Resolute Forest Products Inc (RFP) 2006 Q3 法說會逐字稿

Welcome to the Bowater Third Quarter 2006 Earnings Call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded. I would now like to turn the conference over to our host Mr. Duane Owens sir, you may begin.

Thank you, Denise and good morning everyone. With me on the third quarter call today are Dave Paterson, our President and Chief Executive Officer, Bill Harvey our Chief Financial Officer and Ron Lundsey our General Counsel.

Before we begin I'll 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 statements language that is contained in our press release and on the website. If you have not 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 of that statement actual results will differ and any such statements are not guaranteed of future performance.

Additional financial and statistical information as well as reconciliation of non-GAAP financial measures used on the call can be found on our website. Also Note 7 to the financials provide a reconciliation between the reported loss and the loss net of special items. The call is available to all shareholders via live webcast and reply on our website at Bowater.com. The call is also open to press.

Please note while any member of press who attends our call is free to quote the company speakers, but other participants on the call should not be quoted without their permission. I will now turn the call over to Dave Paterson.

Thank you, Duane and good morning. Thank you for joining us today. On the call today, I will talk about third quarter results then discussion current market conditions and update you on the initiatives we are taking to improve our company.

For the third quarter, we reported a loss of 16.1 million, or $0.28 per share. Excluding special items, the loss for the quarter was 12.3 million or $0.21 per share. Special items net of tax included a $33 million gain on the sale of Timberlands in the U.S. and Canada. A 1.5 million charge due to translating our foreign denominated balance sheet items into U.S. currency.

A 5.7 million tax benefit related to the valuation allowance recorded during the quarter due to operating losses in Canada and a reversal of tax reserves. A 4.5 million severance charge, and a $36.7 million impairment charge, consisting of two items. The indefinite idling of the New Way facility in Benton Harbor, Michigan and a right down of a machine at Thunder Bay.

Adjusting for special items are operating income approved by 25 million for the second quarter. This improvement was a result of less maintenance spending and approved manufacturing performance across the board. However, the improvement was less than our expected $30 million, due to the significant deterioration in lumber pricing.

Turning now to our markets, year-to-year comparison of North American newsprint consumption remain negative. Consumption was down 6.3% year-to-date as of September. However, operating rates at 94% to 95% indicate the supply and demand are balanced. September inventories at the customer level are down about 4% from August and down almost 8% from September last year.

On a global basis, newsprint demand is growing. It is up 1.4% through August. Most of our international customers are having a good year and they expect further improvements in 2007 with rising circulation, advertising, and new product developments. Our newsprint pricing increased slightly in the third quarter. We announced in August domestic $20 price increase as meeting heavy resistance from our customers.

During the quarter our inventories increased slightly, but are down nearly 25% from this time last year. The small increase from last quarter is do to the timing of export shipments. In order to match our production to customer demand, in September we curtailed paper production at our Thunder Bay Ontario facility. This site is our highest [cogs] newsprint facility. Last week, we restarted one of the paper machines because our order book dictated the need for it. This machine provides a wide range of products from newsprint to unfitted mechanical papers. At this point we have not made a decision regarding restart of the second 140,000 ton per year machine.

Together this machine and the machine that was converted to Calhoun from newsprint to specialties represents about 290,000 tons of annual newsprint capacity. Further mechanical is demonstrating good demand. Magazine advertising revenues rose 6.6% in September and ad pages were up 2.4% according to publishers information bureau. Over all North American demand rose sharply in September up 7.2%, operating rates in North America are at 98%.

However, North American inventory remain above historical averages and in the third quarter we experienced some price erosion. Our average price was down $12 per ton from the second quarter. North American Book and [inaudible] mechanical shipments are up 11% and 16% September year-to-date respectively. However, prices were mechanical grades have remained low.

Our Calhoun machine conversion was completed at the end of the second quarter, the machine began production in July and is exceeding our expectation. We continue to build our order book in this offering. This product allows us to make a advantage of our multiple [fibre] strings we have in our Calhoun, Tennessee facility. Shifting to market pulp. World pulp shipments are up nearly 5% year-to-date, the shipments to capacity ratio improved to 98% in September. Producer inventories at the end of September at 29 days of supply are low.

Overall the market is strong especially in soft wood grades. Our average pricing for all grades was up $37 per ton in the third quarter. We are informed that North American European customers with a $20 per ton price increase of hard wood grades effective November 1. Lumber markets have been very weak due to reduced lumber demand driven mostly by the hauling of residential housing construction.

Housing starts sell year-over-year by almost 18% in September to on annual level of about 1.8 million as well in October it appears there was a significant impetus especially in the west to ship lumber in advance of the implementation of soft wood lumber agreement. The agreement was [over bided] on October 12. The entire Canadian industry is operating under Option A until year end is required by the implementation terms. At current pricing levels Option A resulted in 15% export tax on shipments from Canada to the U.S.

In January, we expect the major jurisdictions in which we operate in Quebec and Ontario to shift to Option B, which at current prices would result in export tax of 5% as long as the Provence operate within the quota system. To date we have deposited 113 million in duties with the U.S. customs. Under the terms of the agreement, we expect to receive a refund of approximately $100 million. Current lumber prices combined with the implementation of soft wood lumber agreement have resulted in significant lumber curtailments in Canada. Bowater is operating with shorten scheduled. Our limber mills do provide wood chips to our paper mills. We continue to monitor demand for our lumber products and make appropriate decisions as to our operations.

Moving to strategy. We continue to make substantial progress on our asset sales program. During the quarter we sold approximate, we sold 23,000 acres for proceeds of 58 million or approximately $2500 per acre. Total sales to date under our program are almost $340 million. We still own approximately 145,000 acres and have another 70,000 acres of leased land in the southeast United States. We anticipate selling all of this land. We expect to receive an additional 200 million from this program by the end of 2007.

I am pleased to report that at the end of the quarter we have put in place all of the necessary actions required to achieve the annual $80 million cost reduction program that was announced last fall.

Since joining Bowater in May, I have found significant opportunities in addition to this program to improvement performance by emphasizing manufacturer excellence. In the third quarter we realigned the organizational structure of the Company, eliminated the divisional structure, in addition we have recruited additional heat and manufacturing talent was proven industry track records. As I mentioned to you last quarter I believe there is potential to achieve additional cost savings to $10 per ton across our 5.5 million ton platform by implementing best practice and manufacturing techniques. It is now up to us to execute and capture those benefits.

Our short term priority is to improve our balance sheet by reducing debt. We have reduced debt net of cash by 187 million since the end of last year. This reduction has been entirely through asset sales. My emphases is to improve our cash from operations to further draw debt reduction. With intent to focus on cost control and manufacturing excellence, Bowater has the potential to delever very quickly.

During the quarter we made the decision to [inaudible] a new facility in Benton Harbor Michigan. We were previously operating to New Way facility about 50% of capacity. This closure will allow us to operate one site more efficiently and reduce cost while continuing to serve our New Way customers effectively. The impairment charge during the quarter represents the right end of the Benton Harbor assets as well as severance and other related cost for the closure.

Also, in the quarter we made a decision to write down the value of paper machine No. 3 at Thunder Bay. This 140,000 ton per year machine has been idle since 2003. With the continue decline in consumption in newsprint in North America we now have no plans to restart this machine. In the quarter we booked a charge of 19 million associated with this machine in the quarter. In addition, our organization of realignment from division base to product line base reporting structure has cost us to perform an interim good will impairment evaluation. We are in the process of continuing this evaluation based on previous division base reporting structure. W expect to have material non-cash charge associated with this evaluation. The charge my impact our final file of third quarter results. In the fourth quarter we will report part of annual good will impairment exercise on our new reporting structure. Our third quarter capital spending totaled $47 million. I expect capital spending to be below depreciation for the forceable future. In terms of the fourth quarter outlook, I expect continued progress in manufacturing improvements. However, I would note the fourth quarter typically is a high energy and [fiber] cost quarter due to the impact of inclement weather particularly at our northern facility.

From an operating income perspective I believe in improving in manufacturing performance across the company will off set any price decline. Operationally we are going to remain focused on becoming better at the basic combined with the stuff we have taken to realign our leadership and organizational structure, to deliver on our strategies, we will head into 2007 in a better position to [inaudible] performance. Operator I would now like to open it up to questions.

[OPERATOR INSTRUCTIONS] One moment for our first question. Our first question comes from Rich Skidmore.

Hi, good morning. Just a quick question if you might on newsprint capacity as you look at the supply demand outlook in newsprint going forward, what as you look at it, are you thinking about any rationalization at Bowater, any additional rationalize at Bowater on the newsprint side.

Evaluate it based on market conditions and we'll make those decisions as we go through the quarter.

Okay. Second question would be in terms of just the use-- as you get the cash flow in and the timing of the Timberland sales, the Timberland sales will occur over the next 15 months through the end of '07. Is that when you expect $200 million to come in at Bowater?

Let me have Bill Harvey answer that question.

Hi, Rick. We expect it will be significantly front-end loaded over the next two quarters with some tail of that occurring on n the second half of next year.

Thank you.

Thank you.

Our next question comes from Mark Weintraub.

Thank you. First, on the-- the lumber business, taking a fair bit of downtime that you are going to be in the fourth quarter, will that lead to a significant reduction in the losses? Or will that be-- or-- or will you have to continue to have fairly high costs in running the operation, even though you're not producing as much lumber?

We expect our performance to improve in the fourth quarter both from, as you said, asset run rate rationalization, but also we have seen a slight improvement in lumber pricing, just a little bit of a balance effect going on there so we don't see it deteriorating in any further.

I guess I'm little puzzled, you talked about good demand in the [inaudible] ground wood market and yet obviously performance was not good and pricing was not good. Can you help explain what is going on in that business?

Yes, well we're not satisfied with the performance in that business, like you aren't. Couple of issues there. I think one mill inventories are substantially higher. This-- this quarter than they were last year, part of that is some capacity restart in North America during the year. And we have also seen a pick up in imports in-- call it the third quarter while year to date imports are actually down, we have certainly seen a pick up in imports in the third quarter and I think the announced closures in Europe in this sector really haven't come to into play yet. So I would see that as potential a positive. Imports drop off, let's say first and second quarter next year and I think demand is fine. How long will it take this inventory to work its way out of the system.

Okay. So when that happen-- do you see this as a business that's maybe on the brink of a powerful recovery, you just have to work through the inventory? Or are there just going to be structural issues related to imports creating a overhang which kind of prevents this business from having a powerful upturn? How do you view it?

I like the terminology of powerful upturn. I would say demand is good. We had-- we had a greet September in terms of shipments in the sector, up over 7%. I think the fundamentals of the-- the mechanical sector are good. So, yes, I think this is a business we-- we like, we enjoy. I think we perform well in it. I am disappointed, as you are in the third quarter, and we'll work in improving, but fundamentally I feel good about this sector.

Two last quick questions. One, pension accounting, the change this year, do you have a sense to what the impact on the balance sheet will be from that. And second, if you could just explain a little bit how we should think about the tax rate on a go-forward basis both from a book and a cash accounting basis.

Bill?

Sure. On-- on the pension accounting, we have not disclosed a number yet. I can point to the fact in the 10-K we talked about at that point a funded deficit of 570 million pre-tax. Interest rates have moved up relative to September 30 of last year, but that's all I can really point to at this point. And the second question pertained to-- Mark, can you remind me?

Tax rate.

Tax rate, you should think about a statutory basis of 35%. We will not be paying taxes in Canada for the foreseeable future, and in the U.S. on a cash basis we will be an AMT payer at 20%.

When you are losing money in Canada, how does that work?

When we're looking money in Canada, we have a valuation allowance set up relative to the tax shield created by the losses and you see that in our results, and it's broken out in the table.

So--

To make money in Canada, with that we'll reverse, and so for instance in the situation where the [inaudible] a payment would flow right through that and would be almost entirely both-- a pre-tax and after tax number, the $100 million from a book point of view.

Okay. Thank you.

Thank you.

Our next question comes from Don Roberts.

Yes, couple of questions. David, again, the bright side of the coated groundwood demand. I'll just wondering what we're seeing here as opposed to necessarily robust fundamentals perhaps it's a lot of integration substitution in response to the prelow prices.

There's some of that for sure. I think there's also great shifting amongst the sectors. When I look at it, though, I think when you look at where this product is going in terms of catalogs and some of the ad page things that goes into it, those are looking pretty good. I mean pieces on catalogs are still up about 3.5%. The ad pages are about up 2.5%, so these fundamentals that are pretty sound. I think that, I think product substitution is an issue, and I guess the way I would answer that is saying if I have got a very high quality coated mechanical asset in [tatoba] and a very low cost structure, so I feel good I can compete against all of the grades whether they are produced in North America or the continents.

Second question just on [inaudible] again you reiterated the Thunder Bay the high-cost facility, I'm just wondering, elsewhere in the system, we haven't heard too much about-- [inaudible] yet they are still a, facing some higher electricity price included in the Canadian dollar. Any observations on the outlook for that.

Couple. One I would complement the management team at [Delmonte] think given the things you talked about energy cost as well as the exchange rate they have done a very good job on cost containment there. That mill is 100% export mill. So it benefits from a growing export market. And the management team along with employees that made that a competitive mill and one that operates well and we're happy with it. So it's a function of what the team has done up there. Our employees as long focused on the expert market not independent on the North American market.

Given your exposed-- could you give us your observations on where that is at now, and I guess whether this is sort of long-term structurally challenged because of the Chinese, or I guess what is your view on it.

Well, I think because of their proximity with China, they will have to compete head to head particularly in that portion of about a third of our production to Korea in exported. We don't think we have a huge structural disadvantage. Vis-a-vis Korea competing with China, we have a modern machine there. We're always based. We're pleased with the performance of the mill, though, we do anticipate that particularly on the export side whether it's coming out of Mokpo or Korea or coming out of one of our other mills in North America, we expect price competition from the Chinese to be pretty intense particularly next year as they find places for those tons. But I still believe personally that over time those tons will get pulled back into China and things will stabilize, but '07 will be that fighting year in terms of Chinese finding homes for that paper.

And lastly just to clarify, then-- our expectation is that you are expecting Q4 net to be better than our Q3 numbers?

Overall?

Yes.

I think it's going, Bill do you want to comment?

The cost side will obviously offset pricing deterioration. So we feel we'll be at or about--

The wild card will be lumber, quite frankly. I think owe all you have a lot of positives happened in our pulp business. We have got-- a lot of people have written about all of the pressures in newsprint, but we think we can manage those through our strategy through the fourth quarter. I think coated paper was-- is fine and then it comes down to lumber and exchange rate, so we're very sensitive to exchange rate changes in the quarter. We're not covered on a currency perspective, so that will-- that can move the needle one or $0.02 on the Canadian exchange rate, it can move our needle pretty quick.

Okay. Thank you.

Yes.

Our next question comes from Mark Wilde.

Good morning. It's actually Chris Johns speaking for Mark.

Hey, Chris. How are you doing?

Good. First of all on the it seemed to realize a very nice price on the land sale you announced this quarter. Can you talk a little bit about where that land was.

Sure it was primarily in Tennessee and South Carolina.

Okay. And then on the remaining land, to what extent do you think we can look forward to evaluations similar to this one? Or was this sort of a one-off event.

This was higher than what we have been tracking in the past. Going forward I think you can revert to what we have been doing prior to this quarter. We had very good HDU type of land in the third quarter.

Okay. In your press release you talked about how there might be further tangible opportunities to reduce costs. I don't know if you care to quantify the extent of the opportunity there.

Well, we have quantified in the sense of, I said an internal target, which I have been talking about of getting an initial $10 per ton. I think as our new management team gets in place on the manufacturing side, and they are gaining traction, and gaining visibility across the whole Bowater manufacturing platform, we'll give you periodic updates or give the market periodic updates, but I continue to be encouraged by the size of opportunities for finding, and I do believe we now have a structure and a management team in place to go capture those, but at this point I'm not saying more than $10 a ton.

Okay. And then on your lumber operations, it was about $13 million EBITDA negative in 3Q, and I know you said that your planning on some slow backs in 4Q and that some of the chips go into your mills. But I'm wondering if there might be further opportunities to improve results for the Company with lumber at these price levels by, closing the operations all together and finding chips from alternative sources. Is there such an opportunity?

Well, we-- we evaluate that as part of the decision to run versus buy decision that we make basically every week at these locations, and what-- what is the cost or the cash cost of producing the chips versus the cash cost of procuring the chips, and I would say particularly in the eastern parts of Canada, the chip-- purchase chips are expensive-- chips you don't control you have to go buy them are expense i partially because of all of the lumber shut downs also the harvest in eastern Canada is being cut, so the availability and price of purchase chips still says you are better off making your own chips even at today's numbers, but you better not make one more ton of chips than you need to consume in your paper mills.

Finally on your on your Donnacona mill can you talk about its competitive position right now?

Well, it's improved. I mean we entered into a revised labor agreement at Donnacona, which will significantly reduce our ongoing cost at that facility. It is-- there's more work that we need need be done there. The employees have helped and from an operation's point of view, we need to continue to drive costs out. It is not a low-cost producer in that sector.

Okay. Thanks for your help.

You're welcome.

Our next question comes from Chip Dillon.

Yes, good morning.

Good morning, Chip.

First question as a way of clarifying you mentioned the 200 million in addition proceeds from asset sales, is that all expected from the 170,000 southeastern acres you still own or were there other asset involved with that?

There's 145,000 acres owned outright in the U.S. south as well as 70,000 acres of lease land it is almost entirely that with some small component comes out of some Canadian land.

So 145 owned outright. And the leased land, how-- how does that compare when you sell it-- or sell the leases versus land you own? I mean it's probably a lower number, but how much-- percentage how much lower? .

Oh, 50% lower. They are long-term leases and that's the reason you can sell wit value, but they are lower.

Okay. What will you have left in Canada after you-- let's say you sell this 170,000 -- I'm sorry 145 plus 70, how much would you have left in Canada that you own?

600,000 acres.

And this is mostly in the Maria Times.

Yes, in Nova Scotia.

Would that be comparable to what we saw last year near pick too on that transaction or is this not as attractive.

It's comparable but not as attractive as that land.

Okay. That's helpful. When we look at the specialty ground wood segment, which did very well, you mentioned the operating cost did fall $60 a ton. Now obviously that's because you weren't down, but you also were starting up, and there are often startup costs involved. How should we think about the costs or the profitability of this segment in the fourth versus the third, especially in the cost?

The cost will be-- likely be flat to down. We did start up, you are quite right on the Calhoun conversion. We did-- and that will continue to help us in the fourth quarter. We do have some mills in Canada where there's higher-- as we mentioned-- as Dave mentioned there's higher cost in the fourth quarter. But the cost at Calhoun are helping.

But just in general, I think the goal of reducing our long-term cost position at the mill level is gaining momentum, so-- you know, I think a lot of the improvement you saw at Calhoun in particular was from the restart and lack of maintenance, but the underlying costs are also coming down.

That's right.

And I guess last question is if you theoretically, and correct the way I ask this , because maybe it's just impossible but I think you know what I'm getting at. If you decided not to run your saw mills for a quarter. Obviously I would think you would get no cash in. How much cash would you have to pay out?

Boy it's a fixed cash cost-- have you looked at that?

No. We tend to look at it on each saw mill specifically, so I have never really looked at it Chip as--

What I'm getting at is do you have to lose 13 million of EBITDA in the quarter or is that sort of a one time. I imagine if you didn't run you probably wouldn't lose that much.

I think that's a fair statement.

That's correct. But the other piece we would have to look at is what paper is fill Mills we would have to shut down.

Right. But I would imagine given what we see going on out there with the duties going away and verbally I guess Option B I might have missed this, starting in January is more favorable because the tax goes down, correct?

That's correct. But there's also a quota system associated in there. So the quota, you know, limits your ability to produce in a sense.

Right.

Because that's what the government quota system does to you.

Is that-- is your allocation of that quota that you can do, is that-- is that based on a mill by mill basis or on-- or what you own an entire province. In other words the they look at each mill or do they have an amount you can play with and you decide how to produce that.

On a province by province basis by company.

Got it. Great. Thank you very much.

Thank you.

Our next question comes from [Eding Sabot]

Thanks very much, gentleman, and I was hoping you could talk about the decision to restart the Thunder Bay machine a little bit, particularly in light of the overall weak shipments. Should we just anticipate that you'll sort of be using that machine to help balance our own inventory position.

Thunder Bay 5 restart was reaction to customer demand. We have customers throughout and we continue to be in the newsprint business, and we had adjusted or inventories to the point, and we're at a position from an order book point of view we needed to restart the machine.

Would you characterize that as mostly a seasonally strengthening in demand or are you seeing any n your own order back in slacking--

We are part of the industry and the head wins are impacting us. So-- no I think it was-- part of-- well, inventory adjustment on our part. I think also our customers went through an inventory adjustment, as I think have been talked about 4 or 5% reduction in customer inventories in the month. So inventory has been taken out of the system, people are back order from our perspective our customers are ordering consumption again. That machine is aligned with certain key customers particularly in the midwestern markets, and we needed to meet their needs. We needed to start that back up.

Thanks. And thinking a little bit-- I apologize I know you guys have been over what you are seeing in the fourth quarter, but I want to make sure I'm not parching it too closely. This there are seasonal cost increases that are going to be incurred-- do you believe-- do you believe you are offset those via your cost improvement programs?

We believe that we can-- we can offset those. I think to be fair, also, I think the energy component as-- right now as we sit here is not as severe as it was this time last year and Bill may want to talk about this a little bit. We have been able to hedge some of our gas costs in particular going into the winter months, which is good and at favorable price points, and I think from an operating strategy, we-- we are focused on running those assets that generate the lowest cost position for us. So-- Bill?

Yes, we particularly hedge almost 50% through the winter, and we have been putting in hedges that are up 20% now at pretty favorable rates through the winter strips.

Great. Finally I just wanted to offer-- I mean a note of congratulations on that EBITDA per ton in the newsprint business. So it's not to see those profits going thereupon.

Well that team has done-- is working hard and continues to work hard, and we are proud of our newsprint business it is-- as you said it has tough head winds but that management team and the employees in that business did a great job in the third quarter.

Good luck to all of you going forward.

Thank you.

Thanks, .

Our next question comes from Rich Schneider.

Good morning.

Hey, Rich.

Wanted to talk about that positive number you were able to post on newsprint. Clearly, you benefited from reduced maintenance downtime in the quarter. Could you give us an idea of what, you were able to come out or improve from a production cost standpoint just based upon your initiatives, X-ing out the maintenance situation.

I think on the manufacturing side, the-- the mills ran more consistently, and I think that-- the up time was significantly improved. Essentially, we have got the team's focused on the things that will drive their costs out. Really for us it's staying on production. Staying on quality. Eliminating breaks-- eliminating unscheduled mechanical failures, machine center reliabilities. I mean, we have a number of initiatives across all mills that are trying to drive unnecessary costs out mills that are trying to drive unnecessary costs out of the manufacturing process.

I am, again, greatly encouraged by the initial progress we have made. I think there's tremendous opportunity there. I relate it to my industry experience in what I know can be done given the right focus and resource application and Bowater has started that process and it will be a multi-year process, but it is-- it is not something in my experience that we're asking for hurricane Leanne efforts out of our manufacturing organization, and we'll get there so I think the biggest improvement near term I have seen has really come in the Calhoun operations.

I think they came out of their rebuild and-- certain large capital items in a good fashion. I'm also encouraged by Tucson, and-- even Thunder Bay given it's tough situation there has done a nice job coming back up, bringing the machine, bringing the machine up at a lower cost position than when he shut it down. Across the system I'm-- I'm encouraged.

In terms of your target for the year, which was $80 million. I'm not sure-- of cost cutting, did you say you have achieved that already or where are you already on that.

On a run rate, yes, we have achieved. It was a few million more. In the third quarter we met our run rate target. I would also point out in the third quarter, Rich, we-- that was the quarter when-- where we basely are urge hedged and compared to the-- to the second quarter, for instance, we had $6 million less of cost benefit from the hedging program. So on the newsprint side alone that was pretty meaningful for them to other come.

In the fourth quarter you'll be flat with the third quarter on the hedging situation.

That is correct.

There's no hedge. And-- and what about the $20 million savings that you were going to get from the closure of the line at Thunder Bay? Is that still ahead for you?

Yes, that's coming in. It's really-- what has happened is that loan closed. We're double Manning and through the year the people are leaving-- the appropriate training goes on. So there will be a little bit more in the fourth quarter as that's implemented fully.

And then everything that you-- you are talking about in terms of the $10 cost savings across the board, that's still to come?

Yes, that's on top of everything. I mean I think as I mentioned in the earlier call, I think we'll continue to update you as we go through the year. I mean, we have seen, clearly, some locations we have seen that already, and we'll go to the next level, but-- yes. $10 is still ahead of us in terms of system wide.

Just curious about your comment on the fourth quarter saying that, you expect your cost reduction program and your cost management to offset any deterioration in pricing that you could have. I'm not sure where that the deter your pricing would come in the fourth quarter. I mean you have got pulp that should be up, and I'm not sure if coated ground wood is stable, but specialty doesn't seem to have a lot of pressure. Are you talking about newsprint pressure? Or exactly what are you talking about?

Well, certainly the-- the stalled out price increase in newsprint and then I guess generally what industry analysts are writing about newsprint is putting a lot of negative accommodation on the stall-out price increase and the continued rapid decline in consumption is has put the specter of a negative-- into the marketplace on newsprint. We don't think that necessarily needs to happen in terms of our ability to sell products, but that's certainly the sentiment in the analyst call community as newsprint is coming pressure.

Lastly from an overall standpoint what is your strategy on newsprint?

Well, I think we try to be consistent, is that-- I believe that you have to balance supply and demand from a Bowater perspective within our order book. Our customers are facing challenges. Ultimately it comes down to customer demand. So as they-- they reduce their consumption of newsprint, we have to reduce our tons we're selling to them. And we have manage that as Bowater. I think the good news on newsprint is I do think our customers have taken a lot of excess inventory out of their system, partially-- they needed to do that-- partially I think it was a tactic to resist the announced price increase, and that seemed to have worked, but at this point, at least our customers-- having to order, and our order book is strong, certainly very strong for October and heading into November we feel good about it, and then we'll see what happens in December. December is normally seasonally slow, but we'll just have to see.

Thanks a lot.

Thank you, Rich.

Operator, we have time for one additional question.

Finally, our last question comes from George Staphos.

Hi, guys, good morning. I'll try to ask it in sequence since it's late in the call. First of all in terms of the cost savings you are looking to get, Dave--

Yes.

Obviously some newsprint and the effects-- perhaps reduced operating leverage, do you think you can still get at the $10 a ton-- or excuse me-- $10 a ton and the 80 million, or do you think there will be natural fade on that? Also quickly, why you think imports will peak out, if I heard your right, in second quarter next year? And then last, Bill, just help us think about interest expense. I would expect a little more of a drop off in interest expense in the third quarter. Given the cash were the moving parts in there? Thanks, guys. Thanks, guys.

The way I think about the cost question is no, I don't see any fade in the sense that specific to newsprint, I think it was a combination question, but specific to newsprint, the key, of course is loading our-- our-- our order book of newsprint on the lowest cost machines we have, and not-- and-- and not saying just because they are low cost, that you in a stand still position on those machines, but the size of the opportunity in some cases is as longed large on our so-called low cost machines as the higher cost machines. So you do both simultaneously. You load your best-- and you continue to improve those machines. The second question, I think related to imports. I think my comment was more specific to mechanical grades-- where we have seen some announce NLTs in the European market of reductions in capacity. I think my comment was more specific to mechanical grades-- where we have seen some announcements in the European market of reductions in capacity. I think some of those machines are in the first couple of quarters, next year-- or they are faced in. I think they were stepped in closures. So I would expected mechanical imports to drop off and interest rate question?

Yes, George. I'll do it two ways. One relative to last year, if you do a comparison there, we have one floating note that has a variable interest rate. We are repaying that note-- or we are repurchased 20 million of that, approximately in the third quarter. We did have some small premium associated with that in interest expense as well our capitalized interest number was up-- was lightly different. So you are right it will be coming down, again, in the third quarter there was simply some noise related to capitalized interest. Secondly, the flow rate interest note going up, and thirdly, actually we had a bank facility we put in the second quarter and there were some financing fees that have backed this slightly.

Thanks. But that should drop off 4Q is what you are saying.

Yes.

Thank good luck.

Thank you everyone for joining our call today.

Ladies and gentlemen, this conference will be available for replay after 1:30 p.m. today through November 2 at 11:59. You may access the AT&T teleconference replay system at anytime by dialing 1-800-475-6701, and entering the access code 845070. International participants dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844 access code 845070. This does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.