Resolute Forest Products Inc (RFP) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Abitibi Consolidated Fourth Quarter 2005 Results Conference Call. I would now like to turn the meeting over to Mr. Frank Alessi, Director, Investor Relations. Please go ahead, sir.

Thank you, Stephanie. Good morning, everyone. As mentioned by Stephanie, my name is Frank Alessi and I am the Director of Investor Relations at Abitibi. I’m here with John Weaver and Pierre Rougeau, our CEO and CFO, respectively, as well as Jocelyn Pepin, VP and Corporate Controller.

As in the past, our prepared remarks will be very short and include John commenting on our in-depth operations review, the market, and other company highlights, then, Pierre making a few key points on the financial results. We will focus primarily on the quarter and comments on the year where pertinent, basically, what we think are the key takeaways. Then, we’ll go right into the questions.

Two quick notes before I hand it over to John. First, a reminder that effective with the third quarter of 2005, the information pertaining to Pan Asia is no longer proportionately included in the Company’s financial--consolidated financial statements, but rather presented as if continued operations.

Secondly, any forwarding-looking statements 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 form those expressed or implied. John?

Thanks, Frank. Good morning, everyone. A year ago, we announced an in-depth review of all our operations. At the time, we gave ourselves until December 2006 to achieve certain targets. Simply put, Abitibi assets would improve EBITDA and the potential to generate positive returns. The cash flow would be used for debt reduction. As part of the operations review, our North American newsprint mills would be in the best 50% of the cost curve. We would achieve 175 million in improved EBITDA through various cost and productivity initiatives. We would target an additional 75 million in improved EBITDA through the additional revenue from, among other things, the next AO/EO project and the potential restart of Lufkin.

Let’s start with an update on these initiatives and the progress to date. At the end of 2005, we attained 90 million of our 175 million EBITDA improvement target related to cost, productivity, and mill mix. And we are on track to attain our goal by the end of 2006. Slide four of our package presents a breakdown of the improvements to date.

Our additional 75 million EBITDA target--we have delayed future AO/EO conversions and the potential restart of Lufkin. Therefore, no impact is likely in 2006. However, this year, we do expect to realize about 25 million from the Alma EO ramp up and from the I-joist investment, which started operation in Q3 of 2005. As part of our operations review, both the Stephenville Mill in Newfoundland and the Kenora Mill in Ontario have been permanently closed. We held lengthy discussions with respective stakeholders to find ways to resolve the high production costs faced by the respective mills.

Despite the efforts made, we were not able to find solutions that would have repositioned the mills within our targeted best 50% of the cost curve and made them viable in the long-term. We were, therefore, compelled to make the difficult decision of closing these operations. In addition to this, we have advised the U.K. Bridgewater Mill of our intention to permanently close one of the three machines at the mill. Today, the U.K. mill is our highest cost operation and has been impacted more than other--more than any of our other operations by rising energy costs. Therefore, a long-term solution is needed.

Including the 90,000 tons previously announced for Kenora, the above closures will remove 434,000 tons of newsprint capacity in North America and 60,000 tons in the U.K. Given the impact on our employees and their communities of these decisions, as well as those taken last year in Sheldon and Port Alfred, these are difficult decisions. However, these steps are clearly necessary as we continue to face softening demand in the newsprint segment increasing energy and fiber costs and a very strong Canadian dollar.

Excluding Lufkin, the above closures have permitted the company to rebalance its newsprint portfolio of approximately 3.7 million tons of newsprint production for 2006. Looking at North American mills, we now have a low cost structure with all our mills expected to rank in the first two quartiles of the cost curve.

Regarding the newsprint market, the movement to lighter basis weights has continued in the fourth quarter, and this has impacted consumption numbers by about 2% in 2005. We expect this trend to continue in 2006, and when combined with reduced circulation and continued conservation measures among the daily newspapers, should result in a decline in 2006 newsprint consumption of about 4%. However, the anticipated decline in North American consumption should be more than offset by capacity reductions. And we expect high operating rates in 2006. In fact, industry analysts anticipate operating rates near 97%.

The Company enters 2006 with a solid order book with record low inventory levels. In fact, our inventory is 50% lower than last year, and we hold less than one week of inventory in North America. We completed the implementation of the October price increase with the improvement in pricing now reflected in our mill nets, though a great proportion of it was offset by the increasingly strong Canadian dollar. The latest increase of US$40 per ton in the U.S. was announced for February 1. That’s today.

Internationally, overall mill nets were negatively impacted in Q4 by the weakness of the Euro and the British pound against the Canadian dollar. As you know, these two mark--these are two markets where prices are established at the beginning of the year. We have seen pricing improve in the fourth quarter, and we are looking for price increases in the U.K. and Europe in the 8 to 10% range for 2006.

As with the case of newsprint, commercial printing paper segment is also undergoing operational review. While the Fort William mill is still under review, we did complete the sale of timberlands in Ontario for $55 million. At [Belgo], the machine conversion from newsprint to high bright is now complete and under the CapEx budget. This project will convert about 110,000 tons of capacity from newsprint to high bright grades in the first part of the year.

We continue to leverage our investments in the ABIOFFSET grades with the introduction of the innovative offset, an environmentally friendly, cost efficient, effective paper and we’ll deliver about a 20% savings to the customer because of its lighter basis weight. Innovative offset will be produced at our Alma and Beaupre mills.

The Company’s shipments of commercial printing papers remain relatively constant. However, the mix of alternative offset and equal offset continue to grow with shipments increasing 4% in the fourth quarter of 2005, compared to the same quarter of last year. These grades have seen shipments increase by 16% in 2005, compared to 2004. When North American demand for uncoated groundwood papers decreased by 1.3% in fourth--in the fourth quarter of 2005, it increased 2.3% for the year. The decrease in North American demand is mainly attributable to a reduction in imports in the fourth quarter of 2005.

Price increases announced for Q3 for ABIBRIGHT and ABIBOOK have been implemented, and we expect both print advertising and demand to remain positive in 2006. As for the ABIOFFSET grades, the price increase of $60 per short ton was announced and is effective February 1.

We continue our efforts to mitigate the ongoing energy and wood fiber price increases through our Company’s product development initiatives that focus on cost reduction and efficiency improvements. In wood products, lines were down due to the 20% reduction in allowable cut in Quebec, and prices were lower when compared to last year. Softwood duties, while still not zero we’d like, were revised in mid-December to 3.2% AD and 8.7% for the CVD, bringing our combined rate to 11.9% when--and this is comparable to about 20% for 2005. Housing starts throughout 2005 remained strong and we expect demand to remain steady in 2006, though slightly lower than 2005.

Just a few points before turning it over to Pierre. As most of you know, we finalized the sale of our 50% stake in Pan Asia, and the cash received was used to redeem some US$579 million in notes. As I said before, this sales us--allows us to reposition ourselves as a less-leveraged company, with about C$1 billion less debt. Over the last three years, we have made considerable strides in our debt reduction efforts, with total debt at C$3.7 billion or US$3.2 billion at the end of the year. Pierre will have more details on this.

Mill closures--the mill closures we announced are indicative of our commitment to have all our mills in the best 50% of the cost curve. Being low cost is an absolute and we remain undeterred in this initiative. In this regard, our fourth quarter results were a disappointment impacted by mill idling and energy spikes. As we start 2006, our focus is strongly on further productivity and cost improvements.

While we remain very focused on cost, we continue to make wise investments such as the Belgo conversion to high brights and the launch of new innovative offset product. We are well poised as we go into 2006. Our newsprint order book is solid, we have record low inventories, the demand for commercial printing papers continue to improve, and wood products should benefit from lower duties.

Pierre?

Thank you, John. This morning, we reported a fourth quarter loss of $355 million, or $0.81 per share. Table 2 of our MB&A and slide nine of our presentation break down the specific items net of income taxes. Without the specific items, the fourth quarter result, which is not a recognized GAAP measure, would be a loss of $51 million or $0.12 a share, compared to a loss of $56 million, or $0.13 a share, in Q4 of 2004.

This quarter included, on an after-tax basis, $220 million of asset write downs, mainly due to the permanent closure of the Kenora and Stephenville paper mills, as well as asset impairment charges taken for both the Lufkin and the Fort William paper mills. After tax, mill closure elements of $50 million were booked in the quarter. This charge was partly offset by an after-tax gain of $48 million realized on the sale of timberlands in Thunder Bay, Ontario.

Also booked in the fourth quarter was a one-time $41 million income tax charge, mainly due to the increase in income tax rate introduced by the Quebec government, $14 million of financial expenses from the premium paid on early debt redemption, and a $9 million loss on translation of foreign currencies. The results in the quarter reflect a $10 million after-tax loss on the sale of the Company’s 50% interest in Pan Asia. While we had the pre-tax gain on the transaction, the loss is due to timing differences and the recognition of income for accounting purposes versus income tax purposes.

EBITDA for specific items in the fourth quarter came in at $139 million, compared to $138 million last year. Basically, a $26 million improvement in our paper segment was offset by a $25 million reduction in wood products. And the Canadian dollar strengthening, compared to the same quarter in 2004, had an impact of $29 million.

For the year-ended December 31, 2005, the Company recorded a loss of $350 million, or $0.80 a share, compared to a loss of $36 million in 2004, or $0.08 a share. The strengthening Canadian dollar negatively impacted our company-wide results in 2005 by $252 million pre-tax. Excluding specific items, the total loss for the 12-month period would have been $176 million, or $0.40 a share, compared to $153 million, or $0.35 a share in 2004.

Despite a slightly higher loss in 2005, our cash flows from operations improved significantly at $164 million, compared to negative $3 million in 2004, thanks to a much improved working capital management. The newsprint segment posted an operating loss of $268 million in Q4, primarily due to asset write-downs and mill closure elements totaling $295 million. Excluding specific items, the newsprint segment posted an operating profit of $27 million, or $33 million better than 2004. On a first time basis, cost of goods sold in newsprint was $20 higher, as lower usage was offset by increased energy and fiber costs.

The fourth quarter operating result in the commercial printing paper segment reflects a $57 million reduction when compared to 2004. The reduction is mainly due to asset write-downs and a stronger Canadian dollar. The negative impact of the write-downs are partly mitigated by the gain realized on the sale of timberland. Before specific items, the segment reported an improvement of $11 million when compared to 2004, with an operating loss of $7 million, compared to a loss of $22 million last year.

On a [indiscernible] basis, cost of goods sold for commercial printing papers in the fourth quarter of 2005 was $29 higher than the same quarter last year. The cost increase was mainly due to higher input prices in energy and fiber, as well as pension and other employee future benefits. This was partly offset by better efficiency and lower usage.

The wood products segment reported an $81 million decrease in fourth quarter operating results when compared to the same quarter last year. Of that amount, $57 million is explained by the CVD and AD credit booked last year. The fourth quarter of 2005 was also affected by a sales volume reduction of about 100 million [indiscernible] when compared to last year. This was mainly due to the impact of the 20% annual allowable cut reduction in Quebec. Results were also impacted by higher wood and fuel costs.

In the quarter, as John pointed out, we closed the sale of our interest in Pan Asia. The proceeds from the Pan Asia disposition were used to make a cash tender offer for a certain series of outstanding debt and US$579 million of notes were accepted for repurchase. Details of the debt are presented on slide 18. After the completion of the tender offer, we now have reduced debt maturities over the next two years to US$76 million, basically, $15 million in 2006, and $61 million in 2007.

The sale of Pan Asia in itself allowed for a debt reduction of roughly C$1 billion, as we no longer consolidate our share of Pan Asia’s debt, hence, significantly improving the Company’s balance sheet and liquidity position. The Company has reduced its long-term debt level from $6.1 billion in 2001 to $3.7 billion at the end of this year. As a result of the above debt reduction, we expect 2006 financial expenses to be around $315 million. This is about $160 million less than the 2001 level.

Following the mill closures announced in Q4 and the write-downs taken in Lufkin and Fort William, we expect 2006 amortization expense to be about $450 million, compared to $508 million in 2005 before specific items.

Regarding the financial covenants of our banking agreement, the net funded debt-to-capitalization ratio was 59.1% at the end of the year, compared to our 70% covenant, and the EBITDA-to-interest coverage was at 1.9 times, compared to our 1.5 times covenant.

During the quarter, the Company also replaced its securitization program with a US$300 million North American program committed for three years, and a US$125 million uncommitted international program. Neither has a rating trigger or a company-specific financial covenant.

Finally, at the end of the year, we had $70 million drawn on our credit line.

Now, let’s go right to questions. Frank?

Thanks, Pierre. Just before going to questions, a reminder that the call will be archived on our website or you can listen to a replay until February 8. And I’ll give you the numbers. The dial-in number is 514-861-2272 and the passcode is 3172732.

Stephanie, we’ll start with the questions from the investment community and we’ll conclude with the business media.

Okay.

And any follow-up questions can be directed to me at 394-2341.

Thank you. (Operator Instructions.) The first question is from Kevin Coleman from Banc of America Securities. Please go ahead.

Good morning. Thanks, guys. If you could give us a little bit of a tint on the 4Q versus 3Q EBITDA bridge, it seems like cost and energy are a continuing issue. Maybe you can put just a little bit of color on that because I think results maybe were a little lighter than what I have been looking for at least.

Well, as I said, we did suffer a little bit in the fourth quarter because of the cost of the idling of Kenora and Stephenville at mid-quarter, really, at the end of--middle of October. We also saw a significant increase in energy costs in the quarter. So, our expectation as we--would be that energy costs will probably continue high in the first quarter, normally a relatively cold quarter, in Canada. However, we do expect productivity to improve without the idled mills.

Okay. Any thoughts in terms of 2006 debt reduction and free cash flow?

We don’t make forecasts, so we don’t give out forecasts on free cash flow for next year. One thing for sure, what we’ve all--what we’ve been saying is that free cash flow will be used for debt reduction.

Okay. And then, lastly, and I’ll turn it over, on the newsprint front, if demand were to be worse than down 4% call it in 2006--I think it was down about 5.5% in ’05 in North America. Who do you think would take the pain to close mills? It sounds like you guys--in the first and second quartiles there would be someone else presumably or not necessarily or how should we think about that?

Well, I think, certainly, we feel like on a new--that we have a good portfolio of low cost assets on the newsprint side. And--but, I can’t really speak for other people. I think our position is that supply/demand should be very much into balance next year given the closures taken to date, and that we expect maybe consumption will be a little soft in the first part of the quarter--the first part of the year, but should average around 4% for the year.

And then, on the energy front, can you remind us, John, how much the Company saved from the hydro assets?

About--.

--108 last year. 109 last year.

Pardon?

The saving last year was about $109 million that was for 2004. This year should be in a similar range. I mean, we haven’t got the final tally on that one. But it should be in a similar range given the fact that energy prices have gone up, so the savings per facility should be higher. But, at the same time, we did suffer from lower water level in one of our facilities this year.

Great. Thanks a lot, guys. Appreciate it.

Thank you. The next question is from Bruce Klein from Credit Suisse. Please go ahead.

Hi, guys. Just on the follow-up on the energy. What--is there any hedges in ’06? And at one point you guys had--I know you had the co-gen asset. Is there any thought or chance or what will kind of drive the decision whether you want to consider monetizing that in ’06?

I think the--we don’t significantly hedge energy. Our big exposure to energy is in Ontario and a little bit in the Southern United States. But, of course, Quebec and Newfoundland and B.C. are regulated energy environments. So, there’s not--we have no hedging in place. I think as far as monetizing of our energy assets, I think that we continue to look at that. Of course, that is also a--sort of a mortgage of your future cost position. And so, we’re looking--we continue to look at the right alternatives for that as we go on. But, I don’t think it’s a significant solution to us because it will just be raising our costs.

Okay. And then, fiber cost trends. I know the wood cut was cut, but any thoughts on kind of ’06 versus ’05 or what the latest trends are there?

Well, I think the trends are that you vary by region. Certainly, British--B.C. has probably some of the lowest cost wood in the world right now with all the beetlewood. The--in the Southern United States, costs of wood remain good and perhaps going down some. The primary increases in wood cost are in Ontario and Quebec, especially in Quebec, where we have most of our assets. I think we’re seeing--on a year-over-year basis though not a significant increase in wood costs. Most of the increase happened in 2005.

And lastly, just your latest thoughts on CapEx for ’06.

’06 should be around the same range as ’05, $200 million.

Okay. I’ll pass it on. Thanks, guys.

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

Yes. Just one other question. I was wondering if you could talk about what your pension expense was in ’05 versus what your actual cash contribution was? And maybe, if you could tell us what to expect for ’06?

Yes, Joe. The cash contribution in ’05 was $65 million higher than the expense. Okay? We expect a similar spread next year. So, we expect cash contribution next year to be around $65 to $70 million higher than the expense. And we expect the expense next year to be about $30 million higher than this year, so, about $5 a ton.

What--can you tell us what the expense was for 2005?

Oh my gosh. I’m not sure that’s a number that we’ve put out in the past, but it probably was around 140ish--130ish was the expense.

Okay. Thanks. That’s all I have.

Thank you. The next question is from Kuni Chen from Banc of America Securities. Please go ahead.

Hi. Good morning. Can you just run through--each of the idled mills kind of what your time frame is in terms of resolving whether to permanently shut or move forward with some kind of conversion project.

Well, I think all the mills are permanently closed with the exception of Lufkin. And so, for the permanently closed mills of--they are in various stages of dismantling and land sale going back all the way, I guess, to the West Tacoma closure where we’re in the process of selling the property there. But, it varies from mill to mill as far as what stage they are in terms of equipment salvage, etc. The Lufkin mill, however, is idled and we are in the process of, as we have said in the past, looking for a partner to restart the mill to make lightweight coated and also to install an energy co-gen operation at the site. We have--we are actively pursing that possibility.

All right. And just because you took a write-down at Lufkin, that really doesn’t signify anything in terms of your outlook there?

No. It just--it was just an adjustment in the future value of the mill.

Okay. Fine. And on export markets, can you just give us a sense as to what your longer term outlook is and kind of what does your research tell you when you look at capacity ads in other parts of the world, and kind of what the outlook is for exports?

Well, I think that we have to remember that globally demand for paper products continues to grow. And newsprint, we export--our primary export markets are to Europe and South America and limited to Asia, primarily India and Asia. And I think that as we look forward the most--the favorable markets probably today are India and South America, and that’s mostly exchange driven. But, we do see growth and we expect export probably close to 1 million tons of paper in 2006.

Okay. And one last question, then I’ll just--tax rate for ’06?

About 32%.

Okay. Thanks.

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

Hi. Good morning. A couple of questions. First one, I’m interested in your thoughts about targeted capacity utilization in both the newsprint mills as well as the commercial paper side as we enter this year--where you see things going. And the second is a little more technical on the wood side. The--I’m wondering whether the reductions that you had in the fourth quarter are sort of a good target for a run rate or whether you should see further reduction in your capability for loggings for say in Quebec.

Well, just quickly on the wood side. I think the fourth quarter volumes are probably approximately in line, maybe some up side adjustments as inventory. But, the allowable cut is pretty much the same in 2006 as in 2005. And I think as far as the idling of mill capacity, I think that--or the mill availability, however you want to say it, is we pretty much expect newsprint to run full. We actually have more sales than we have capacity currently as our order book is very strong. In the commercial printing side, we also expect to pretty much run all our facilities, although we are upgrading the mix as we go forward. I just was reminded myself that there was a big forest fire in Quebec this summer, which caused us to lose some production in the summer months and we should--to ’05, but we should regain that in ’06. So, perhaps our overall wood availabilities will be higher in ’06, slightly higher.

Thanks. And then, just a final question. Could you give us a little bit of guidance on your hedging program for the currency right now, where you are and what you--?

--Yes. Well, Bill, it doesn’t change. We still intend to hedge between 30 and 40% of our exposure. And what was done, Bill, however, was that we sort of reduced the timeframe of the hedges, so now we go out 12 to 15 months. In the past, we used to go out two years. But, I guess, for the last six or nine months, we’ve been going shorter.

Can you help us quantify a little bit? As we look into ’06, whereabouts your average hedges are rolling at this point?

Well, I guess, I mean they will be rolling at the average rate--close to the average rate, Bill, of 2005. So, the average rate for last year was about, what, $0.82.

Okay.

So, they will be rolling in that overall area.

Okay. Great. Thanks.

Thank you. The next question is from Don Roberts of CIBC World Markets. Please go ahead.

Thank you. Gentlemen, it looks like you’ve done a good deal of the heavy lifting for the operational review. But, I’m just trying to focus a little more. You’ve mentioned, first of all, with regard to I guess your Lufkin and your AO/EO, but that’s now not going to affect your ’06, correct? Just--I want to verify that.

Yes, that’s correct.

Okay. And that your Bridgewater is sort of, I guess, the new problem child there, now that you’ve dealt with the others. You’ve--could you remind us what’s the remaining capacity we’ve got at that mill on the other two machines? And also, your assessment--there’s been this proposal of a new recycle-based newsprint machine in the U.K.--your assessment of whether this is someone’s just wishful thinking or is this a meaning thing we should pay any attention to?

Well, our capacity at Bridgewater is about 240,000 tons. I think we believe that we can grow that capacity back because of the pulp availability now from the closure of the smaller machine. I really don’t have a perspective on the possibility of the recycle machine in the U.K. Of course, as you may know, a couple of years ago, there was incentives offered by the government to increase recycling and no one really took up on it. So, I don’t know what will happen this time around.

Okay. And just, lastly, with regard to the Fort William and Grand Falls. Just your assessment of what are the options there right now? Those are--you had mentioned in your release, two of the ones that you’ll focus on in ’06.

Well, the Fort William plant is under review and we would like to find a--it’s a commercial printing paper mill. And we want to--we are looking at what are the possibilities for producing high brights there long-term at low cost. And we’ve got several initiatives underway there. As far as the Grand Falls mill, we have announced the closure of number seven machine there, and we still believe that that machine is not long-term viable. But, with the recent increase of Stephenville, we have a little bit of leeway on the balance of our export business. But, long-term number seven machine in Grand Falls will also close.

Okay. And there’s no--okay. Okay. Good. Thanks very much.

Thank you. The next question is from Mark Connelly from Credit Suisse. Please go ahead.

Thank you. Just--just to ask one more time on the AOEO stuff if we could come out slightly differently. We’ve seen the [indiscernible] free sheet producers change their brightness. I’m curious if that’s having much impact on you. We know it’s having some impact competitively on the opaque market. So, that’s the first piece of the question. And the second is, if you weren’t in the financial situation that you are now, do you think there is more room currently for AO and EO grade capacity? If you had the money, would you want to be doing it in 2006?

Geez, what was the first part--oh, the--.

--The brightness--.

--The brightness, right. The overall free sheet brightness was raised. I think the big selling point for AOEO, of course, is that it’s a very high bright product, 84 brightness. But, it also has a very cost competitive position. It’s been our experience that anyone who tries our ABIOFFSET grades stays with them. And that’s mainly driven by the fact that you get anywhere from 15 to 30% more copies for your dollar with alternative offset grades.

So, we feel like they sell primarily based on their cost efficiency for the customer. He prints more books per ton, more direct mail per ton, or whatever his printed product, he gets more volume for his product. And so, we don’t really sell to the archivable very high bright market or even to the--currently sell to the cut size market. So, I think that we still--we feel that we have a very competitive--that offers a cost advantages for our customers.

As far as future AOEO growth, I think that we can stay--we continue to look for future growth in these grades and that it’s mainly a question of breakthroughs in the marketing of the product. And we expect to continue to grow our capacity. And certainly, right now, financially, we have decided to delay for a year or so.

Sure. Just one last question. You talked about export tonnage of newsprint already. I’m just wondering, when you look at the export market more broadly from the U.S. and Canada, do you see anything changing there? I mean, is the outlook for North American or Canadian exports? Is there a secular change underway as you see it?

Well, there seems to be for some reason some West Coast suppliers are withdrawing from Japan, so Japan seems to be a less favorable market, or for some reason, anyway, a repatriation of traditionally Japanese tons from the West Coast back into North America. But, other than that, I think the trade flows will remain fairly consistent over time. But, the biggest thing right now impacting trade flows is probably the strength of the Canadian dollar versus the Euro.

Okay. Thanks very much.

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

Hi. Could you just talk about pricing in commercial printing papers? On a U.S. dollar basis it was up slightly in Q4. You did announce some price increases in some of your grades. Could you just talk about that going forward--if there are some price increases at the beginning of the calendar year?

Well, I think that we have--we’ll have a rollover of the prices announced in 2005 in 2006 for almost every grade of paper we make from newsprint to commercial printing, and sometimes multiple price increases. The price increases for the commercial printing paper grades are more impacted by the Canadian dollar because most of our production is in Canada, and all of our sales are in the U.S. But, we did have price increases of our--of most of our grades. For example, we did it--and we have announced another increase on February 1 for AO/EO grades of $60.

Okay. And how are backlogs in demands in that business?

Well, the commercial printing grades generally have a softness in the market around Christmas and those things are starting to pick up again. And it’s pretty much following the traditional pattern for those grades. And so, we don’t see any weakness in our order book currently.

Okay. And you said you expect to operate full out pretty much in Q1, or is there some downtime?

No downtime.

Okay.

Other than our closures.

Okay. And could you talk about overall costs to the Company in ’06 as you look on a--looking at all your costs, wood fiber, transportation? What kind of overall inflationary cost increases you are looking at?

Well, I think that as far as overall inflationary costs as we look out into 2006, we don’t have--we’re pretty much in line with the inflation with the exception of energy, which is sort of an unknown. We have forecast some energy increases, but there are actually, especially in certain markets, people forecasting that oil prices, for instance, might--may come down as we look out, but who knows about energy. So, I think our main exposure for costs next year will be energy.

Okay. So, is 3% overall costs increase a reasonable assumption? Cost per ton?

It’s in line with inflation. I think that our goal is always to offset inflationary costs with productivity improvements.

Okay. And just on the 90 million you said you would save by the end of 4Q, should we see some of that in Q1? In other words, was very little of that realized in Q4?

Well, the improvements are there in Q4 in productivity and costs, and especially in mix and logistics. I think the difficulty in trying to forecast what will be seen in the bottom line is that we have had in the--starting in the fourth quarter a rapid increase in the Canadian dollar, which is offsetting some of the improvements that we--that you would have seen.

Okay. And did you quantify or can you quantify the impact of the inefficiencies from the closing of the mill?

I think the biggest problem there is that it’s related--it’s mostly related to the cost of paying ongoing people costs while the mills are down until the permanent closure takes place. I don’t have the number on the top of my head. I could get it for you if you--later on.

Okay. Thank you.

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

Yes. Good after--or good morning. On the--the first question is on the capital spending that you plan for ’06. What’s that level?

Capital spending for ’06 is around 200 million.

Okay. And is there anything that’s beyond maintenance--that’s included obviously. You’re deferring the AO project. Are there any other projects that would be in there? I guess, the finishing up of the one that’s just starting up now.

Oh, the--.

--The Belgo--?

--The Belgo startup, there may be some carryover there. But, I think the main focus for capital spending besides asset maintenance next year will be on energy projects.

Okay. And on the Belgo, is that--you’re saying conversion. That’s going to be straight 110,000--for 110,000, and that would be an uncoated groundwood grade you’re making there?

It will be an uncoated groundwood 75 bright type product. There’ll be a ramp-up as we go from newsprint. It won’t happen instantaneously in January. It will take some months, but that’s our plan.

And--but this is not one of the uncoated free sheet substitute grades, or is it?

No. It’s not a super high bright. It’s just a 75 bright.

Got you. Okay. And then, looking at the--you mentioned that you think as you’re configured today, John, that you’d be making about 3.7 million tons of newsprint in ’06. What are sort of the projections that you have for the other group--for the uncoated groundwood grades altogether, or if you want to break it down for us?

The uncoated groundwood grades is about 2 million tons.

And how much of that would be the AO/EO/IO grades?

I think it’s 650.

Okay.

650 plus or minus.

Okay. In ’06--and then, when you look at the lumber, I think you said you would probably make about 100 million board feet less in ’06 than ’05. Did I hear that right or not?

Yes. We should be around 200 million--just under 200 million board feet.

2 billion.

200 billion.

2 billion.

2 billion--2 billion board feet. I always get--2 billion board feet of lumber in ’06, just under that.

Okay. And then, lastly, I noticed today the Canadian dollar continues to make you guys richer. It’s up close to $0.88. What was it in the fourth quarter on average?

Yes. I have it here, Chip. Hold on a second. The average in the fourth quarter was $1.17, so if you were--.

--American, that is.

It’s like $1.14 right now. Yes.

8524.

So, .8524 and now it’s like .8777. Okay.

About $0.02 higher now.

Okay. And then, I want to make sure I understand the--I think Pierre mentioned that you guys were--you had drawn, I think, if I heard you right, you had a 425 million in bank lines and that you’d only drawn down 17 of that.

No. C$70 million was drawn at the end of the quarter.

That’s 17 or 70?

70.

Okay.

The bank line is $700 million.

Oh. So, the bank line is 700--.

Yes.

And you’ve drawn down 70.

Yes.

And then, but you--I think you said--maybe I misunderstood you. You said you had some other three-year--.

--Yes. Okay. What we’ve done--okay. Your--in the quarter we also redid our receivable securitization program.

Oh, yes. Okay.

Okay? And the old program was for US$500 million. We would never use that much. And the old program was basically not committed. So, now we’ve changed it for two programs. One is for US$300 million, okay, which is committed for three years. And the other program is for US$125 million. That program basically addresses international sales. And that one is not committed. The--so, combined, the two programs are for US$425 million.

And any amounts--I mean, that’s mostly used up continually, right?

It’s mostly--at the end of the year, we had C$459 million drawn.

Okay.

Versus 441 last year. So, there’s been no real change in the use of these programs--.

--Okay--.

--Year-over-year.

And the last question is on the bank lines that--you have 700 million. And that’s Canadian, correct?

Yes.

And when does that expire?

December of 2008. This is--this bank line was also redone, but in the third quarter of this year.

And the covenants--I think you told us that the covenants--did they change?

Yes. Well, the covenants are 70% debt to cap. We were at 59%. And--.

--1.5.

Pardon?

And the 1.5 coverage?

That--yes. That is correct.

Okay. Got you. And so, basically, you have 630 million available under that?

We have a bit less because we also have letter of credits for, what, 80 million.

Okay. So 550. Got you. Okay. Great. And thank you very much.

Okay. Thank you.

Thank you. The next question is from Mark Wilde from Deutsche Bank. Please go ahead.

Yes. Good morning. I wondered, given where the Canadian dollar is today, which depending on how you look at it--it looks to me like between $0.87 and $0.88. What’s the cost position of the mill system right now? Is everything still in that top 50%?

Well, I think what we generally find as the Canadian dollar strengthens is that our--is you look at the overall cost curve. Our U.S. operations move down the cost curve and some of our Canadian operations move up the cost curve. It’s--we’ll know more when we get some more independent data at the end of the year, but we feel like that everything is very close--that are in the first two quartiles as of for 2005.

I think that given the fact that everybody is seeing the same impact of the dollar as we are, that we will remain in the low half of the cost curve.

The thing, Mark, is that I would probably say that the Canadian newsprint mills that we have left are pretty good by Canadian standards. So, they would tend--if you were to do the Canadian cost curve, okay, they would tend--they would be very, very good.

Okay. Pierre, just on that issue. Do you guys have any thoughts on why so few other Canadian newsprint mills have closed up to this point? I mean, energy, wood, [FX]. You guys seem to be doing most of the lifting up in Canada.

I think I--well, I guess I can’t really comment on everybody else’s strategy, but we obviously don’t see the logic behind it.

Well, I mean, do you think that there are people who are running cash negative now and are just either hoping for price or hoping for weaker currency, or what’s the issue?

Well, I think there are some people very close to the line. And--but, as far as speculating on what their strategy is, I don’t think the likelihood of wishing for a weaker currency is likely to happen.

I agree with you. I’m just trying to figure this out. Let me ask also that given all of this pressure, why is it that we seem to come away from all of these newsprint hikes with just 20 or $25?

I don’t know. I think the analysts should talk about that.

You have no perspective?

I think the reason is with some small producers, the big buyers still have considerable leverage. Although there’s certainly a good balance of supply/demand, some producers make decisions for one reason or another to take a lesser price.

Okay. My last question, John, as long as I have covered Abitibi, which is over a decade, we’ve talked about all the potential hydro projects. And I just wondered, given the high cost of energy right now, and the fact that so many mills up in Canada seem to be on the bubble, are the provincial governments getting a little more flexible in terms of what they might let you do in terms of more hydro development?

Well, I think there are options for hydro development. I think, historically, the return on the investment has not been the same as it is today. Certainly, as we sit here today looking at much better returns on investments. I don’t think that provincial governments are necessarily a limitation, mostly past returns versus what the return possibility is today.

Great, thank you.

[John Finkelstein] from Jennings.

Yes, good morning, just one question on your press release you announced. You said, on your newsprint capacity, you have 150,000 tons of idle capacity. There have been so many closures and there’s so many machines that you have out there that are in the 150-range. I take that one to be Grand Falls number three?

No. That is the mill in Lufkin, one small machine in Lufkin.

So it’s Lufkin number two?

Yes.

Yes.

Okay. That’s all I had. Thank you.

Grand Falls number three is running. The Grand Falls mill is running.

[Frank Danelle] from [Adairs Capital].

Yes, I’ve got a few questions. Actually, I forget who asked the question about how much this mill idling thing costs, but I’d like to know that number too, in terms of paying people. And I assume that’s not part of whatever those numbers are that you yank out when you get to whatever, to $0.12? That’s something on top of that?

No, no, no, it is part of that.

Oh, it is part of that.

Yes.

Okay, it is part. So then, I really don’t need to know that. On the $41 million tax adjustment for Quebec, were you adjusting some sort of deferred tax account or what’s going on there?

Yes. It’s all the future taxes that you have because of the change in tax rate that you have to put through your profit and loss statement in one big swoop.

Okay. Right. Okay, that’s what I thought, because, I mean, if you’re losing money a higher tax rate actually should benefit you.

Yes.

Okay and I just also want to make sure I’m doing my arithmetic right. I think you said the financing cost would be $315 million in 2006?

$315 million.

$315 million and you went at it like the fourth quarter at $91 million a quarter or if I multiply by 4 that’s $364 million, but you didn’t get to pay down a lot of the debt associated with the sale of Pan-Asia.

Bingo.

So, if I take $91 million times 4 and I do $364 million minus $315 million and I tax-effect that, does that get to my $0.07 to $0.08 pro forma benefit, sort of, of what I was going to get out of Pan-Asia? Or can I look at it that way or was there--?

--Yes. You can look at it that way, but yes, it’s 3--well, it’s more than that, because the interest cost this was more than $365 million, I think.

Okay. But what I’m trying to figure out is you didn’t get any of the benefit in the fourth quarter from being able to pay off the interest expense.

No. That is correct.

And I don’t think you’re running any--other than that $0.02 thing, you were running any losses or gains associated with Pan-Asia through the income statement, right?

Yes, no, that’s right.

Okay. So there’s a benefit, when going forward, if I’m just looking at the fourth quarter. I should add [inaudible]?

Yes, absolutely, Frank. What you need to look, I mean, there are--if you were to pro forma the numbers for fourth quarter, yes, you would have to reduce the interest costs by, I don’t know, $12 to $14 million.

Okay. That’s what I wanted to know. Thanks.

Rick Skidmore from Goldman Sachs.

Good morning, thank you, two questions. First, what’s your new sensitivity to the Canadian dollar, given all your closures that you’ve made? And then secondly, John, given that your cost position now is in the first half of the cost curve, how has that changed your position on running to demand, if for any reason the market was weaker than you had anticipated?

Right, should I take care of the first one? It’s about $35 million cash per US$0.01, about C$0.01, US$0.01.

Okay.

Well, I think that most of our programs today have been focused on ensuring that our mills were profitable. And I think that with our mills profitable it becomes much more difficult to permanently close capacity that’s very profitable. So, I think we’d have to really do some soul-searching on that one.

Okay. And then, just to clarify, all of the capacity closures you’ve announced have already been done, so that nothing--your closures took place in 2005 and they’re all shut down except for the transition from newsprint to the uncoated groundwood at Belgo? Is that correct?

The transition at Belgo and the closure of the Bridgewater mill will take place in March or April of 2006.

Okay. Thank you very much. Great, thank you.

Andrew Brown from [Conning].

Yes, I was wondering, on the heels of the sales of the 485,000 acres of timberlands, I was wondering if we could expect any more of that in ‘06 or is that just more of an opportunistic thing?

That was more of an opportunistic thing related to Fort William. We don’t really have a significant freehold in Canada. We have some forestlands in the U.S., but we’ve really no intent to sell those in ‘06.

Okay, thank you very much.

Thank you. The next question is from Eva Young from Independence United.

Yes, hi. Actually, it’s Cheryl Van Winkle. First, I wanted to ask you, with your energy costs, as you noted, went up a fair amount this latest quarter. Could you give us a sense of how your BTU usage for purchased energy weights out in different parts of the year? I mean, is it 50% more that you use in the fourth quarter than in the third quarter? Could you give us a sense of that?

Well, I think that--I don’t know if I got it on percentages basis, but basically the third quarter is our lowest energy quarter and the first quarter is the highest and so the other two quarters are more or less average. Fourth quarter depends on the weather, really.

Okay, so fourth quarter is sort of an average quarter and could you give me a sense of how much lower than that the third quarter is and how much higher than that the first quarter is?

I really can’t give you that. Maybe we can follow-up with you.

Okay.

If you can give a call in, because I really don’t have that information.

Okay. And then, I just wanted to ask, is most of--would you consider most of your purchased energy more linked to oil prices or more linked to natural gas prices?

In the U.S. they’re linked to natural gas and in Ontario I guess you’d have to say they’re gas and oil mix.

Okay and then I just wanted to ask, would you consider most of your purchased energy more linked to oil prices or more linked to natural gas prices.

In the U.S. they’re linked to natural gas and in Ontario, I guess you’d have to say they’re gas and oil mix.

Okay, okay and then someone else asked this question and I wasn’t sure if I got the right answer. Earlier in the call you had mentioned that the capacity that you permanently closed, prior to closing it you had been idling it and it sounded like there was an idling cost that didn’t get put in sort of the special charges category. Is that true?

There is some--go ahead, Pierre.

The cost, okay. Once we’ve shut down a mill, okay, like right now Kenora or Stephenville, we do incur costs every month or every quarter as the mill gets, I guess, dismantled over time. We are still incurring costs like security and so on. These costs get put through our regular cost of producing newsprint. So there are costs, which are associated with once a mill is shut down, there are costs which are associated with just keeping the mill there while it’s getting dismantled over the next one or two years. Now--.

--Okay. So--go ahead.

When we idle the mill, those costs tend to be higher, because when you just idle the mill the prospect of a potential restart forces us to heat the mill during winter time and incur other costs, which tend to be higher. So, when you finally decide to shut down the mill for good, those costs go down and hence there is cost improvement down the road.

And could you give us an idea of how much those costs that were included in just regular operating, regular cost of sales, were in the fourth quarter?

Yes, well, it’s about $5.0 to $6.0 million per mill per year.

Per mill per year. But you said it was higher when you first idle.

Yes, but those mills were not idle for long. They were just idle for two months.

Okay, so we’re talking about four mills and two divided four. I guess four times two, divided by 12, times the $5.0 to $6.0 million?

Yes. It’s not much. I mean, the idling costs for the last two months of the year were not that big, okay.

Yes, okay. Thank you.

[Pierre Lequoi] from Desjardins Securities.

Yes, just quickly, we talk about energy a lot. But have you put, it in the past, some kind of energy sensitivity to the natural gas and oil, prices?

No, we have not, Pierre. It is something that we’re looking. We’re probably going to have something with our annual report when it comes out at the end, with our financial statements when they come out for the year at the end of February.

Okay. Thank you very much

Chip Dillon from Citigroup.

Yes, thank you. First question is what is the status, again, if you could just refresh me, in Kenora? Is that mill considered completely, permanently closed or just one of the two machines?

No. That’s completely closed. We announced one machine closure at mid-year and we permanently closed the entire mill at the end of the year.

Okay. And then, secondly, in one of the, I guess on page 18, if I read this right, you have about $350 million in maturities in ‘08 and ’09, plus the $76 million between now and the end of ‘07. So you add that together and you get about $4.25 million and you have $550 million remaining under your revolver. So, I guess in an extreme way, if you generated even small amounts of negative free cash flow, in a sense you don’t really have to hit the bond market till 2010. Am I missing something there?

No. That math seemed to be fair, but at the same time it doesn’t mean that we will not do it, if there are good conditions to do that.

No, I fully understand that. But, the point is you don’t have to do it till then if you don’t need to.

Yes.

All things not being so great, if that’s the case.

That’s right.

Thank you very much.

Thank you.

Thank you. We will now take questions from the media community. (Operator Instructions.) The first question is from Allen Dowd from Reuters. Please go ahead.

Yes, just wanted to clarify one of the numbers. You talked about a 4.0% drop in, I guess, demand from newsprint in 2006 or an expectation. Were you talking just North American demand on that or [inaudible]?

No. That was North American demand. I think the expectation for globally is flat to slightly up.

Okay. The other thing I wanted--and you felt that that would be offset by cuts in production. Are those mill closures that are already in place including yours or are you looking at future mill closures to offset that drop?

No. That’s just based on what has already been announced.

Okay, so and the supply and demand would back in that. Okay, because you talked about being very much in balance next year. I guess what you meant was actually in 2006 or else even next year, 2007.

Well, you have to remember that we basically permanently closed around over 400,000 tons of capacity that previously ran for most of the year, 10 months of the year. So, that will all be taken out in ‘06.

Okay, thanks.

Peter James from Kenora Daily Miner News.

Hello. I was just wondering what the plans for the Kenora site are, both in the short-term and the long-term.

Well, in the short-term, of course, we’re focused on making it secure and we are in discussions with various people on the right procedures to go forward, what uses it may have for the community and where we could. Whether there’s a transfer of equipment that we would like to take place. But, basically, we’re having discussions on what future use of the property may be.

Are there any concerns about the environmental cleanup costs?

No. We have set aside moneys for that and we are doing environmental assessment, but we have no real concerns about the cleanup.

Thank you very much.

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Alessi.

Thank you all for joining us and we will speak to you again on April 26 for the first quarter results. Thank you.

Thank you.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation and have a nice day.