Resolute Forest Products Inc (RFP) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Abitibi-Consolidated third 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, Lisa. Good morning, everyone. As usual I am here with John Weaver and Pierre Rougeau, our CEO and CFO respectively, as well as Jocelyn Pepin, Vice President and Corporate Controller. Our prepared remarks will be very short and include John commenting on the operations review, the market, and the other Company highlights, and then Pierre will make a few key points on the financials, essentially the highlights of the quarter. Then we will leave as much time as possible to take all of your questions.

Just before I hand it over to John, please remember that any forward-looking statement made this morning is based on information we believe is current. However, any number of variables can affect what we say, causing results to be materially different from those expressed or implied.

One final note, effective with the third quarter of 2005 the information pertaining to Pan Asia will no longer be proportionally included in the Company’s consolidated financial statements, but rather presented as discontinued operations and assets held for sale. So with that, John.

Thanks, Lorne. Let’s start with a look at the current state of the North American newsprint market. The June price increase is behind us with a $35 increase per ton now reflected in our mill nets, but nearly all eliminated by more currency fluctuations.

The latest increase of the US $35 per ton on October 1st is now being implemented, and we expect the results of this increase to be evident in the Q4 results.

A look at industry statistics show that newsprint production during Q3 was down 3.9% compared to a year ago, while consumption was down a total of 6.4%. Exports, meanwhile, were essentially flat year-over-year. And remember, that while we are focused on our North American asset base, we are still the most important exporter of newsprint, accounting for some 40% of North American exports.

As a result of the balance between production and consumption, total inventory levels remain tight, down 2.1% year-to-date, and particularly low at the mill level, which is down 7%. Our own inventories declined by 8% from the end of the previous quarter.

Basis weight shifts are still having an effect on production levels, and account for approximately 2% of the consumption drop in Q3. We expect continued conversion to lighter basis weights over the next six months. Add swing capacity and you get distorted consumption and capacity figures.

For uncoated ground wood grades, we have seen year-to-date demand growth of 3.6%. Internationally, prices remain positive, up in all of our export markets except for Europe where we have annualized pricing.

Now to follow up on the actions taken with respect to the operational review. First, a quick reminder of the goals we initially set for ourselves. We want all of our mills in the best 50% of the cost curve. Being low cost is an absolute must, as is the ability to deliver our product at satisfactory margins. We are committed to achieving $175 million of EBITDA improvement through various cost and productivity initiatives, and we have targeted an additional $75 million in the improvement of EBITDA to be generated through additional revenue from the next AOEO project and the potential restart of Lufkin.

First on Newfoundland. From the outset of the operational review our preferred path for Newfoundland included two profitable picker machines at two locations. At the end of the second quarter of 2005 a solution could not be found to resolve Stephenville’s high energy and fiber cost challenges.

However, during the third quarter the Company received a government proposal that would potentially reposition the mill over the long term. As a result, the 194,000 ton Stephenville mill was indefinitely idled in October rather than permanently closed, and will restart if – and only when – it can be positioned to compete in the global marketplace.

At Kenora, we are in discussions with stakeholder groups trying to outline a solution to help reduce the mill’s cost. Independent of these discussions, one paper machine at Kenora was permanently closed a few days ago, removing 90,000 tons of annual newsprint, and the second machine, with an annual capacity of 150,000 tons was indefinitely idle at the same time, pending a satisfactory conclusion to our discussions. We expect discussions at both mills to be resolved in the near future.

On the commercial printing side, Q3 continued to see pricing improvements in ABICAL, ABIBRITE and ABIBOOK grades. Compared to Q3 of last year, prices in this segment were up on an average of $71 US per ton, yet the strengthening of the Canadian dollar has cost us business, about $35 million over the same period.

An additional November 1st price increase of $40 per short ton for ABIBRITE and ABIBOOK grades will be implemented next week. And also, we will begin implementing a US $20 per short ton surcharge increase related to fuel charges and rising costs on all grades except those announced for the November price increase I just spoke to, that is ABIBRITE and ABIBOOK.

Demand for commercial printing grades slowed in the third quarter, however like newsprint we are sold out through the end of the year.

For wood products, prices and volumes both took a hit in Q3 of ’04 and this is the first disappointing quarter for wood products in several. Softwood duties continue to be booked at the rate of 20%.

Before turning over to Pierre, a quick summary. The action plan related to the in-depth review is now being implemented. We are focused on our targets currently, and we expect results to start showing up in the coming quarters. We have permanently closed 90,000 tons of capacity and 344,000 tons are currently idle at Stephenville and Kenora. The restart of both mills depend on cost and profit-generating solutions.

The marketing process for the Fort William Mill, as well as the nearby Timberlands in Northwestern Ontario is expected to be complete this year. We are still evaluating scenarios for Lufkin, Texas including potential paper and energy partners for the relaunch of Lufkin into coated ground wood grades. With gas prices now near $14, the importance of finding an energy solution is certainly underscored.

A check for Pan Asia is expected in the coming weeks, at which point we will begin the process of applying the proceeds to debt reduction.

Finally, the newsprint market is tight and we are essentially oversold. Kenora and Stephenville are not closed for the lack of orders, but rather for costs and profitability reasons. Pierre.

Thank you, John. This morning, we reported the third quarter earnings of $99 million or $0.23 a share; table 2 of our MD&A breaks down the specific after-tax items. This quarter included a $168 million gain on the translation of foreign currencies, and a positive income tax adjustment of $1 million, offset by $16 million in asset write-downs, $12 million in mill closures and $2 million in financial expenses incurred for early debt retirement.

Without these items, the result – which is not a recognized GAAP measure – would be a loss of $40 million or $0.09 per share. This compares with a loss of $15 million or $0.03 a share in Q3 of 2004.

On a pro forma basis, taking into account the Pan Asia transaction and the resulting debt reduction, the loss would have been $0.07 or $31 million. EBITDA before specific items in the third quarter came in at $176 million. Pricing improvements fended off a great deal of the impact from rising input costs and other uncontrollables.

An operating profit of $8 million was recorded in Q3, compared to $75 million for the same period last year. This quarter’s operating profit was impacted by charges of $41 million in asset write downs and mill closure elements. Tables 1 and 3 of the MD&A provide a detailed summary.

After this $41 million charge, the newsprint segment still posted an operating profit of $9 million in Q3. Newsprint prices were offset by a stronger Canadian dollar and higher costs from high energy and fiber prices, while our production was affected by lower basis weights.

Revenue in the commercial printing business, despite being impacted once again by the strength of the Canadian dollar, saw higher year-over-year prices, keeping commercial printing papers in the black with a $1 million operating profit in the third quarter.

Our ABIOFFSET shipments continue growing, up 13% year-over-year in Q3. However, for wood products, prices of various grades in Canadian dollars were down by 16% in Q3 of 2005 compared with Q3 of 2004, despite continued strength in housing starts. Our wood products segments posted an operating loss of $2 million in the quarter, after $17 million in lumber duties expensed at the approximate rate of 20%. Year-to-date, this business has still contributed $43 million in operating profit.

In the third quarter, the Canadian dollar took flight again, negatively impacting our company-wide operating results by about $74 million after strengthening by almost 9% versus the third quarter of last year. After nine months, the Canadian dollar has negatively affected the Company’s operating results by $211 million.

During the third quarter we also renewed our banking facility and modified our covenants, the details of which are laid out in both the press release and the MD&A. Basically, we now have two secured facilities totaling $700 million. With improved covenants paying an interest coverage of 1.5X and net from the debt to cap of 70% until the end of 2007, at which time it goes to 65%.

A provision is also included which allows the Company to exclude from the debt to cap ratio the after-tax impact of non-cash write downs of up to $500 million, including the $235 million stake in December of 2004 and the $18 million stake in this quarter.

In Q3, our interest coverage was 2.1X over the last 12 months, while the net debt to cap stood at 64% and on a pro forma basis, accounting for the sale of Pan Asia was 58%. Let’s go to your questions. Lorne.

Thanks, Pierre. Just a reminder that the call will be archived on our website and you can listen to a replay until November 3rd by dialing 416-695-5800 and using the pass code 3116708. We will start with questions from the investment community and we will conclude with the business media. Any follow-ups from either the investor side or business media should be directed to me at 514-394-2360. Other media can contact Dene LeClair at 514-394-3601. Lisa, if we could poll for questions from the investment community.

Thank you. (Operator instructions) The first question is from Kuni Chen of Banc of America Securities. Please go ahead.

Hi, good morning gentlemen.

Good morning, Kuni.

Good morning.

First off, I just wanted to get some more details on what kind of proposals are on the table for Stephenville. I mean, is this a package giving energy subsidies? And if the mill does come back, would it still remain focused on the export market?

I think that for Stephenville, of course, the problem is essentially rising energy costs over the last two years and the proposal on the table certainly does focus on energy and the possibility of development some of the Company’s assets in the future. That is the basis. It is enough of a contribution where we can bring the mill back to a low-cost position. Stephenville is on an island, and we will continue to focus it on the export market.

So it is a CapEx spending type of project to get this going?

No, there would be no CapEx involved for the Company.

Okay, all right. And moving on, just on the commercial paper side, margins have been near breakeven levels for quite a period of time. At what point do you start to become more skeptical on whether you relaunch Lufkin or continue to invest in AOEO capacity, given the profitability of those grades versus newsprint, which basically has been pretty similar.

Well I think that certainly the margins for newsprint continue to improve as do those of commercial printing grades. Commercial printing grades are much more -- for Abitibi-Consolidated -- much more impacted by currency fluctuations. So our total revenue brought back to Canadian dollars, despite a near $71 price increases year-over-year, we realize only about $35 of that in terms of price increase.

I think the market in the commercial printing grades is much more fragmented in terms of grade structure also. But we continue to feel optimistic about our super high brite grades, the ABIBRITE grades, they continue to grow at double-digit rates, almost 20% growth and satisfactory margins. So it is still a very good business.

Okay, and one last question if I may. I just wanted to get a sense from you on what your view is on some of the smaller newsprint guys out in the industry. I mean, you have obviously led the industry in terms of shutting and converting newsprint capacity. What have you heard from some of the smaller, especially Canadian-based mills, that may be more cost disadvantaged or have kind of stressed out balance sheets. Do you expect more capacity to come out from that end of the industry?

Well it is not really appropriate for me to comment on other people’s difficulties. I think you are much more aware of the conversations than I. But all I know is what I read in the newspaper.

Okay, thanks. I will circle back.

Thanks, Kuni.

Thank you. The following question is from Joe Stivaletti of Goldman Sachs. Please go ahead.

Hello. I was wondering if maybe you could talk a little bit about the new bank facility. I noticed that you gave some fixed assets and I was just wondering if you could talk about which ones, how much that was and why that change occurred.

Related to that, I was wondering if you had any concerns that due to notching concerns the agencies might take any negative action on your bonds that are outstanding as a result?

Okay, well I am not sure we can actually really go into what fixed assets from our bank, it is obviously not all of the fixed assets of the Company. It is a very limited number of them.

The guarantee is for $550 million, that is what it is. The reason why we did that, first of all we have about 70 basis points improvement in our interest costs, this is non-negotiable. At the same time, we were able to negotiate this thing which I was talking about whereby we can exclude from the debt to cap ratio $0.5 billion of asset write downs, including the ones we had taken last year and this year.

So it does put us with a lot more leeway as far as the debt to cap ratio is concerned. Like I said, on a pro forma basis, we would be down to about 58% against a ratio of 70% as a covenant.

And lastly, we also were able to negotiate this thing for the next 3.25 years, so until the end of 2008 and again, we have a better covenant on the interest coverage which is 1.5X until that time. So we were able to successfully improve the covenant package and get our interest costs down against giving security on that loan.

To answer your last question regarding the rating agencies, we don’t expect that this loan facility will impact how the rating agencies look at us. Quite the contrary, I think they will be happy to see that we have a facility until the end of 2008.

Those conversations, did they already take place or?

Well we meet with them once or twice a year and I guess we have not met with them since last Spring, so we would expect to have meetings with them between now and the end of the year.

Okay, all right. Great. Well, thank you.

Thanks, Joe.

Thank you. The following question is from Bruce Klein of Credit Suisse First Boston. Please go ahead.

Hi, good morning. I was wondering just on fiber in Canada, maybe you could give us an update of what you are seeing in Quebec and Ontario and maybe what the delta might have been 3Q versus 2Q and whether you think it is changing, getting any better or still tight?

Well certainly in Eastern Canada we have had a reduction in allowable cut this year in Quebec and in previous years in Ontario. Certainly we feel like we are in a favorable position competitively because of our integrated forest land – I mean our lumber wood products business. So we don’t really foresee any security of supply issues.

There is, however, some increased cost of fiber in both provinces, more notably in Quebec than Ontario. However, as we have indicated on previous conference calls, our total exposure to the cost of chips is lower because of our integration in wood products. It is mostly what we pay on the paper side shows up as lower manufacturing costs on the lumber side.

Could you just address the energy side? Maybe review how much, what the sensitivity is for a dollar change in MCF, maybe the breakdown overall if you have that handy? Of energy.

We have not given that in the past. We are looking to potentially give that out in our next annual report, as far as per dollar of natural gas and so forth. What we have said in the past was that energy is about 22-23% of our overall costs and we are about 25% self-sufficient. Of that 25%, or 24% of energy costs, there is about 25% which is natural gas and oil. That is where most of the fluctuation happens.

The challenge for us on that question is, of course, that for us we operate significant capacity in provinces that are primarily hydro capacity and more or less fixed power rates. And then we are exposed in Ontario and the US to the same escalating prices that our competitors are, but we have some self-sufficiency so for us to give a sensitivity it almost requires us to break it down by province, by state and it is almost a point in time kind of calculation rather than an ongoing calculation, because of the changes in rate structure that occur quarterly, almost.

Okay. And last question was just on the banks, Pierre. What are the bond indentures allowed in terms of the maximum amount of security that could be permitted to be given to the banks, and what was –

Well essentially the bond indenture allows up to 10% of tangible net assets.

Is that what you basically was pledged?

I beg your pardon?

Is that what was pledged, more or less?

No, it was less than that.

Okay, I will pass it on. Thanks, guys.

Thanks, Bruce.

Thank you. The following question is from Bill Hoffman; UBS. Please go ahead.

Yes, I just wanted to follow-up on Bruce’s question on the energy costs. Pierre, can you help us a little bit just to help quantify, maybe on a dollar per ton increase that we might see going from Q3 to Q4? And also, a little bit more detail on the actual hedging strategies you have for your natural gas and oil?

Q3, Q4 not a whole lot. We might have some next year as the rates are revised by the various provincial, but Q3, Q4 not a whole lot. Maybe a bit. Again, if you take about 25% of Company costs – and that is the energy costs – and then you take about 25% which is fossil fuel, you can then derive how much sensitivity we have to fossil fuel.

Okay, thanks.

I think on the fourth quarter we do expect higher usage of energy in the fourth quarter, because of colder weather, but not necessarily because of higher fuel prices.

Okay. Thank you. And then the next question is just, can you give us some volume numbers for Pan Asia in this third quarter?

There were no Pan Asia numbers in the third quarter.

No, I know. You include them just as discontinued operations, I just wondered what the sales volume was.

It is in the slides.

It is in the slides, the sales volume for Pan Asia or the sales numbers, certainly in dollars, it is in the slide package.

I know that dollars are, I was wondering if you can give me the volumes.

Well not – wait a minute. Hold on a second, we have the number here.

And just while you are looking for that, the final question was, I just want to get a sense as you look into –

See, the thing is that we don’t tend to focus on Pan Asia results anymore because we expect the closing next month, so you ask me a question which for us is not the real situation.

No, I can get you afterwards, that is fine. But going into ’06, can you talk about your capital spending dollar numbers that you are forecasting at this point?

I think cap spending for ’06 is on the order of $200-250 million.

Great, thank you.

Thank you. The following question is from Chip Dillon of Citigroup. Please go ahead.

Yes, good morning. I wanted to ask you about the Stephenville and Kenora situations. I found it interesting, you said that you felt that would be resolved in the near term. Is that a way of saying that you will either get some kind of an agreement with labor and other parties that you find makes sense from an economic perspective; and, if you don’t get that then you will make a decision to just make some permanent closures? Is that the way we should read that?

Well I guess the basic principle is you can’t talk about it forever, right? So you either come to a resolution or you move on, so that is the point we are at today. So we hope to come to some resolution or we will move on.

And I guess the way to think about it is that you are spending shareholders’ money to just keep those things in limbo, right? You have to maintain them until you decide not to continue. Is that right?

Well, both mills were idled over the weekend, so I don’t – there will be an idling cost, of course, versus permanent closure or even versus running so we don’t want to let them sit in an idle state for very long, we want the decision to be made.

Okay. And then as you look at – could you just review for us in terms of Lufkin, that is still on the books and that is a more indefinite situation, is that correct? In other words, you don’t feel any rush to find a solution for that? You will just keep that on the books maybe for another year or so to see if it does become compelling for someone to step up there?

Well the cash flow position at Lufkin is minimal because we have already essentially severed all employees a year ago, and we just have the so-called security kind of costs for the mill. I think there is no rush to get to a solution, but on the other hand we would like to either find a solution that would relaunch the mill or else take alternative action on the mill.

So we are pushing hard to also get that cleaned up by year end, but it is not necessarily going to be resolved by then.

And then lastly, you mentioned the tightness in the newsprint market. I guess in Europe we have heard talk about – at least from the producers, and maybe it is self-serving – but saying they are having difficulty actually meeting the order books and telling customers, actually order what you need, not above and beyond that. Would you describe the market as actually that tight?

And then the second thing I would ask is, it is interesting how some of the newspapers here are complaining about newsprint costs and yet the price of newsprint – and forget inflation – in nominal terms I think is about where it was in 1988. I would imagine none of your costs are what they were in 1988.

Well certainly the newspaper publishers don’t seem to have the same perspective on input costs as you do. I think the global newsprint market is tight. We do see some capacity coming online in China, but other than that the global marketplace remains fairly tight, and even with the forecasted decline of consumption in North America we see that production has actually been less than consumption for most quarters over the last several quarters, so we have seen declining inventories.

Actually, our North American inventory level for Abitibi is at a record low, currently. So there is an oversold position looking forward.

Got you. Thanks.

Thanks, Chip.

Thank you. The following question is from Ashwin Krishman; Morgan Stanley. Please go ahead.

Hi, guys. I just wanted to get your view on where you see newsprint consumption next year. As in, do you have an idea of what the reduction in consumption would be in North America?

Well I think we are planning for the same continued decline in consumption, based effectively on – first of all, we know that we are going to have a 1.5% or 2% decrease due to basis weight which will also be reflected in lower production rates, so that means that production and consumption remain in balance. And then if you take historical declining rates of 1% that puts you down 3% or maybe 3-4% next year, that is sort of where we are planning.

Okay, and just coming back to another issue which has been addressed on previous calls, you have a debt target of about $3 billion US. Can you refresh us on the timeframe of achieving that target?

I did not get the question, Lorne.

A timeframe on achieving your $3 billion –

Well we are going to get the funds from Pan Asia hopefully sometime in November, and then once we do that we will proceed with the debt reduction we announced when we announced the sale of Pan Asia. So we would expect to proceed with a debt reduction of about $600 million US, hopefully before year end, and that would put our debt level at about $3.2 billion US. Then from there, we will use free cash flow to bring it lower than that.

Okay, thanks guys.

Okay.

Thanks, Ashwin.

Thank you. The following question is from Frank Dunau; Adage Capital. Please go ahead.

I have a few questions. On Stephenville, did I understand – I think you had some things in some of those answers to some of your questions that, you know, there is an energy problem and I guess a fiber problem that has to be resolved. And you pointed out that you would not do any CapEx. Are you implying that maybe the government will do the CapEx as part of this whole deal?

Well I think there are going to be some near-term energy incentives that will reduce the cost, and longer term possible projects to develop hydro assets that the Company owns.

Okay. And if you were to keep Stephenville – if you were to actually run Stephenville, is there any thought of taking something else down in the system, or would that just be incremental to the amount of tons that you would be producing?

Well as I have said several times, our goal is to get all of our mills in the low cost of the curve, and also to sell tons at a profitable margin. So we continue to look at driving down our costs but we also want to ensure that the order book is profitable. And so perhaps in the future we will look at other ways to lower our costs of various mills, and if necessary reduce capacity.

And whatever – if there is a solution to Kenora and Stephenville, am I correct that those are all newsprint solutions? It is not some other type of paper solution?

We are looking for energy solutions right now.

I am not talking about – they will make newsprint, they won’t make –

Yes, they will make newsprint. And of course Stephenville would be an export mill and Kenora would be a North American mill.

Right. And I am a little confused still on the asset test on the new bank line. Let me just try to word it simply. You had $500 million you are allowed to write off. Now, are we starting $500 million now or do I have to subtract the $200 million plus you have already done?

Essentially, what you have to do Frank is you take – when you do your debt to cap calculation, you have to add back to our equity $235 million for the write down we took last year, and $18 million for the one we just took. So you add to equity the total of $253 million.

Okay, and from there I can write off another $500 million or something?

No, another $250 million.

Well the next $250 million will not count, so i.e. the equity will not be impacted by that for the calculation. And after that, then if we were to get there, then it starts to count.

So you have $250 million more in write downs you can take before it counts?

That is right.

All right. And just one last question. On Lufkin, given $14 natural gas, is there any possible energy solution with a co-generating that would ever make that thing work?

Well, hog fuel.

You know, not hog as in waste fuel – a waste fuel boiler would work, there is plenty of bark in the region. There is also cogens based on petro coke, I believe they call it, with a residual of the refining industry of which there is some capacity in Southeast Texas. Those are the kind of proposals that are being brought to us as possible energy solutions for Lufkin.

I guess the big thing that has changed in our thinking is that we had originally thought we would convert the machine and convert the energy solution after start-up of the machine. Now that looks less likely.

Okay.

Frank, just to make sure, the write down is of course, after tax.

Okay, that’s good.

So it can be more than that on a pre-tax basis.

Okay, thanks. That is all I have got.

Thanks, Frank.

Thank you. The following question is from Keith Kasagawon; Greenwich Capital. Please go ahead.

Hi, can you give any color on why the bank facility was upsized? And related to that, the availability on another line?

Well the bank facility is $700 million –

Right, the upside is [inaudible] million?

No, no it used to be $800 million, there was no upside, it was about the same. Basically it is $100 million less than it was before, but we never even came close to using that kind of money.

And what is the availability?

The availability, there was $133 million used at the end of the quarter, and if you include the certain letter of credit there was about $500 million which was available out of the $700 million.

Thank you.

Thank you. The following question is from Levon Von Redden; Hockey Capital. Please go ahead.

Yes, I think earlier you had mentioned some numbers related to some of the cost savings from some of the restructurings that you were going through. Can you repeat that please?

The specific items that we reported.

The specific items for write down.

What was the question? I didn’t get it.

Right, I believe earlier you had mentioned something, I thought the number that you had said was $75 million related to some of the cost savings expectations from some of the restructurings that you were going through right now. I was just trying to make sure I understand it.

I said that maybe as part of our EBITDA improvement program the total $250 million improvement; $175 million of EBITDA improvement comes from cost and productivity improvements and another $75 million would come from additional revenue, primarily in commercial printing grades, AOEO or the relaunch of Lufkin. Is that your question?

Yes, that is. Thank you.

Thank you. The following question is from Dimitri Kollomitsin; Dundy Securities.

Yes, hello gentlemen.

Good morning.

You had indicated that currently all of your mills are in the first or second quartile in terms of cost or below the average cost curve. Now what about your Bridgewater Mill in the U.K.? Does this mill apply to the same criteria as well?

When we talk about the lower part of the cost curve we primarily focus on our North American cost base. Bridgewater, no pun intended, but it is kind of like an island unto itself. It produces in pounds, it sells in pounds, it sells in the U.K. and so we look at it as separately from our North American asset base. Bridgewater is not a low-cost mill. It has its own operational review underway, but it is usually held separately from our North American base.

Okay, thank you so much.

Thank you. The following question is from Jennifer Troinski of Barclays. Please go ahead.

I had a question about the debt reduction. Now in ’06 to ’08 you have about a $650 million US maturing, and of course the first thought is that that is what you would use the Pan Asia proceeds for. But is that a reasonable assumption? Or, in the near term might we see you guys take out maybe some of what you have in the revolver in the interim or maybe go after, maybe take down the AR facility in the interim or maybe do some open market purchases throughout your maturity curve, rather than go after the most immediate maturities?

I think that the AR facility is fairly safe the way it is now. I mean, we plan on keeping on using that facility or other facilities if we decide to change it, but it is a program which we like.

On the debt reduction side, using the proceeds from Pan Asia we have three goals. Essentially, we want to create some liquidities, we would like to deal of course with the earlier maturities. We also want to maximize our interest cost reduction from that exercise. So it doesn’t mean that all of the debt in the short-term will be taken out because this is where the lower coupons are, or the highest cost of debt.

So one should expect a mix, but our goal is to one, to deal with the liquidity in the short term but as well to lower the interest costs on an annual basis as well. So I would not tend to look only to the first couple of years.

Okay, thank you.

Thanks, Chuck.

Thank you. The following question is from Jeff Harlib of Lehman Brothers. Please go ahead.

Hi, good morning. Are there any restrictions on your credit facility in terms of repurchasing debt securities in the open market?

Any restrictions on your credit facilities in terms of repurchasing debt securities?

No.

Okay. And just looking at the $175 million you talked about, cost and productivity, is that something that happens right away with these mills shut? How is that going to phase in throughout ’06 and what are some of the areas?

Well of course there is some improvement in our average cost structure with curtailment of high cost mills. The rest of the improvement comes from productivity and cost improvements by various initiatives we have underway in our mills, and we are targeted to begin to see that come to the bottom line throughout 2006.

Okay. And in Q4 do you see some inefficiencies relating to the closures and that kind of thing?

No, we are getting pretty good at it.

Okay. And if we look at 2006 newsprint shipments, assuming the mills that are shut remain shut, about what would you be looking for? Like 3.3 million tons? That is what I am coming up with.

No, I think that is pretty low. We should be about 3.8 million to 4 million tons of total shipments.

That is newsprint?

Yes. Another 2 million tons of commercial printing.

Okay. And can you say how the current newsprint price increase is phasing in versus previous increases?

Well I just can speak for Abitibi, there is not much of a phase in. It goes up October 1st for the vast majority of our customers. I think that in the industry, perhaps there is a phase in but for us, we will start to see the majority of the price increases come into play over the month of October.

And as you look at your cash costs, ’06 versus ’05, inflationary costs, energy, et cetera, what kind of increases are you looking at year-over-year?

Well I think that is a forecast, but we are looking at certainly higher energy costs, somewhat higher fiber costs and the other thing is some higher labor costs which we essentially negotiated in terms of salaries and pensions.

And just the last thing, pension, how do you see that in ’05 and ’06 in terms of both expense and funding?

Well the expense in ’06 should be about $30 million higher than this year, $30-35 million higher than this year, but the funding should be about the same as this year. So essentially, $5 or $6 per ton if you translate that on a per ton basis, on 6 million tons of paper for the expense side, but the funding should be about the same.

Okay. And this year the funding was about $100 million higher than the expense?

About $70 million.

$70 million?

Yes.

Thanks very much.

So the funding next year is going to be about $35 million higher than the expense.

Thank you. The following question is from Mark Bishop of RBC Capital Markets. Please go ahead.

Thanks, a couple of questions. First, Pierre, could you characterize the $20 per ton cost reduction quarter over quarter in newsprint, to where the major elements of that were?

Better productivity, but the main elements I guess one is – keep in mind that when we bring our US mills back in Canadian dollars and the Canadian Dollar strengthens, that helps a bit on the cost side. And then lower maintenance costs and lower energy costs. Those would be the three factors. I would say better maintenance costs and better energy costs and then the exchange rate helping a bit.

Okay, and that would be principally better energy costs on the Canadian side or would that be the impact of the Canadian dollar on –

No, no, no.

the impact of usage.

Usage, okay. Simply the seasonality.

Now keep in mind, summer months, right? July, August, September we take less energy as well.

Just a follow-up question on CapEx, your note indicates that you will end the year no more than $200 million but that is almost $90 million in the quarter. What are the major capital spend projects this quarter that we should expect to see?

We have really no major capital projects in the fourth quarter. For your planning, I think we are probably going to be at $175 million or less.

Okay, that helps. And then just finally, on the $75 million that you have earmarked as a run rate improvement from AOEO or Lufkin, is that getting a little aggressive now, given that there has not been a decision made, and obviously regardless of which project you go with there will be a ramp up period and a CapEx period – or have I missed the deadline as to what you are going to declare, what your project actually is?

Well I think that certainly Lufkin is a challenge, but we have to remember that we have additional product sales from the ramp up of the Alma project versus this year. We continue to produce more EO product at Alma. We also have announced the conversion of one machine at Belgo to high brite grades, so from newsprint to high brite. That is going to be some additional sales of not AOEO but commercial printing grade, 70-75 brite. But there probably is going to be a challenge to generate $75 million run rate by the end of next year.

Okay, so we should look at the $75 million as incremental over and above improvements at Alma and some of the other conversions you have already announced.

I think the big focus is to stay focused on the $175 million.

Okay, great. Thank you.

Thanks, Mark.

Thank you. The following question is from Sean Steuart of TD Newcrest. Please go ahead.

Thank you. Most of my questions have been answered. The one thing I was wondering about is what you are seeing for O&P costs. Some of your competitors have talked about seeing some pressure in the US, I guess in the wake of the storm season. Are you guys seeing that as well?

Most of our O&P costs seem to be flat, we are forecasting flat into the fourth quarter. I think there is pressure, the availability of O&P in the coastal states is perhaps threatened, but we don’t really collect significantly in those grades and we have our own collection also.

Okay, that is helpful. Thank you.

Thanks, Sean. Lisa, we will have one more question from the investment community, and then we will poll and see if there is anything in the business media.

Thank you. The following question is from Matthew Armist of Goldman Sachs. Please go ahead.

Good morning, just a couple of quick questions. Can you provide what the effective exchange rage was for the quarter?

Well the exchange rate for the third quarter was $1.2014. The average rate of the US dollar, Canadian dollar.

And can you talk about what your hedging strategy is going forward? Are you as hedged as you were a year ago, or are you lightening up on the hedge position in light of where the Canadian dollar is today?

No, well we are still about – it is the same policy where we hedge about 30% of our exposure going forward by about 12 months. So whether or not the hedges do turn out to be successful or not depends on the variation in the Canadian dollar. But that is where we are.

Great. Can you talk to capacity in China, particularly with Hebei coming online, how you see Chinese prices developing? Is there going to be pressure on the global export market?

Well I don’t think China will anytime in the near future be an exporter of newsprint, but as far as the pricing in China probably since we no longer participate in Pan Asia, I will let that go to my ex-partner.

And on that note, can you talk to what your strategy is going to be as far as exporting to China now that you are no longer a part of that project? Are you free to sell into that market to any customer you would like?

We are free to sell anywhere we like.

Great, thank you very much.

Thanks, Matthew. Lisa, perhaps we can poll and see if there are any questions from the media.

(Operator instructions) The first question is from Lynn Moore of The Gazette. Please go ahead.

Hello, could you tell me what proportion of your wood products division is softwood lumber? Give me some figures as to that?

Well it is 100% softwood products, but we do make some engineered wood products which is a conversion of softwood lumber into other grades such as I-Joists, bed frames and other products. But it is essentially all softwood lumber.

What portion of that would be building supplies? Like boards.

Essentially all of it.

Except for the bed products. 98% is building products.

Okay, that includes the engineered products.

That’s right.

Right. Okay, and what are your prospects or the Company’s prospects of increasing softwood trade with non-US customers?

Well the biggest non-US customers we have is Canadian customers. We sell primarily in Canada and the US. We have only small distribution outside. We do sell some from the West Coast to Japan, but not much.

Are you thinking of ramping up your non-US sales or promoting that side of the business?

No. We are going to continue to market in the US and Canada, North America.

I understand that you are involved when there are negotiations about the softwood lumber duties. What are your thoughts on that, given the current situation?

Well I think that Abitibi continues to favor a solution, and so we are encouraging both governments and all other parties to negotiate to a solution, to find a solution.

A negotiated solution.

A solution. I don’t really care how it comes about, but I think that this has gone on long enough.

Thank you.

Thanks, Lynn. We will take one more question, Lisa.

Thank you. The following question is from Alan Swift of the Canadian Press. Please go ahead.

Yes, Mr. Weaver, regarding Stephenville.

Yes.

I gather there is two parts to the program from the government – one is energy relief and the other is to develop some hydro assets on your property down the road. What type of energy does the government provide? Is this electric? Are we talking about electricity rates?

We are talking – I don’t want to talk too much about the specifics of the negotiations, but the mill is exposed to high electricity rates and that is what we are trying to find a solution for.

Okay. And you say that there are potential hydro assets on your property. This is Company property, then, around the plant in Stephenville?

No, it is Company hydro assets on the island.

On the island? From what? Which island are you talking about? Newfoundland?

Yes.

Okay. So how would this affect your Company or affect Stephenville? I don’t understand. Is this land in which you have cutting rights?

No, sir it is the water rights and hydro rights and future development of additional assets on Newfoundland where we currently have hydro assets.

Okay, it would be maybe expanding your hydro assets then?

Yes, expanding our new assets on the exploits.

Okay, and the other mill in Newfoundland, is it part of these negotiations as well?

Well, it has been an ongoing negotiations across the whole island, but it is somewhat separate mill to mill.

But is it subject to the same possibility of being reopened, pending these discussions with the government?

Well the Grand Falls mill is currently in operation. It is running.

Okay. But I thought it was slated for closure, or at least a partial closure?

There is one machine at Grand Falls that is scheduled to close, tied with the modernization of the mill.

Okay, and this is not affected by your current negotiations?

No, sir.

Okay, thank you.

Thanks, Alan. Thank you everyone for joining us. Q4 and year end results will be reported late January, on the 27th. Have a good day.

Thank you. The conference has now ended.