Resolute Forest Products Inc (RFP) 2006 Q1 法說會逐字稿

Welcome to the Bowater first quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded. I would now like to turn the conference over to our host, Mr. Duane Owens, Assistant Treasurer and Director of Investor Relations.

Thank you and good morning, everyone. Welcome to our first quarter call. With me on the call today are Arnie Nemirow, our Chairman, President and CEO, and Bill Harvey, our CFO. Before we begin I will cover a few preliminary items. Following our prepared remarks we will take questions. The call is scheduled for about 45 minutes.

I need to call your attention to the cautionary forward-looking statement language that is contained in our press release and on our Website. If you haven't read it, please do so. We will be discussing such forward-looking matters on the call today, and you should be aware, due to the uncertainties inherent in such statements, actual results will differ, and any such statements are not guarantees of future performance. Additional financial and statistical information, as well as reconciliations of non-GAAP financial measures used on the call, can be found on our Website. The call is available to all shareholders via live Webcast and replay on our Website at Bowater.com. The call is also open to the press. Please note that while any member of the press who attends our call is free to quote the Company's speakers, other participants on the call should not be quoted without their permission. I will now turn the call over to Arnie Nemirow.

Good morning. Thank you for joining us today. Our first-quarter reported loss was $18.8 million, or $0.33 per share. Bill Harvey will discuss the specifics in a few moments. In the quarter we reduced our debt levels by $19 million.

Our operating income was $40 million, including a gain of 29 million from asset sales. Net of special items, operating income was $10 million lower than the fourth quarter. During the first quarter we achieved higher average transaction pricing across all our products, with the exception of coated papers, which declined $25 per ton, due mostly to seasonal factors. Higher revenues were offset by a stronger Canadian dollar, coated pricing declines, as I just mentioned, and higher labor and maintenance costs.

Looking forward, we have four important initiatives underway that we expect will accelerate our recovery.

First, in order to reduce a significant amount of our operating costs in Ontario, we announced last quarter that we will permanently close the older of our two kraft pulp mills. We expect this closure to benefit the Company by $20 million per year.

Secondly, we have been aggressive with changing our product portfolio with product development. Our Calhoun mill was once the largest newsprint mill in North America. After the machine conversion underway right now, and accounting for other product mix changes, about two-thirds of that mill's output will soon be in specialty grades.

Third, last fall we announced an $80 million cost reduction program. We expect to meet our target annual run rate of $80 million by the end of this year. And in October of last year we announced a timberland asset sale program with a target of $300 million of proceeds. To date we have sold into that program approximately $150 million of assets, and expect to sell an additional $80 million of timberland under this program by the end of the second quarter. And we expect to significantly exceed our $300 million target this year. That will all go to debt reduction.

I'll elaborate on the first two initiatives, and Bill will talk about the third and fourth one in a few minutes.

Back to the first one, the Thunder Bay A kraft shut. As we announced in January, we're permanently closing the Thunder Bay A pulp line in May. This closure will allow the remaining pulp line at Thunder Bay to benefit from lower wood and energy costs as the marginal requirements of the site are reduced. We expect that this will translate into a financial improvement, as I said, about $20 million per year, after a onetime cash charge of $15 million, most of which was taken in the fourth quarter of last year.

Secondly, the product development point. Our strategy of shifting capacity to the products that serve the direct mail markets has been supported by good demand growth and its growing share of the advertising dollar. Direct mail is a $57 billion market that is forecasted to grow about 6% per year over the next three years.

We have had tangible success in product development. Year-over-year, we shipped 12% more specialties, first quarter to first quarter. Due to the choices of [fiber furnishes] available at Calhoun, including kraft pulp and recycled, we have shifted about 275,000 tons of Calhoun's production, even before the current conversion, from newsprint to specialty grades, with brightness levels of up to 85.

For example, about a year ago we began supplying a rather unique uncoated bleached specialty packaging product for fast food chains. Calhoun also produces high bright book papers used in specialty book publications. In addition, we're looking at lightweight uncoated printing grades at Thunder Bay, used by general commercial printers.

All these product development benefits are being accomplished without significant capital expenditures. Ultimately, we do have the high-return ultra-lightweight coated opportunity at our Thunder Bay mill that could move our coated and specialty offerings to the next level. This project remains a very viable potential investment when conditions are appropriate.

The conversion of a machine at our Calhoun mill from newsprint to lightly coated sheets will be completed in a few weeks. The combination of excellent printing characteristics, bulk and strength in this kraft pulp-based sheet directly addresses the customer needs in a cost-effective manner. Our product will provide the customer with 15% more printing surface per ton than a traditional uncoated sheet. Timing for the introduction of this new product is excellent, the fundamentals of the market for these products are strong, and we are very optimistic about the success of this conversion.

And our confidence in our strategy at Calhoun is enhanced by our proven track record on conversions. The shift of the newsprint machine to lightweight coated at Catawba a few years ago has been a strong success. The numbers are compelling. The coated product line, providing operating income of $114 million last year, and with depreciation, this product line contributed EBITDA of $158 million. Since the conversion, our margins at Catawba have improved very significantly.

Turning to our markets, our outlook for the business continues to be positive. Operating rates are in good shape. The tone of our markets should improve across the board as we enter the seasonally-strong second half of the year.

In terms of newsprint, according to industry stats, the North American operating rate was 94% in March, which is very healthy. Our order book is good. Total U.S. consumption of newsprint was down 1.9% year-over-year from March and down over 3.5% year-to-date. This is a meaningful improvement to the numbers we have seen over the past year. Inventories for both mills and users are low. By the end of the first quarter we had implemented over $20 of the $40 price increase previously announced.

Although in the U.S., newsprint consumption continues to decline, the February figures continue to show healthy worldwide demand growth, up 3.5% this year versus last year. This growth is fueled by real worldwide consumption growth, improved advertising and pagination, as well as new titles. Pricing trends in the export market continue to be positive.

Shifting to coated and specialties, the long-term fundamentals of the coated mechanical remains strong. The first quarter is essentially a soft period for coated mechanical papers. Our average price did decline by $25 during the quarter. Consumer magazine advertising prices were up slightly, 0.3% through March. Mill inventories have increased, but we expect the market to improve in the latter half of this year.

North American demand for uncoated mechanical high brights is strong, as customers are shifting from other grades. Industry shipments for the superbright grades are up about 11% through March. Bowater's order book for these grades remains strong. We announced price increases for February and again for May in these grades.

The tone of the pulp market has improved rapidly in the past couple of months. World demand is up 4.4% through March. The operating rate is strong at 96%. Producer inventories are down to 31 days of supply. Consumer pulp inventories in Europe are at their lowest level in about nine years. We have informed our North American customers of April price increases of 20 to $30 per metric ton, depending on the grade, and we expect strong fundamentals in the pulp market to create a favorable environment for Bowater in the second quarter.

Our lumber results improved slightly in the first quarter due to higher prices. Housing starts in March were at 1.9 million units; although lower than 2005, still at a good level. A settlement of the lumber dispute appears to be imminent. With over $100 million U.S. on deposit with the U.S. Department of Commerce, and with tariffs still in double-digit levels, Bowater would benefit substantially from a resolution of this matter.

Finally, at the beginning of this year I announced my intent to retire from the Company. Earlier this month we were pleased to announce that David Paterson, Executive Vice President of Georgia-Pacific, will succeed me as President and CEO on May 1st. David has been with Georgia-Pacific for almost 20 years, and most recently has served as Head of the Building Products division. Previously he ran the Pulp and Paper Board divisions, as well as the Communication Papers divisions. He has an excellent track record, and I believe he has all the qualities necessary to lead Bowater into the future. I am confident that Bowater will prosper with Dave Paterson at the helm. To help with the transition, I will serve as Nonexecutive Chairman of the Company until the end of this year.

Personally it has been a great honor to serve Bowater for the past 12 years. We have accomplished a lot in both managing a challenging newsprint environment, as well as creating a new platform to grow coated and specialty product lines. Recent years have brought strong headwinds, particularly currency, declining newsprint demand and energy issues. But we are meeting these challenges directly with steady progress. I appreciate all the support that the financial community has given our management team, and me personally, during both the good times and the bad times. We have the asset base, we have the customer base, and a strong management team and great employees, and now with a new leader, Dave Paterson, who will succeed in the future. Thanks again for all your support, and I will now ask Bill Harvey to comment on details of the financial results.

Thank you, Arnie, and good morning, everyone. As Arnie mentioned, our reported loss for the quarter was $0.33 per share. Special items net of tax included a 17.9 million gain on the sale of timberland, a 1.4 million benefit due to foreign exchange, a 2.6 million charge as a consequence of the adoption of FAS 123R relating to share-based payments, and a 2.9 million charge with respect to severance payments.

We also incurred a 13.5 million tax charge, resulting from offsetting tax benefits associated with operating losses in our Canadian operations. For the balance of 2006, we expect that income tax benefits generated at our Canadian operations are likely to be offset by a tax charge. We expect these tax charges to diminish and then reverse as the Canadian operations' results improve and they generate taxable income. This will result in significant volatility relating to our effective tax rate. Our statutory rate remains at 35%, and we expect this rate to remain in place going forward. We do not expect to lose the value of any of those tax attributes. Note 5 of our press release provides a reconciliation between the reported loss and the loss net of special items.

In the first quarter, the average selling price of our products was higher than the fourth quarter, with the exception of coated paper. However, our operating costs were also higher, primarily due to the Canadian dollar, which averaged $0.015 higher in the first quarter than the fourth, and was -- and raised our costs by 7 million on a quarterly basis; secondly, increases in labor and fringe benefits of about 6 million; and in addition, our pension expense also increased by 6 million.

On the operations side, in the first quarter we took our annual Catawba pulp mill outage and lost about 3000 tons of market pulp production, with $4 million of additional costs at the site, and consequently this raised our coated paper operating costs in the first quarter.

Our capital spending was 38 million. Spending in the second quarter will be higher as we complete the paper machine conversion at Calhoun. For the year we expect to spend about 220 million, or about 70% of depreciation. In the first quarter, we sold 24,000 acres of timberland in a small sawmill for total proceeds of 36.8 million. In the second quarter, we expect asset sales totaling an additional 150 million. We have already received 70 million of proceeds closing on the sale of New Brunswick timberlands and a small sawmill yesterday. We expect the total proceeds of our asset sale program to be significantly in excess of 300 million.

In the first quarter, as Arnie mentioned, our debt was reduced by 19 million. As our asset sale program ramps up, I expect significant debt reduction to be achieved.

We deposited 4 million in the quarter for duties on lumber that we export from Canada into the U.S. This brings our total amount deposited up to date to about 105 million. In December our rate for duties was lowered from 20.2% to 10.8%.

We have raised our NBSK inventories in the quarter to about 40,000 tons to transition customers in light of the permanent closure of the pulp line A at our Thunder Bay site. We expect this transition to be seamless, and anticipate our inventories to return to more normal levels in relatively short order.

Last October we announced an $80 million cost reduction program to be implemented by the end of 2006. We have made significant progress in the program; however, I do understand it's difficult to see the underlying impact given the strengthening Canadian dollar and other noncontrollable cost pressures. That being said, we achieved a reduction in costs in the first quarter of 5.5 million, which translates to a run rate of 22 million, or 25% of the program. To put it in perspective, compared to the first quarter 2005, the Canadian dollar and direct energy prices alone raised our costs by 50 million year-over-year. The swings in uncontrollables have been sizable; however, our cost reduction efforts are very meaningful and will have an increasing quarter-to-quarter impact for the balance of the year.

In mid May we will be converting paper machine number 4 at Calhoun, Tennessee to a lightly coated product. The machine will be down for 18 days and we will then be going through the startup curve. The loss contribution in the quarter will be approximately 5 million.

The second quarter is also our normal quarter for annual maintenance outages at our pulp and newsprint mills. During the quarter we have annual outages at Coosa Pines and the Thunder Bay pulp line B, and we will lose 26,000 tons of newsprint and pulp production and spend about 10 million of repairs.

For the second quarter, we are continuing to implement price increases across many of our grades. I expect some improvement in operating performance across all paper grades. Pulp, however, will be negatively impacted by the significant maintenance downtime.

In the second quarter we are also implementing price increases in pulp, as Arnie mentioned already. Although the scheduled maintenance outages do result in significant pressures on Q2 costs, we also expect significant improvement in costs in the third quarter. Looking into the second half of the year, we believe the combination of limited scheduled maintenance, the positive impact on costs as a result of closing Thunder Bay A pulp mill, the startup of the Calhoun paper machine number 4 conversion, our $80 million cost reduction program, and reduced interest costs due to debt reduction from our asset sales program, as well as current good operating rates in our products, combined with seasonally strong demand in the second half of the year, will result in a meaningful improvement in bottom-line performance.

Finally, I would like to point out that we've made a change to our financial operating statistics that we pose to our Website each quarter. We are now breaking down the product line information to show coated and specialty separately. To remind you, the coated product line consists of our Catawba mill and the two small Nuway operations. I hope you find the new information helpful.

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

(OPERATOR INSTRUCTIONS). Joe Stivaletti.

On the debt reduction front, what debt are you looking to target as you get the substantial proceeds in?

We have a few things that we have ability to repay. Of course, there's some amount outstanding at our bank line at the end of the quarter. We had about $48 million under our bank line. As well, we have about -- approximately $450 million of debt that we can repay with very little premium. And we would target that, as well as some open market repurchases.

That would include your closing rate notes?

That could include -- that 450 million I specified does include the floating rate notes.

On the duty refunds, if you were to get back -- whatever you get back, will there be a tax impact there?

If we get the duty refunds, that would be to our Canadian subsidiary. There would be no cash taxes, and actually the tax charge we talked about earlier would reverse.

Finally, what is your CapEx budget for this year? I might have missed that.

We talked about that earlier in January. The CapEx budget for this year is 220 million, which is about 68% of depreciation.

Peter Ruschmeier.

I wanted to revisit the statement about significantly exceeding $300 million in proceeds. Any color you can offer as to whether that's 50, 100 million, 200 million? Just order of magnitude as to what your expectation would be, please.

If we look at our program and where we are now, where we expect to be at the end of the second quarter, we expect when we hit the $300 million mark, we'll have well over 100,000 acres of southeastern timberland that we would still have to sell, if that helps you.

Okay. And are you expecting to continue to sell the southeastern timberlands completely?

Yes.

Can you comment on the remaining assets that may be considered non-core, perhaps some sawmills? Are there other assets that you may consider to be non-core in your portfolio?

None specifically. There are some sawmills that we -- we sold one in the first quarter, and we have sold one in the second quarter. But those are very isolated.

I guess perhaps a question for Arnie on Dave Paterson coming in. I know you're probably hesitant to speak for him, but at the same time I'm sure it was probably important to you and the Board to have a sense as to Dave's views on debt paydown and priorities for cash flow. So, can you at least comment to the extent to which you expect Dave to have a similar philosophy as the current Bowater management team?

As you suggest, Peter, it would not be appropriate for me to comment on his views on specific things. We -- after a long search, I think we got the best person available. We hired him based on his track record and accomplishments, and he's starting Monday full-time. So, I think he will be getting into all of these issues, and you'll have, I'm sure, plenty of access to hear from him directly on all those issues.

Lastly, if I could, coated paper price decline of $25 -- a little more than I expected. I'm curious if you can break that down between mix and market prices, and perhaps help us with the outlook. It seems that you should benefit at some point from reduced import pressure and seasonally-improved demand. But I've been surprised that we haven't seen it pick up to date. Can you clarify on that?

Most of it was market decline, some mix.

$5 dollars of it was mix.

Things do look up.

Things look up. I think you pointed out that the actual imports are down about 15% year-to-year in coated. And as we enter the seasonally-stronger period, the second half of the year, we are optimistic.

[Bill Hoffman].

Just wonder if you could probe a little bit further into your specialty papers. Obviously, the strong move (indiscernible) the Calhoun will push additional capacity into the specialty papers market. Can you talk about your outlook for whether we're going to continue to see the demand at these kind of levels, what the pricing environment is, and what competitive conditions you see there at the moment?

I'll kick it off and then ask Bill to punctuate with some metrics. But this is a -- this conversion at Calhoun really is entry into what we consider about a 3.5 million-ton market. This is roll stock, and this is a relatively small percentage of the overall market for uncoated freesheet. We're coming in with a relatively small amount in a niche position with a superior sheet, we believe, in terms of brightness and bulk and strength, taking advantage of our kraft pulp mill infrastructure at Calhoun. So, we are introducing a relatively small amount of new tonnage into a rather large market, which we think will be at a very -- our sheet will be at a very competitive advantage, given the quality, the attributes of the particular sheet.

On the other side of specialty papers is what we've been doing with no capital, and that's been both at Calhoun; we've started at Thunder Bay. We are attacking both niche products and also just the standard uncoated mechanical, which as you know the stats, is growing very strongly. In 2004 it was up 16%; last year 2%; this year it's been flat, but off of a very strong uptick. And you can imagine that part of that is simply shifting with customers if they're going to a higher bright paper. I think it's not a coincidence that that went up 15% one year and newsprint was down that year. There is some substitution that occurs by customers. We're following that and taking advantage of our asset base.

Arnie, I wonder if you could also comment about the pulp markets, given the fact that the Canadian dollar continues to rise, and what your thoughts are for Thunder Bay (indiscernible) the other pulp line, whether that's going to continue to be an attractive business. Or at some point in time do you think about shutting the other line?

We think it's going to continue to be an attractive business and an attractive infrastructure, now that we have taken, in effect, the incremental high-cost wood and energy load by shutting down the older kraft mill. Pulp markets are strong. We noted this morning one of the sell side analysts announced -- reported that a major pulp producer has announced yet another price increase going forward for May across most of its grades. Inventories are relatively low. So, we're quite bullish on the market pulp business. And taking the high cost out of the Thunder Bay infrastructure, we've got a very good pulp mill business and pulp mill assets in the B kraft mill at Thunder Bay.

George Staphos.

Arnie, good luck with the transition. Could you remind us why do you get an extra 15% surface area with the uncoated mechanical, or the lightly coated mechanical versus uncoated freesheet? Is it just sheet count on the roll, or are there some other issues there?

As it relates to -- it's the bulkiness of the sheet; for every ton, you actually give in a surface area 15% more. So, print area per ton is higher because of the bulkiness of the sheet related to the introduction of TMP into the process.

Got it. Bill, could you go over again, or maybe provide a little bit more color on the tax charge regarding Canada? I didn't quite follow what you were getting at. It seems like it's an issue that's behind you by '06, but if you could give us a little bit more detail there.

It's related to the profitability -- from an accounting point of view, the profitability, or lack of profitability of our Canadian operations, which is a wholly-owned subsidiary, are not booking the tax benefit generated from the losses there.

So, basically the auditors are saying, until you prove that you can be at an earnings level that's positive, we're not going to allow you to take the benefit. Is that right?

That's exactly right.

In terms of coated paper pricing, what impact do you think Miramichi coming back to the market -- I think it's been discussed -- by May will have, or do you think seasonal factors will -- and hopefully good demand will offset that impact?

I think the seasonal demand -- it is a market that has a high degree of seasonality to it. Miramichi coming back in May or June will, of course, add some supply. But imports are also down, I believe, 15% year-to-date. And as well, of course, the European situation, with announcements there, likely means that the import number is -- being down is sustainable.

Do you think there is -- Arnie, do you think there was any impact in the March numbers for newsprint from Port Hawkesbury being down -- you might have seen a little bit more consumption for newsprint because you had some mechanical grades that weren't available for production?

Hard to tell really. Perhaps, but I really can't --

I think the newsprint number reflects a lot of things. Of course, the publisher's was off 4.5 or 5%, but the other -- the total newsprint market was only off, of course, 1.9%. And a lot of that relates to the classification of newsprint, things that -- the dailies number is only dailies, whereas the other number includes free papers, includes a lot of things that have shown some resiliency in newsprint. And of course, there's also just the specialty ship. But the Port Hawkesbury machine that is down is an SCA plus machine, I believe, and there'd be very little substitution between that and newsprint.

I get you, Bill. The last question and I will turn it over. It would appear that the industry will be -- I don't want to put words in your mouth -- but in a position to raise pricing again at some point in the second half, given where operating rates are, and your presumption that operating rates will remain strong and demand might even pick up a bit. Are you getting the sense -- let me phrase it differently. Have you been surprised with the degree to which the newspapers have been able to conserve as prices have gone up? And do you think that that's, between financial tables, etcetera, behind you now at this juncture, so you'll get more of that price through without loss to operating leverage? Good luck.

Edings Thibault.

I was hoping we could focus on some of the cost issues in the specialty papers business. Can you talk, Bill or Arnie, about the cost increase quarter-to-quarter, how much that was strictly seasonal there and how much that may have been related to the work that is going on in Calhoun? And then, what kind of benefit should we expect as you get the volumes from Calhoun to come on, and over what kind of time period?

A few things that occurred in the first quarter. One is there is about over half of the specialty papers is produced in Canada, so we had the currency impact on the results. We did have some issues, operating issues at Calhoun that we worked through in the quarter. We do expect better performance there going forward in the second quarter. So, there was a combination of both the Canadian dollar as well as some operating issues at Calhoun. And to underscore, Calhoun is of course a very large mill, about 700,000 tons of production. Almost half of it's specialty, so that does have a pretty meaningful impact on our bottom-line results.

It sounds as if you expect -- again, just focusing on the cost side -- those costs to go up as this conversion and the extended downtime you're planning on taking go into effect.

We expect that the downtime -- there will be an impact of about $5 million with respect to the downtime. And it's really a loss contribution in the second quarter. And that will in effect take newsprint and specialties out of the market as we convert, but we do expect the other operating issues would not be in the second-quarter results.

It sounds from what Arnie was saying before you expect that capacity to ramp up ready quickly once it's in place. I think Arnie said small tonnage in a big market.

Yes. It will ramp up very quickly over -- it will be a six-month period before we're fully in that market. But before that, we will be entering other markets as we move up to transition.

Thanks very much. Good luck, Arnie.

Rich Schneider.

Just wanted to delve into the whole cost situation, because I think that was clearly the problem this quarter. When you look at your hedge position on the Canadian dollar, how much of that rolling off may have impacted the cost situation?

There was some -- the Canadian dollar and actually some component of the Korean Wan increased our cost in the first quarter from the fourth by about 7.5, $8 million. There was an impact with respect to the hedges rolling off of -- and it's a combination of less hedges and less attractive rates. I believe it's approximately $3 million.

And beyond just the things that you went through between labor and the Canadian dollar and the maintenance expenses, was there anything else you would point out that pushed up your costs here in the first quarter versus what you were showing in the fourth quarter?

I'm just trying to make sure I don't miss anything. The labor and pensions were a very significant component, as well as currency. We also -- we also had the operational issue I discussed at Calhoun. If you add that up, that was pretty meaningful.

Looking to the second quarter, you have the $5 million of expenses related to the startup of Calhoun and the $10 million related to the pulp maintenance. But this quarter you had 4 million. So let's say it's an additional 11 million related to outages in the second quarter. With your cost reduction program, is there enough there to offset that incremental cost going up in the second quarter?

Not specifically only from the cost reduction program. It would be a combination of topline and the cost side.

Okay. So in other words, costs, because of those outages, will probably be up in the second quarter versus the first?

Yes. I'm also putting into that that the Canadian dollar is stronger today than it was on average for the first quarter.

So then, in the second half there's not much at all of outages, as you mentioned, and you'll see much more of the effect of the cost cutting. So, that's why your view is -- not trying to put words in your mouth -- but that's why your view is the second half of the year is going to be improving on the cost side.

I think, yes, we expect a material improvement from those four things, both the cost reduction program; we expect it at the Calhoun startup, which does impact our costs on -- as it starts up; thirdly, the Thunder Bay closure. That closure in the first -- of the pulp mill at Thunder Bay, the closure in the second quarter. As that gets behind us, we're going to lower the costs at Thunder Bay by -- just on the pulp side of the business by almost $50 per ton, and then we lead into, of course, stronger markets.

Just one last thing. Thanks for breaking out the specialty papers, but the one thing it does show is that on an EBIT line basis, you've been basically flat in terms of margins. I guess last year, the margins of that were half a percent. And that's where you're doing a lot of the converting. And I know the Canadian dollar has impacted you. But you know, if newsprint margins were higher then specialty papers for you last year, could you talk through that? Because if you're putting more tons in there, and we're doing it with -- you're getting lower margins in that area.

I think -- and I think you've asked before -- that both specialty papers -- could we break it out, and I think we're -- putting it out there does, of course -- does two things. It shows you just how profitable Catawba was, which is the good news. The other side of it is that we've had some issues in specialty papers, primarily with some of our Quebec miles, of course, that make SCA and SCB, and that's the base. The actual peripheral tons, or the new tons we've been adding out of Calhoun and other sites, have been better than newsprint on a margin basis at those sites, I would say, with the exception of the first quarter, where we did have some operating issues. I think it's less related to specialty papers at Calhoun than just normal operating issues you have at a site. But on a margin basis, this shift, we are picking up on the shift, and we think you'll see it in the bottom-line numbers as some of this gets behind us.

Chip Dillon.

Getting back to the use of proceeds, you mentioned that you had 48 million [bill] on the revolver outstanding, and debt you could buy. How much is available, or how big is the revolver? Could you review that and let us know when that has to be renegotiated?

Sure. The revolver is really a $435 million revolver, as well as 175 million AR securitization program, so that -- you add those together; we have 48 million drawn under both, under both -- it's really under the revolver, but it's really a gross amount, as well as $97 million of LC usage. The revolver comes due next year about this time, and we'll, of course, be talking to our bank group early. And we believe that we will do like we normally do, which is about a year early, put together a new deal.

So basically you have 465 sort of completely untapped as of the end of March, if you count the 48 you said you drew, plus the 97 that's tied to the LCs?

Yes. And we do on the financial and operating statistics provide a sheet on the revolver (indiscernible) calculation, etcetera, if anybody has interest in that.

In terms of the maturities, I believe you really have nothing to do until '08. How does that work in '08 and '09? How much do you have coming due?

'09 is the first date of a large maturity -- $250 million coming due in '09. Other than that, we have just sinking funds, about $20 million a year. So, there's no major maturity facing us until 2009.

My guess is, of course maybe there's a reason you wouldn't do this because of market prices of buying in your debt. But would you see the remaining 150, let's say, you're getting in this quarter, and maybe the other -- we hope 100 million you get from selling this other acreage in the south. Would you see using that money primarily to attack that '09 maturity, or would there be a reason to leapfrog that?

We'll focus on improving liquidity every way we can. And there may be some financial benefit elsewhere, but we won't lose sight of the fact that liquidity is very important.

You mentioned that your costs -- and by the way, thanks for -- it's really great to get this data -- your cost per ton would be down $50 in pulp, at least at -- I'm sorry -- the Thunder Bay mill, when the A line goes down. But if you look at, for example, the specialty papers, where they were up $30 a ton, or coated, which I know for reasons were up $45 or so a ton -- $35 a ton, where do you think your costs will be in the third quarter if we look at these by product line? Based on what you can see, do you think we'll be actually below fourth-quarter levels in addition -- I would imagine in pulp we will -- but in the other grades as well, or similar to fourth-quarter levels, in the third and fourth quarter of this year?

It's a tough question to answer, because a lot of it depends on the Canadian dollar, where that will be. I could tell -- and we also have a burden of the pension expense across our company going up. I can tell you that looking into the third quarter, we expect improvement -- significant improvement over the first quarter in all -- all the grades. (multiple speakers) get back to fourth quarter we'll -- just like to see that happen first. I don't know.

Great. And good luck, Arnie.

Operator, I think that's about all of our time. I'd like to thank each of you for your interest in Bowater.

Thank you very much. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect.