine and why would you just want one of those in your system?

Well, I think the -- a coated grade, we would still be more than 5% of the market. We have our markets researched so that we basically, we already sell to those customers. So we're not looking at new customers. I think the margins on these products are -- continue to be good and allows us to provide the full spectrum of products. I think and most importantly, as our -- if we can find the right energy solution for Lufkin, we believe, given the size of the machine, that we will have have a low cost asset in the LWC world, in terms of production capacity.

But does it still make some sense if you can to find somebody who is already in that world to partner with as opposed to going it alone?

That's a possibility we are also looking at.

Okay. And on Fort William, if you sell it, would you sell it with a clause that whatever they're going to make at Fort William doesn't compete with whatever you make in the rest of your system?

Well, it is currently an uncoated groundwood mill. I think the -- there's always options to look at. You know, we can sell it with restrictions and not with restrictions. I think for us, we certainly wouldn't want it to make newsprint, but we have some flexibility in other grades.

And just on the -- I guess you call it communications papers, --

Yes --

You call that value added.

Commercial printing papers.

Commercial printing paper, okay, there we go. I thought you would do better there in this quarter because as far as I understood, you were rolling a lot of contract -- I thought they were rolling January 1. Did they roll at some other time other than January 1? And as they roll, are you writing annual contracts or do you shorten the terms of the contracts?

I think our prices were up quarter over quarter significantly about $80 or so. But most of those contracts that of course we're exiting where possible, most of those are in the glossy business, not free sheet, or other high brightness grades. We do have a carrying cost in the commercial printing group of Lufkin, but I think we do foresee that things should continue to improve both on a cost and price side. We do, in the first quarter, too, we're just getting Alma I would say up to break-even in the first quarter. We expect it to start to turn a profit here going forward.

I guess it was Pierre during his presentation who was making comments about having to play catch-up in pricing. How much do you have to catch-up? What were you talking about there?

It was ramp-up, I was talking about Alma. The fact that it is not producing paper on the, you know, the proper basis and producing very good paper. As John just pointed out, we are looking forward to better profitability out of the mill as the paper production seems to be going fine.

Okay. Thanks. That's it.

Thank you. Our next question comes from Kuni Chen, Banc of America Securities. Please go ahead.

It is Kuni Chen with George Staffordshire Group. With regard to the 250 million EBITDA improvement target for next year, and I think you've said that you can get to maybe a 60 million run rate by the end of this year, I mean as far as what has been announced in Newfoundland, how much of that gets you a little closer to that 60 million target? Or what does that contribute to it?

Well, I think the -- our goal is to have all our decisions implemented by the end of the second quarter. So we have the second half of the year to begin to get the benefit from the decisions implemented in the first quarter. I don't know that it makes sense for us at this time to break down the contribution from each scenario, but perhaps that's something we can look at for the end of the second quarter.

But I guess, we're still confident about what we told you before about the run rate by the end of the year. We're still lined up for that.

Okay. Sounds good. And as far as your strategic plans for Lufkin, and I don't want to beat a dead horse here, but there was some discussion yesterday from one of your competitors regarding their potential conversions into lightweight coated grades. Did that have any bearing at all on your thinking for Lufkin at this point?

We were thinking maybe they're announcement had a bearing on our announcement that was planned for today. But anyway, I think it is -- the announcement for Lufkin will be clear by the end of the second quarter. We are still looking at opportunities. I think the best thing about the announcement of our competitor yesterday is that in theory, we're looking at a significant amount of newsprint tonnage to come out of the market over the next two years, so we're glad to see that.

Okay. Great. And then just lastly, can you give us some revised guidance on the tax rate? Do you think the adjusted rate came in at 28% in the quarter, versus your 31 guidance.

Well, yeah, that's still -- that's still the case. Use 31 to 32%. That's a good approximation for the time being.

Okay. Thanks a lot.

Thanks Tony.

Thank you. Our next question comes from Christopher Miller, JP Morgan. Please go ahead.

My questions have been answered, thank you.

Thank you. Our next question comes from Bill Hoffman. Please go ahead.

Good afternoon. John, I just wonder if you can address the issue of capital first, some of these conversions. I mean obviously you've indicated the opportunity for an asset sale here that might support one of your conversions going forward, but over time we would assume that there is more to come, and you're obviously going to need more capital to achieve that. Barring a more robust up cycle, can you just talk about what other things you might be exploring at this point, and I know there has been talk about your hydro assets, et cetera, for providing some sources of capital, but I just wonder if you can sort of outline those, what you're thinking at this point?

Well, you know, we continue to look at some isolated asset sales and I think other opportunities that are available to the Company remain some select hydro monetization, and perhaps other asset sales that we've talked about in the past, for instance, or those things that are more or less not entirely in the core of our operations, such as Bridgewater or MacKenzie, as possible candidates, but as far as a more -- breaking down the detailed level of that or the value of these assets, I just think the main thing is that we're determined to pay down debt this year, and we're going to do whatever it takes to make an effort to do that in 2005.

Okay. The other question I had was when you look at the export markets and you talk about prices being up in Europe, and the fact that there is sort of -- there is some global growth in the newsprint side, even though it is modest, there is some growth. Do you expect to try to more aggressively push out into the export markets at this point in time? Is that another alternative that you think something that is untapped for you?

Well, I think we are a major player in the Asian marketplace. Our total exports from North America probably make up about half of all exports from North America, so we're a significant player in terms of Europe and South America. We sell 7 to 800,000 tons annually in Europe, 400,000 tons in South America, and another 300,000 tons in other parts of the world, so we're a significant exporter, and we don't see a ramp-up, other than further increases in Pan-Asia such as the start up of the [Haybay] machine which starts up in July of this year in China.

So just more incremental than anything else at this point?

Yes, I think -- from North America, we're pretty well staying with our 1.2, 1.3 million tons.

Okay. Thank you.

Thank you. Our next question comes from Mark Wilde of Deutsche Bank. Please go ahead.

Yes, just to follow-up on that export question. What is more profitable to you right now on a mill net basis, export or domestic sales?

It is hard to beat domestic sales generally. But a lot depends on where you're exporting to. There's some very good customers where the freight is not -- such as South America and some European countries remain very competitive on a mill net basis for us. Other places are not as good.

So you wouldn't go as far as to say, you know, export tonnage is more profitable for you right now?

No, I sure wouldn't.

Okay. Another question, John, is it possible we could just see an outright closure up at Kenora?

Yes, that's possible.

Okay. And the last question, I want to bring up -- I don't want to bring up a sore subject here, but, you know, these knuckleheads up at Bessy keep talking about this -- building another news print mill in upstate New York, which we clearly don't need. Do you have any thoughts on what the prospects of that are?

Well, I think, you know, certainly that the way people talk about the consumption declines and the changes in consumption of newsprint, I think that we would be better served to make some other grade besides newsprint. I don't see the financial viability of a new newsprint machine.

And is the story there, as you understand it, really just that they, you know, they need somebody to take the waste heat off of the Cogen, is that it?

That's what I hear but you can do that -- there's a lot of different possibilities for steam house.

Yes. Okay. Do you have any insights on what might be going on there? I mean it is a pretty big project. It would have a lot of impact on you guys.

It truly doesn't make any sense to us, and we would just be posturing to try to see what was going on or maybe they're posturing. We will have to see what the real story is.

Okay. Fair enough. We will see you in June. Thanks.

Thanks, Mark.

Thank you. Our next question comes from Frederic Beausoleil, ----- National Please go ahead.

Yes, good afternoon. Not to overkill the newsprint consumption issue, but I had a question on basis weights. One of the things certainly publishers have been highlighting is a means to reduce cost is, to go towards lower basis weights. As I understand it , John, you did talk about the fact that capacity is constrained as you lower basis weights but also aren't these grades sold at a higher price, and you know, that would offset part of the economic incentive. Would it be fair to say about you guys that it is basically a wash as you produce more 45 gram newsprint in terms of profitability on your overall sales or I guess the return you get on your assets?

In general, there is about an 8% yield difference in a 6 to 8% pricing difference, so it is basically a financial wash for us. We can even, in the end of the day, perhaps see a little bit of upside, since fiber and energy prices are so high today. And certainly, it might actually be cheaper to make, in the long run, of course, while we're on the learning curve during this year, we don't really expect to see any of that. So I would say break-even for this year.

And in terms of your assets that are currently producing the lower basis weight newsprint, and the potential to, I guess, on a number of machines, lower basis weight, are you foreseeing any capital, I guess, expenses to get that done, or is it something that is relatively simple to do with your existing asset base, say, for example, if, you know, the whole North America newsprint market was going to shift in a step change to lower basis weights?

We don't foresee any significant capital changes or costs in order to change from 48 to 45 gram. Perhaps some clothing or other operating supply changes but no real capital in terms of machinery. And as far as the step change, frankly, we would -- that would be the best thing for us, because having a mix is harder to manage than having everybody on one basis weight.

And I guess if we will leave that to the fiber situation and get back, it may turn out to be a good thing for you guys. Thanks. That's all the questions I have.

Thank you.

Thank you. Our next question comes from Chip Dillon, Smith Barney. Please go ahead.

Yes, good afternoon. First question is, when you're looking at Lufkin, make sure I understand this, are you only considering when you -- when you look at a conversion, going to coated groundwood, or did you also say you would consider going to some other uncoated specialty like AE or OE?

No, right now, our main focus is to do a more in depth study on the -- of going, making the conversion to lightweight coated.

Okay. So no equal offsetting or other uncoated groundwood there. And then when you -- you mentioned the energy issue there. Obviously, someone asked you, if it doesn't -- if it is not a clear winner for you, what would make it a clear winner for someone else, again you would say the difference there is someone who is willing to put the money in to do a Cogen project, and that sounds to me that that 100 million would not include that, that is something that you would therefore not want to do.

The 100 million doesn't include the Cogen. I think the -- there is all kinds of different Cogens, as you might know, all from enough to supply the mill, to enough to sell 200 megawatts on to the grid, and I think those kind of -- those investors are different, and the profitability of such partnerships are different. And so we're going to continue to explore them and the overall impact they have on the profitability of the Lufkin operation, and once we've done that, we will be able to make a better decision.

And then when you look at the CapEx, you mentioned 350 is the number for this year. Next year, is there a range that you would give us sort of at least, you know, what would be the most it would be, and maybe what the least it would be?

I would say that 350 is the most it would be. I can foresee numbers, you know, 100 million lower than that. You got to remember that we're doing our operational review. We could have less operations.

Okay. And then when you --

And also, Jocelyn just reminded me, that China [Habbay] project will be complete in July, and so that's 100 million this year that won't be there next year.

Got it. So it must be a stretch to see you spend 350 next year?

Yes. I would say it is unlikely that we will.

Okay. And then on Stevenville, I mean just sort of reading the body language, it seems like, you know, if you were to pick between the two, that mill probably has a greater chance of finding some future than say Kenora, and in that vain what is the issue there that remains for you to make a go-no go decision there?

In Stevenville?

Yes.

As we said, Stevenville, the biggest thing is that the province of Newfoundland raised energy prices by 16% on January 1, and if they continue to accelerate their energy -- the energy prices on the island, it is going to be difficult for us to find a way to run that operation.

Okay. And then lastly, when you look at the global situation, John, I know that your project, you mentioned in July, was -- with North Ski is going to be finished in China and from what I can see, the only machine finally left to be built in Europe that's underway is [Homens] Peninsular in Spain. And then that's starting up I guess early next year. And then there is nothing in Spain, barring something in upstate New York, there is nothing here. But what other plants that you know of are going on anywhere else in the world?

Frankly, I don't think there is anything that certainly will start up next year. I think there is only one or two discussions for new machines in China. But nothing that is going to start up in the next two years. It's just a conversation at this point.

And when you look at China, it seems like that from what I understand, that when the machines come on there, that pretty much the government allows newspapers to increase pagination to absorb it. In other words, it is perhaps an artificially held down level of demand there. Is that a fair representation or said differently, do you feel when the machine starts up, it will be sort of the capacity will be spoken for right away?

We expect that we will be able to sell out the [Habbay] machine rapidly. It is both a question of pagination and also the fact that there is some rather -- much older machines, narrower, and environmentally unsound machines that are in the process of shutting down in China.

Gotcha. So what you're telling us is that we've got all the shut-downs taking place in North America, we've got one machine left to start up in China, and one in Europe, and as far as we can see, that's really all the capacity issues that we can see at this point?

Yes, and we are probably looking at global growth of 2 or 3% over that time.

On the demand side?

Yes, on the demand side.

And is China what, 50, 60% as big as it what is in the U.S. now? Is it a 5 million ton market?

I think it is more like a 3 million ton market.

Okay. Gotcha. But growing double digits?

Yes.

Thank you.

Thank you. Our next question comes from Steve Chercover, D.A. Davidson. Please go ahead.

Good afternoon. Mine is kind of like Frank's question 20 minutes ago. Would you consider at all closing the Fort William mill and just selling the timberland as opposed to having that mill compete with you in any kind of paper configuration?

Everything, you know, everything is open for consideration, and I guess a lot depends on pricing and value, and other options available to us. But as we sit here today, we feel like we can maximize value by selling the operation.

Thank you.

Thank you. Our next question comes from Jeff Harlib, Lehman Brothers. Please go ahead.

i, in your lumber business, it looks like your wood costs were higher in the first quarter, decently higher than year ago levels. Can you talk about that? And also about the reduction in cutting rights and what that means for your wood costs as well as you being able to supply your paper operations?

I can take the first part. The first part of your question, the -- our -- the cost of harvesting wood is higher this year than last year. So that's one of the situations. The second part is that we are selling more value added product into our wood business, more I-joist, and more, you know, more value-added product, so the unit costs appears to be going up. Our actual lumber costs of producing a 2x4 are not up all that much. It is because we're producing different kind of grades.

As far as the Quebec wood reduction or allowable cut reduction, in all of Quebec, I think across the whole province, the average is more or less 18% reduction and we're pretty much looking at 17 to 18% reduction inside of Abitibi. If you look at the overall profitability of our -- and output of our wood products, or division, we expected to remain relatively the same as 2004, and in other words not a significant reduction in profitability due to volume. We do expect to see, however, an increase in chip prices in Quebec. And -- but I think the main thing to keep in mind when chip prices increase, since we are pretty much integrated supplier, what that means to us is that profitability moves from the paper division over to the wood products division.

And as a company, in this province, technically we're economically open to about, you know, once this is all said and done, we will probably be as economically open to about 200 to 300,000 tons of chips so if chip prices goes up by $10 or $20, it means a $4 to $6 million difference for the company as a whole. But that's for the Company as a whole. So it is not a huge impact on that front.

Okay. Thanks. And just can you talk a little bit about what you've seen in April in terms of orders, and demand in newsprint and commercial printing papers?

I think newsprint order book continues to be sold out. We're looking for commercial printing papers actually continues to -- we expect to see continued growth there, so we still see improved demand for all our various products, and as you may know, there is price increases announced in most commercial printing grades for mid April. So things on the order book side are holding very sound.

Okay. And just lastly, your revolver matures I think in June '06. Do you see yourself addressing that soon? Or do you think you will wait until you complete your asset sales? What's your kind of financial strategy?

Well, yeah, this is a good question. We are probably going to wait yet a few more months, we would like to be complete with our operational review, and then once that is said and done and behind us, we will sit down with the banks. Ideally, we would probably do this before year-end. I don't think that we will sit down with the banks with only six months left on the revolver.

Okay. Thank you.

Thank you. Our next question comes from Heather McPherson, T-Rowe Price. Please go ahead.

Hi, guys.

Hi.

Just really quick, have you given us any thoughts on how much EBITDA contribution you think will come from [Habbai] this year, and maybe on an annualized basis, and maybe the easiest way to think about that is maybe the contribution margin that you guys see per ton coming from that?

I think since we approved the project, of course we've given significant study to what the contribution on an EBITDA margin will be. I don't know whether we -- should we -- I think it is a -- I think the biggest thing is that we expect the machine to ramp up from say a 60% operating rate to over time into next year for full operating rate at the end of next year. And therefore, it will depend -- it is going to -- we expect pricing in China to continue fairly good, so --

You know, if you -- a very good newsprint mill will -- depending on the price and so on, will probably give you maybe 150 to $200 per ton of margin when times are good. Again, depending on pricing and cost. So multiply that by 300,000 tons, you get $45 to $60 million U.S., and we basically have a half -- we would account for half of that EBITDA.

But that's by the end of next year it will be ramping up to that.

Okay. And then so that 150 to $200 a ton range, does that -- are we somewhere in the middle of that, given our cost structure, and the pricing environment right now?

That's in China, that's a fair assumption.

Okay. That's it.

Thank you. Our next question comes from Claire Huxtable, RBC Capital Markets. Please go ahead.

Thanks. All my questions have been answered.

Thank you. Our next question comes from Rick Skidmore, Goldman. Please go ahead.

Thank you. Just a couple of quick questions. The timing of the Grand Falls machine closure. Second question would be the age class or harvest profile of those 500,000 acres of timberland that have you identified for sale. And then can you just clarify what the price increases that have been announced in the commercial printing business are for the mid April? Thank you.

Okay. So the timing of the Grand Falls closure is we weren't specific on that because we are in the process of communicating with the employees and once that is completed, it will become obvious. We will speak to that certainly during the second quarter. As far as the wood profile of the half a million acres of private timberland, we do manage and sell that wood from time to time but I think the best thing to do is let the selling agent provide a wood profile rather than me trying to speculate, and I'm sorry, I forget the third point.

The third question was pricing on the commercial printing, what initiatives have been announced for mid April?

I think it is in the MDNA but we are talking 40 to $60 in mid April on basically all of the high bright, very high bright grades, and some glossy grades.

And then just lastly, on the volume growth, in the commercial printing business, what kind of volume improvement should we be seeing second quarter and then throughout 2005 relative to where you were in the first quarter or 2004?

I think the main thing is, is that we are sold out, basically on commercial printing, so more or less, the -- it depends on the ramp-up of the Alma machine. And I would say we probably have maybe one more quarter of ramp-up and then we will pretty much be to capacity.

Right. Great. Thank you.

Thanks, Rick.

Thank you. Our next question comes from Sean Steuart, TD Newcrest. Please go ahead.

Thank you. Hi, guys. A question on the wood products segment. Quarter over quarter, you were basically flat on EBITDA, and we would have thought you would have had a pretty nice lift given pricing and from our numbers, it looks like your operating costs are up quite a bit. I know fiber is obviously tight, but is there anything else behind that? Is it product mix or inventory re-evaluation?

There is a -- as Pierre pointed out some minutes ago, there is a significant contribution for a change in product mix, as we make more engineered wood products. And there is -- we did have a volume improvement in the first quarter for wood products, also. Maybe Pierre has -- I can't think of any other specifics.

No, there is -- you know, there was a bit of an improvement quarter over quarter, I mean but like I said before, the cost, the harvesting costs went up this year versus last. And last year, also, there was about $63 million in the last quarter was for a DVD, so I believe once we cleaned that up, that the results are better this quarter than last quarter.

Okay. Yes, I had -- I mean quarter over quarter, your operating profit -- 22 million, when you back out all the noise, maybe there is something else in there?

No, there was less than that.

Okay. Thank you.

Thank you. Our next question comes from Joe Licursi, BMO Nesbitt Burns.

Yes, thank you, operator, and good afternoon, gentlemen. I just had a question, I don't want to belabor this issue. It concerns the fiber supply in Quebec. If there is a shortage, will this contain the Abitibi mills in Quebec? And if they're constrained, what actions are you taking to mitigate any possible shortages?

Well, there will be some constrainment or whatever you -- reduction in total lumber processed in the province. So we've already said that there is an 18% reduction in allowable cut, and therefore, there is approximately 8 -- 15% less lumber will be produced. We do not -- we are taking action, of course, in order to look at our overall chip supply, and to balance it and as Pierre pointed out earlier, we feel like our exposure to the market is somewhere around 2 to 300,000 tons of chips.

And you don't feel that this is significant enough to warrant any constraint -- I mean one mill or mills in Quebec?

Well, I think there's the impact of this ruling is going to impact other producers much more significantly than Abitibi-Consolidated because of our integrated lumber and paper supply.

Yes, keep in mind, the amount that I gave you 200 or 300,000. That is our economic risk. That is our fluctuation in profit, based on chip prices. At this point, we don't foresee, you know, being significantly -- having problems to access chips for the remainder of the year.

It seems to me -- as someone mentioned before earlier in the call, if you move to a lighter basis weights, wouldn't this alleviate part of the problem? Is that a possibility?

Yes.

Well, it certainly is, at least 6 to 8% less chips needed for newsprint, but for value-added grades, it tends to vary, and for those grades, there is not the same basis weight shift. I think there is also a possibility that we're looking at, as far as upgrading, some of our recycled mills we have in here at Quebec, but also to make sure we get full value from every tree that we harvest and I think we work under -- we're looking at that very closely and certainly for 2005, we do not expect significant impact.

And just one more question, like the amount that you gave of -- or the impact that you calculated, that's after tax or pre-tax?

Pre-tax.

That's pre-tax, hey?

Yes.

All right. Thank you very much.

Thank you, sir. I think we will have time for a couple more questions, Adam, and then we are just going to scan for business media quickly and then we will have to call it a day.

Thank you, sir. Our next question comes from Ashwin Krishman, Morgan Stanley. Please go ahead.

Thanks. My questions have been answered actually.

Thank you, Ashland.

Thank you.

Maybe one more, Adam.

Our next question comes from Ross Turnbull, Odlum Brown. Please go ahead.

Thank you, John. I just wanted to follow up on the 2 to 300,000 tons of chips that you're buying on the market. Does that include the chips that you guys supply to SFK?

We actually buy on the market more than two 2 or 300,000 tons, but we turn around and sell some back to SFK so our total buying/selling exposure is the 2 or 300,000 tons we're short. So that does include what we sell to SFK.

And what is your intent to do with that supply arrangement going forward?

I think as SFK said in their press release, we've said that the reduction by the provincial government constitutes force majure, and therefore, we will reduce our total supply.

Okay. But you still anticipate going to the market for about the same volume of chips that you're buying today or do you intend to scale it back and therefore SFK goes to the market and buys the other half they need or whatever it turns out to be?

Well it would only be a change of 20% or less, but we would -- you know, we are going to stay in the market for chips to supply our agreement with SFK and supply our own needs.

Okay. Thank you.

Thanks, Ross. Adam, maybe we can just scan quickly for one or two questions from business media.

Certainly, sir. Please press star one at this time if you have a question and the pound sign to cancel. Our next question comes from Peter James, Kenora Daily News. Please go ahead.

Hello. I'm wondering what you need to hear from the Ontario government in order to go ahead with any sort of co-generation project or rather energy project at the Kenora facility.

Well, I think we need to clearly understand what the conditions are for the energy agreements that they're trying to implement and the call for some Cogen operations, especially biomass. It is not clearly understood by us at this time, and I think we're waiting for more information on that.

How long can you afford ta wait before you go ahead and make a decision on your own?

I think we -- it is clear to us, what's clear to us is that we're going to make our decisions in the second quarter.

Thank you very much.

Thanks, Peter.

Thank you. Our next question comes from Andy Adam, Lufkin. Please go ahead.

Good afternoon. Regarding the Lufkin mill, --

Yes.

-- the company is still considering converting both machines?

Well, basically converting -- considering only the larger number 8 machine conversion to lightweight coated. We have no plans on the smaller number 2 machine at this time. We've looked at some alternatives of other grades but we don't plan to start that up as, certainly not as a newsprint machine.

Okay. Have you said the conversion could be -- that's why the estimate for converting dropped to less than 100 million, that and Cogen being taken out?

Yes.

Is energy the driving factor to the reopening of that mill? Are there any other issues that are holding that up, that decision up?

There's some other minor issues like environmental permitting and some labor negotiation issues but I think the main one is the energy solution. And plus the understanding that the overall -- that this is the right investment for us.

Okay. The decision end of June or possibly sooner?

I think the best think to say is we expect it sometime in the second quarter.

Okay. Thank you.

Thanks very much Andy. And thank you all for joining us today and we will see you all back here for Q2 results on July 27.

The conference is now ended. Please disconnect your lines at this time. Thank you for your participation. And have a nice day.