Resolute Forest Products Inc (RFP) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, welcome to the Abitibi-Consolidated first quarter 2007 results conference call. I would now like to turn the meeting over to Mr. Francesco Alessi, Vice President Investor Relations and Taxation, please go ahead.

Hello everyone. I'm here with John Weaver and Pierre Rougeau, our CEO and CFO respectively, as well as Jocelyn Pepin, VP and Corporate Controller. Also joining us today is Jacques Vachon, our Senior Vice President Corporate Affairs and Secretary. As in the past, our prepared remarks will include Pierre going over the financial highlights of the quarter and on the year where pertinent. John will comment on the first quarter results and the markets in general. And then give a brief update on our initiatives announced to reduce debt and provide greater liquidity and profitability. We will then go right to questions. Just before turning it over to Pierre, I need to remind you that any forward-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 from those expressed or implied. Pierre.

Thank you, Frank. And good afternoon, everyone. This morning we reported the first quarter loss of $17 million or $0.16 per share compared to a loss of $33 million or $0.08 a share last year. The first quarter results before specific items which is not the recognized GAAP measure would have been a loss of 95 million or $0.22 a share compared with the loss of $36 million or $0.08 a share in Q1 of 2006.

Table 3 of our MD&A and slide 5 of our presentation break down the specific items net of income taxes. Operating loss before specific items for the quarter was $39 million compared to an operating profit of $17 million in Q4 of 2006 and $52 million in the first quarter of last year. EBITDA in the quarter was $17 million compared to $126 in Q4 of 2006 and $162 million in Q1 of last year. The decrease in operating profit and in EBITDA was mainly due to lower prices in newsprint and with products. Lower sales volume and higher cost of products sold in all three segments. The newsprint segment reported EBITDA of $64 million compared to $105 million in Q4 of 2006 and $106 million in the first quarter of last year. The decrease in EBITDA in the current quarter versus the same quarter last year was due to lower sales volume and prices as well as higher production costs.

On a per ton basis, cost of products sold was $24 higher than the same quarter last year, primarily from the rising price of recycled fiber and the impact of the weaker Canadian dollar on our U.S. mill cost. The newsprint shipments in the quarter were 779,000 tons against 880,000 tons in the same quarter of 2006. The lower volume in the quarter is in measured part due to the lower sales in North America and the fact that one machine at our Belgo mill was still producing newsprint in Q1 of last year. Inventories at the end of the current quarter were approximately 60,000 tons higher than both the end of the same quarter last year and the end of December 2006. The increase in inventory is mainly due to inventory buildup required for planned increases in international sales. The commercial printing paper segment reported EBITDA of $30 million, compared to $32 million recorded in both Q4 of 2006 and in the same quarter of last year.

During the quarter, the Company shipped 401,000 tons of commercial paper compared to 419,000 tons in the same quarter last year. The 37,000 ton of down time taken in the quarter caused the segment's cost of sale to be $22 per ton higher than in the same quarter last year while higher input cost of furnish was offset by better productivity. The wood product segment reported a negative EBITDA of $24 million for the quarter compared to a negative EBITDA of $11 million in Q4 and a positive EBITDA of $24 million in the first quarter of last year. This variance stems mainly from lower U.S. average selling prices, which were 19% lower than the same quarter last year. Sales volume in the quarter was 399 board feet, down 100 million board feet from same quarter last year.

In response to the softening wood market conditions, we continue to take down time across the system in Q1. Lower production relating to down time combined with a $7 million devaluation of inventories to realizable value during the quarter resulted in the cost per thousand board feet that was $17 higher than the same quarter last year. Capital expenditures for the quarter were $26 million compared to $37 million last year.

During the quarter, we announced an investment in Biomass Energy at our Fort Francis mill. This investment will be realized over the next tow years within our yearly CapEx envelope. On April 2, we announced the Ontario Hydro asset transaction by creating a partnership with Caisse de depot et placement du Quebec. This transaction which yielded growth proceeds in excess of $290 million will be accounted for in the second quarter. Also, during the first quarter, we started selling the Augusta timber land and expect to receive net proceeds in excess of US $100 million by the end of the third quarter.

Finally, as you probably noticed, our pension deficit was significantly reduced during 2006 by an amount of about $217 million. The pension fund benefited from a fourth consecutive year of excellent returns and our additional funding contributions. On this note, I'll pass it over to John.

Thanks, Pierre. Good afternoon, everyone. We continue to see lower newsprint consumption in North America as publishers respond to a rapidly evolving market, including a decline in advertising. During the quarter, Abitibi shipped 100,000 tons less newsprint than in the same quarter last year. Lower shipments are explained by the 2006 conversion of a Belgo machine to CPP and the softer market. Prices dropped faster than expected as producers undercut the six month pricing deals and these deals fell apart in April.

In the quarter, newsprint prices in the U.S. were $30 lower than in the previous quarter average. In spite of the lower North American consumption, industry operating rates continue to be in the mid 90s. And according to PPPC, producers continue to look to export markets. In contrast to the North America newsprint prices in many regions of the world have increased when compared to the same period of last year. The export markets are also more attractive due to favorable currency exchanges when compared to the relatively weak U.S. dollar. Prices for commercial printing papers remained stable when compared to the previous quarter and were up 3% when compared to the same period last year. While cost of products sold continues to increase, we were able to offset some of this increase with better productivity.

During the quarter, we announced the indefinite idling of the Fort William mill. This mill was identified as a high-cost mill when we did our in-depth review. And despite improvements and many other options explored, we have had to idle the mill given our order book and the increased productivity of our other mills.

We also took some down time at two of our mills, basically removing some 37,000 tons of production in the first quarter. For the balance of 2007, we expect the continued demand growth in our CPP segment driven by higher gloss papers and to a lesser extent by super high brights and lightweight grades. The slowdown in U.S. housing starts continues to be felt in our wood products segment and the deteriorating market required that we idle 5 of our saw mills in Q4 of 2006. As we speak two saw mills are still down. We believe the wood products is a good business long-term, but at this point, we don't see a significant turn around in the U.S. housing market before year-end. As a company, we continue to focus on ways to reduce production costs and make Abitibi more competitive.

During the quarter, we announced an $84 million investment of which our contribution is expected to be $62 million, and a biomass board located at the Fort Francis facility in Ontario. The rest of the financing is from the Forest prosperity fund and the government of Ontario program to generate additional energy from renewable fuel in Ontario. The equipment will generate steam and 45 megawatts of electricity by burning mill generated wood waste and primary sludge. It is scheduled to be in operation by the fall of 2008. And is expected to generate some $26 million in annual savings and reduce greenhouse emissions by the mill by 90%.

On April 2, as Pierre noted, we finalized our Ontario asset section by creating a partnership with Caisse de Depot. Caisse acquired 25% interest in the partnership and also provided $250 million 10 year unsecured loan with no recourse to Abitibi. In addition to generating $297 million in gross proceeds for Abitibi, the transaction provides us with a growth vehicle in the energy sector. Also during the first quarter, we completed a transfer of 55,000 acres of timber land from Augusta newsprint company. The division of these woodlands into salable parcels and the completion of the agents have been engaged to promote their sale. We expect the sale of the majority of these timber lands by the end of the third quarter. And this should generate proceeds in excess of $100 million U.S.

We continue to make progress on our merger with Bowater. In the U.S., a second request has been issued by the DOJ and we are moving forward to comply with this request as quickly as possible. In Canada, the waiting period expired on April 2. With the Canadian brewers pursuing a review of the transaction. We remain confident that our transaction will be approved by the various regulatory authorities.

While we continue to operate as separate and independent companies, teams were created with representatives from both companies to identify specific areas that will provide the U.S. 250 million of synergies expected from this merger. We have also put together integration teams with representatives of both companies that are currently mapping out the most effective structures, legal and operational that will be required to have the Company in day one readiness following the merger. While limited by securities law in what we can say about the merger, I will note that there are a great deal of enthusiasm and participation on both sides as we move forward. On this note, I think we should go straight to questions. Frank?

Thank you, John. Just a reminder that the call will be archived on our website or you can listen to a replay until May 15, by dialing 514-861-2272 and the pass code is 3204932 pound. Just a final reminder before we go to questions, securities laws constrain our ability to speak about the Abitibi Bowater merger. Beyond that information which is already public. The merger website www.abitibibowater.com contains all relative information and I'd ask that you limit your questions to the operating results. Julie, we're going to start with questions from the investment community, so I'll turn it over to you.

Thank you. (OPERATOR INSTRUCTIONS) The first question is from Jeff Harlib from Lehman Brothers. Please go ahead.

Hi, good afternoon. I was wondering if you could talk about what you've seen newsprint demand in your order book into April? And any market related down time you've taken?

As far as the newsprint sector, we have not taken any down time other than maintenance related. And even that has not been unusual. And so as -- but as we look out, I think that there is a softening in the market. And certainly a downward trend in pricing. However, our order book looks pretty good through the coming months. And we are working hard to keep it that way.

Okay. And just -- can you just talk about your international or export price realizations net of freight costs versus your U.S. sell?

In terms of mill nets, international versus North America, certainly there's a contribution from FX, but currently the mill nets of international orders are actually equal to or higher than North American mill nets. And we are, of course, Abitibi is primarily focused on Europe and Latin America with long-term customers. But we continue to look for opportunities and we'll probably increase our sales internationally this year.

Okay. Do you have some targets on that?

Could you repeat that?

Do you have some targets on percentage of your newsprint shipments that will be exported?

I think traditionally our total exports are in the range of 25 to 30% of volume. I think we will be somewhat higher than that this year. We have already said that we expect to increase sales by about 10%. But it won't be 10% of the whole, it'll be like 35% of the total perhaps this year.

And Pierre, just on pension, can you just update us on pension funding versus expense in 2007 how are you seeing that?

The pension funding versus the expense going to be around -- the funding was going to around the 55 to $60 million more than the expense. The first quarter we funded $25 million more than the expense, but that will not -- that should not be the case for the next three quarters. That was a special, I guess funding in the first quarter. Difference in timing. So we expect for the full year the funding to be above the expense by about 55 to $60 million.

Okay. Thank you.

Thank you. The next question is from Kevin Cohen from Banc of America Securities. Please go ahead.

Good afternoon. Thanks.

Kevin, we can hardly hear you. You're going to have to speak up much louder.

Good afternoon. John, I was wondering, can you guys give us just a little bit more clarity and granularity in terms of the newsprint decline year-to-date of about 12%. How do we get our hands around what is causing the rate of decline by kind of a factor of 2 versus prior years? What do you kind of see out there? What gives you comfort that might change?

So I could hardly hear you, but I think the question was what has caused the rate of decline in newsprint to go to 12% from say 6% last year?

Exactly.

So I think that PPPC did some analysis of this when they looked at advertising. And also granage and other things, but we see that there's a decline of advertising that will largely explain the difference from the fourth quarter to the third quarter. I mean, fourth quarter to the first quarter of this year. And then I think we have the additional basis weight changes on top of the 6% we've seen. Certainly, it was an unexpected change in the first quarter. And we have to expect that some of this advertising lineage will return at the quarters to come.

Do you guys think that the rate of decline will then moderate more towards 5 to 6% in the next few quarters? Do you think 12% is were it continues for a little while?

I'm sorry, you'll have to say it again. I can't really hear you.

Do you think the rate of decline will moderate over the balance of the year, or do you think 12% will continue for a little while?

We believe the PPPC is still forecasting an annual decline of 6%. And that's similar to our outlook. And so there will be some kind of a stabilization and even recovery in the coming months.

And is there -- and then just for my second and final question, is there any sort of plan B just given the Canadian dollar is almost at $0.91. And in the event that newsprint demand does fall closer to 12% than 5% for the year is there any sort of plan B?

Plan B regarding what, Bruce?

It's Kevin, actually.

We really can't hear you. I believe the question was at a $0.91 dollar if the decline continues, what's plan B?

Exactly yes, thank you.

Well, I think we have seen $0.91 dollar last year. So I think that we will continue to look at that, I mean as Abitibi has closed, tonnage over many years. But we currently believe that we have almost all, if not all our operations, certainly almost all the operations in the lowest half of the cost curve. And we don't foresee closing any additional capacities. So we will continue to look for ways to further reduce cost in our newsprint operations.

Okay. I'll get back in the queue. Thanks.

Thank you. The next question is from George Staphos from Banc of America Securities. Please go ahead.

Hi, everyone, good afternoon.

Good, we can hear you.

Okay. John, quickly. You're mentioning that you would expect some improvement in newsprint and advertising, I guess the rest of the year. And I realize some of that's based on what the PPPC is forecasting. But what gives you comfort in that comment other than what the trade association is suggesting might happen? and I had a couple follow-ons, thanks.

Well, I think the -- there's certainly nothing about the recent past that would give you much comfort in stabilization, but I think that we have started to see some rebounding in terms of circulation and advertising. And I think most of the newspapers are looking for ways to improve. We still have some deep holes in many of the major metropolitan markets in the U.S. that remain a significant challenge. And so, of course, for our planning purposes, we have to plan for the worst as well as for stabilization. And so it's -- I think that it's very unlike -- I have a hard time imagining we're going to stay at the minus 12% level. So I'd have to look for some significant smoothing as time goes on.

Sure. John, the circulation number has showed a 2% drop, I think in the most recent statistics. Are you suggesting from what you've been seeing that circulation is getting better from what your customers are saying?

Well, I think if you look at the, at least what I've read, there are some bright spots in the circulation. Some newspapers are doing much better. Even Canada on a whole is seeing improved circulation. But there are some dark spots, especially in the major metropolitan areas in terms of recirculation. I think you have to balance -- balance it out a little bit. And if you, certainly without the major metropolitan areas, we would actually have some good results. But unfortunately the major metropolitan are the guys that buy most of the paper.

Two quick ones and I'll turn it over. First of all when we consider things like pension funding versus expense, things that you might be able to do on working capital. Do you think that this year operating cash flow will be break even or better? Obviously a slower start to the year in the first quarter. And then secondly, realizing this is a question about the merger. It's more of a practical question. John, how do you keep the teams ready to go on day one when you get the approval, if there's very little ability to share information at this juncture given the obvious issue that you're still two independent companies. Thanks very much.

This is Pierre. I'll take the first part of your question, then John can answer that. We'll answer the second part. The first part as you know, we don't give forecasts or guidance. But one thing for sure is that we are looking for the working cap to provide cash between cash back to the Company during the last three quarters of the year. Just a normal pattern. And again in Q1 of this year, working capital essentially took close to $100 million away. And we expect that to come back in the next 9 months.

Thanks, Pierre.

Looking forward, at least hat part should be coming back to us.

Right.

In terms of the merger and other details, I think that part of the integration team process is to communicate about those things that with legal advice we've been given permission to look at. And certainly there's a lot of excitement in those people who can do things like thinking about what the new GL will look like. I mean the accounts receivable -- I mean, what is it I'm talking about, the working cap and all that kind of stuff. And so we have some enthusiasm there. There's also the natural kind of competition when everybody knows the day when they'll be compared to their competitor as a partner is only months away. They tend to try to work hard to get there. And we have put together a integration team as we said that is made looking at 12 areas, including some clean teams with outside consultants to do some work for us so that on day one we will have the necessary data and work done for getting underway.

Okay. Thank you, good luck, John.

Thank you.

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

Hi. Good afternoon. I'm wondering on the newsprint you talked a bunch about circulation, but I guess the basis weight issue. Any sense of where we are on that curve in terms of how much have already been cut, or is there any way to know that? And secondly, I guess, I guess one of your competitors talked about some of the newsprint contracts not quite holding. Any thoughts or comments on that issue, as well?

I think as far as the basis weight, I was trying to quickly look. But I believe it was reported that the basis weight has been steady for since October. And therefore, it's looking like it's beginning to level out. And so we'll -- even though we'll continue to see negative comparisons until the fall, they should get smaller and smaller. I think the most recent data was about a 1% drop for basis weight. As far as now I've forgotten the other -- remind me your other question.

Just the newsprint contracts at one of your competitors?

We were really disappointed in the failure of the 6 month contract. And we are -- of course we participated with several of our customers. And I think the customers worked hard to keep it together too. We were all looking for some way to have stability. But certainly we saw that some of the smaller sellers sort of were undercutting the contracts. And that eventually led to failure of the issues.

Right. And then lastly the, I guess the Augusta newsprint, you guys extended the option. Is that indefinite? And is there any update on your latest thoughts there?

There was no cost incurred to extend the option. We extended it out to the end of 2009.

Thank you, guys.

Thank you. The next question is from [Chris Diagh] from [Schroeders]. Please go ahead.

Hi, good afternoon. I want to be sensitive to your request at the beginning of Q&A not to ask merger-related questions. So I've kind of reworded this as best I could. It's been three months since the merger announcement, presumably several more months since the two companies have vetted the benefits of this merger. Are both management teams surprised at the deterioration of newsprint fundamentals in the past 6 months? Has it been worse than expected? Or about what you would have expected given this rapidly evolving market? Or has it sort of taken you by surprise?

I think first of all, I can -- I'll just speak for myself, I can't really speak for both companies. But in terms of -- we are surprised by the drop in the first quarter. I think that January was, is always a very soft month. But we were very surprised that it continued into February and March. And therefore, we thought that was significant. One of the big changes is in the nondailies. You have to look at -- as you might recall a year ago the mill, the SCA mill and [Store port Huxberry] mill was on strike and this took a lot of mechanical glossy grades out of the market. And a lot of people moved into newsprint. And we saw a big jump in the nondaily users of newsprint. So now with the restart of Store in the fourth quarter, I think some of that tonnage has migrated back to them. And that might be a special condition we'll have to sort of watch that as time goes on and see if that's part of the cause. But we do expect some of this to alleviate. And I think that when we, just to say that when we got into the transaction, we knew that this was a challenging marketplace and globally very competitive. And we felt that together we could get to realized possibilities that we couldn't realize alone in terms of financial flexibility. And I think we remain steadfast in that commitment.

Great. Thank you much.

Thank you. The next question is from Christopher Miller from JPMorgan. Please go ahead.

Good afternoon. Just want to follow-up a little bit.

Chris, we can't hear you, you're going have to speak much, much louder.

Sure. I just wanted to follow-up a little bit in terms of you talk about where you are in the cost curve. Doesn't sound like you have any real intention of taking much down time the rest of the year, at least between now and the time the merger is expected to close. Do you see any sense the industry as a whole will be rationalizing any capacity? Or can we expect the supply fundamentals remain about the same all the way through until this merger closes?

Well, I guess all we can say is that certainly we -- in the month of April, the Canadian dollar strengthened by $0.03, it's hard to believe it could go up in one month that much. So we've seen that will put some additional pressure on the Canadians, of course. And we do know that one mill has closed in Pomona, California. And other than that, I think we've seen the reported results of most of the other newsprint companies and certainly there is pressure out there in the marketplace. As far as Abitibi, I think we don't plan to take any -- close or idle any additional capacity at this time. Well, of course, we have idled Fort William, other than Fort William.

Okay. And then in terms of the proceeds from the Hydro sale. One, have those proceeds actually been received? Two, have you determined exactly how you're going to use those proceeds in terms of debt reduction? And then secondly, any help you can give us in terms of the proceeds from the timber land sales what the intention there and how soon you expect to receive those proceeds over the course of the rest of this year?

The proceeds are targeted for debt reduction. We just have identified which debt yet, we're working on that. And the proceeds from the timber land are expected to flow in in Q2 and in Q3. But more so towards the end of Q2 and in Q3.

Okay. Any sense of timing on when you think you'll make a determination of what debt you're going to target with those proceeds?

We do have a maturity coming up in May. That will be the first part of it. And then after that, we'll sit down and see. Of course, I would think that by the time we talk again in July for a second quarter, we'll have a game plan finalized.

Okay. And then last question, also trying to respect the sensitivity around the merger, but is there any provision or can you foresee any circumstance whereby you think the economics of the deal might have to be renegotiated between you and your merger partner?

No.

Okay. Thanks very much. I appreciate it.

Thank you. The next question is from Joseph Nadol with UBS. Please go ahead.

Hello. Just to follow-up on a previously asked question. On the longer term contracts, one of your competitors had indicated that they going forward wouldn't look on those types of contracts very favorably. Are you of a similar mind on that?

I think for a long time Abitibi consolidated has had a position that we are looking for pricing stability. And then we have looked for opportunities to engage our customers in longer term relationships and pricing contracts. And so we would be interested under the right conditions to do it again. I think that certainly it will require additional commitment on both sides.

So at this point, do you have any existing contracts. Or have they all kind of fallen by the wayside in the first quarter?

I think -- I'm not 100% positive the answer to that question. I would just say that most of them have fallen by the wayside.

Okay. Okay. In terms of -- you mentioned that you're not intending to take any additional market down time. But are you -- can you quantify any maintenance down time that you have planned going forward here?

I said that we're not expecting to take any more down time on the newsprint side. A possibility exists that perhaps with the commercial printing will stay pretty much as you know the Fort William mill remains idle on the commercial printing side. As far as maintenance, we do have maintenance down time the second and third quarters are usually the most popular for long items. I think we have a major shut down in two of our mills of about one week each. And I think Mackenzie and Snowflake. There might be another one, but I can't recall right now. But no real unusual maintenance outages.

Okay. And one last thing just out of curiosity in terms of fiber costs. Can you give us an indication as to what you've been seeing here so far in the second quarter I guess both Virgin and Recycle, what trends you've been seeing?

Well, I think, Virgin fiber has been pretty steady now since last fall. Recycled, however, peaked rapidly in the first quarter. And has started to fall back down again. We've had two reductions in pricing, two or three in the last several weeks. So we believe that newsprint prices will fall down, return some to their value, but not all the way.

Not newsprint, John.

Recycled. Old newsprint. Old recycled waste paper will return to its, part way to its fourth quarter level.

Okay. Great. And one last thing. In export markets, can you comment at all what kind of pricing trends you've been seeing say in Europe versus Latin America?

Europe, of course has fixed prices for the year. And Latin America tends to follow the US, but lags a little bit -- lags on the way up, lags on the way down. And then of course, the big thing about Europe right now is the currency versus the U.S. dollar.

Okay. Great. Thanks a lot.

Thank you. The next question is from Bryon Korutz from Bear Stearns. Please go ahead.

Actually it's [Ariel Rothman] on asking the questions. Just looking at your results year-over-year, you give the breakout the impacts of various items. And it looks like year-over-year foreign exchange negatively impacted EBITDA by about 12 million. But if you look at the average exchange rate it looks like the Canadian dollar weakened year-over-year. Just wondering why that was?

It relates to our hedging program. Even though last year we essentially were carrying hedges, which were taken out in 2005 as you know, our hedging program always looks out 12 to 18 months. In the first 6 months of 2006, we were realizing on hedges that were taken out in the first six months of 2005. Right now we are realizing on hedges that were taken out in the the first six months of 2006. So in a sense, the, I guess the process from a lack of a better word on the hedging program was higher last year than this year.

Okay.

That's the main reason.

Okay. And where do you stand now in terms of hedges, I guess going out into the--?

I beg your pardon? Well, I mean, we have the hedge at the same level sizewise as we've had for the last several years. Now we are carrying hedges that we've put in place over the last 12 months. We put in hedges I think anywhere between $0.86 to $0.90 over the last 12 months. So if the dollar stays around $0.90, we will realize some profit on those hedges.

Okay.

Higher than we've seen in Q1.

Okay, thank you.

Not that we are wishing it stays at $0.90.

Thank you. The next question is from [Matthew Armas] from Goldman Sachs. Please go ahead.

Good afternoon. Just a couple quick questions. First, as you look at the export markets, you said you built 60,000 tons of inventory required for export. Can you talk to the flow in your export market? Is there going to be a significant lift in second quarter? Or was there some delayed shipments from the first quarter? And is that tied to the reset of the European contracts?

We expect that the -- in the second -- well, for the rest of the year there will be more export shipments than there were in the first quarter is the best way to put it. And that we've built some inventory. The logistics of export requires some inventory build. It wasn't the entire 60,000 tons, but a portion of that, the large portion was dedicated to export.

And if you could help me understand the typical European contract starts shipping in what we would consider our second calendar quarter? Is that typically how it works?

No, we ship, I guess we ship throughout the year. Shipments usually pick up in Q2.

Shipments to Europe like shipments to the US are always lower in the first quarter.

Right. I was just wondering if there was -- since it's on a contract a year-to-year or six month six month contract basis, if you're growing your exports. Does it tend to grow in a step function at any particular point in the year?

They just tend to be higher in the last nine months than the first three months. And sometimes, as well, you've got to understand that most of our shipping out are northern mills. And sometimes you have problems with boats getting caught in ice and not being able to leave. So you always find some problems shipping out paper in the first 3 or 4 months of the year because of that. Boats are just late, they are caught in ice and so on.

Right. And can you talk briefly about the the wood products business? How much of the wood products production is required in order to feed fiber into your other mill systems?

Overall I would say that the -- we can vary it of course and buy chips on the open market. But if we want to stay primarily our own chips, we can make slightly less lumber than we do today, but not significantly less.

And how do you feel about the state of the market seems to be continued weakness. How does Abitibi feel generally about being part of wood consolidation apart from your merger with Bowater? Is there a broader Canadian solution that's required in order to rationalize capacity?

As you might -- it's obvious we're in favor of consolidation. Whether it be in paper or wood products. And hopefully there'll be some opportunities there.

Great. Thank you very much.

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

Good afternoon, John, afternoon, Pierre.

Hi.

John, just on the newsprint side of the equation, you have I think pretty good sense of kind of where different competitors drop in along the cash cost curve. Are there mills in North America right now that with prices coming down and the Canadian dollar going up you think are cash break even to potentially cash negative right now?

Well, I think that in today's market one would guess that those mills in the fourth quartile must be very close to cash costs. I don't know the details of any of my competitors, but just I would expect that to be the case.

But there are pretty good cost analysis that you could buy or you can do yourself that would give you a pretty good sense given what you know about their fiber and energy, and other things, correct?

We have a pretty good idea, but I don't know if I'll be sharing it.

All right. Next question is on these contracts. And I know from covering you guys for about 15 years that you have been talking about ways to stabilize price through that whole period. But I just -- you kind of wonder is an investor in the Company why anybody would want you to go back and look at these contracts again because it seems like they're kind of heads you win, tails we lose from your perspective. If prices would have gone up, you'd have protected the customer. If prices went down, you didn't get any benefit from it. Why would we go back to this again?

I think that it's been -- it's my impression that the customers did their very best to hold up the contracts. And that the industry was maybe take -- was at fault. We'll have to -- I don't have any details, but that's just my impression from talking to my customers.

Well, did you ever look at this and say, look, if a small mill, a marginal mill wants to sell you at Y, go out and buy it from him, we can supply you at all of your different newspapers and lots of different locations, he can't do that?

Well, you sound like one of my sales guys.

All right. Last question I have, then. For Pierre, it sounds like the timber land pricing that you guys might be up near $2,000 an acre, is that correct?

We should be in excess of $2,000 an acre.

Is there anything unusual? I mean that value seems very, very high Pierre. I don't know that some of this is at Augusta National or what the situation is.

No, Augusta National would be much higher than that. I wish we had some at the Augusta National. But essentially, what you -- what we found out is that a lot of this, first of all it's divided in about 160 different tracks.

Okay.

So it's not one big track. It's not one big forest area. It's 160 different tracks.

Okay.

And some of them are waterfront so they get a lot more than $2,000 an acre.

Okay.

Some of them are surrounded by housing developments. Again you get a lot more than $2,000 an acre. And the fact that we've been able to sell them on this small track by small track basis as well enabled us to get higher value.

So it sounds like you're doing almost more kind of retail sales as opposed to kind of big institutional tracks to the--?

Yes, that's a fact. I would say about 75 to 80% of the tracks are being sold just like you would sell a house.

Okay.

There is an asking price and then people bid on it depending on the asking price and so far in many cases we've seen offers beyond the asking price.

Okay. Well, you've done a good job for shareholders, thanks very much.

Thank you.

Thank you. The next question is from Steve Chercover from D.A. Davidson. Please go ahead.

Thank you. Wanted to ask a couple questions on lumber. With an EBITDA loss of 24 million, did you feel compelled to operate because of chip requirements? Or is this kind of a new break even under the new quota and tariff regime?

I think -- well, as you know we closed 5 mills in -- 5 of our saw mills in the fourth quarter. And we continue to take down time at many of them. In some cases, we've run to balance out chips. In other cases we've had to run select saw mills to meet sort of like home center contracts, you might say for various grades. But we don't -- we don't feel -- we feel that we can be more profitable as a company if we run the majority of our saw mills, but we don't have to run them all.

Knowing that you're not going to give us guidance, should we expect this to be kind of a protracted run rate? Could we see more quarters and similar values or losses?

Steve, can you repeat that question? We really didn't get it from this side.

Sorry. Well, I'm just wondering if lumber prices stay stable and you need the fiber, can we continue to see this kind of a loss for a couple more quarters until things finally turn?

Everything we're doing is focused around getting the lumber business back to, I guess you might say break even EBITDA. And we don't see any advantage in to selling below cost. And we're looking for ways to do that, including reconfiguration of our saw mills. And I think we're going to continue to push on that in the coming quarter.

I guess we are in the lumber business for the long-term and not just there for the next six months. And if you look at the various lumber companies that have reported so far, you will see that they all have similar or in many cases worse margins than what we're showing in Q1 on the lumber side.

Yes, I know things are tough all over. It makes us all wonder why everyone doesn't just stop. We know that there are other reasons to run. Switching gears a little bit. You guys have been great over the years of monetizing noncore assets. I am wondering if you would ever consider maybe exiting your joint ventures in the engineered wood or eye beams.

The question John is would we consider exiting our joint venture with [Elpi] in our high joist?

No, I don't think we would at this time.

Okay. Thanks, guys.

We'll take one more question.

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

Thanks very much. Two questions. First, Pierre for you. The value of the Augusta timber lands was certainly higher than we expected, as well. I'm just curious if you can take us back to the agreement you've got with the option to buy the remainder of the Augusta mill? If you are required to actually sell your interest in that mill instead of have the opportunity to buy it, is there any recourse on the timber land that you have sold?

Absolutely not.

Okay.

Absolutely not. The option value between us and our partner on Augusta is a fixed price. And that price has been fixed for the last 7 years or 8 years whenever that option, that deal was negotiated in the late 1990s. And that price is fixed. That's why the partner didn't have a problem with us selling the timber land because it doesn't change the option price.

And 100% of those proceeds are to Abitibi's account?

Absolutely.

That's a great deal. Are there any more of those out there?

Well, we're working hard to find them.

The other question, John is for you. I'm just curious. We've got a very impressive gap now between newsprint prices and directory prices. And I guess it's a two-part question. How long do you think that can continue? And why are -- why is Abitibi not looking more aggressively at directing more of its volume into that market if it looks like that may be a sustainable or more sustainable market?

Well, it's a relatively small market. It's by -- it also has more capacity than demand. And certainly, though, it has been surprisingly more stable than all the naysayers predicted many years ago. We, of course, have some very low-cost assets at our Abi facility. But if the opportunity exists, we might look at it. But we're not really aggressively looking there. For instance, in 2005 and part of 2006, directory on a per square foot basis was less than newsprint. So it doesn't, sometimes it just doesn't make sense.

So you think this may be a shorter term anomaly? Just a catch-up and then obviously it'll continue to catch-up but in the other direction?

Well, the one good thing about directory is a lot of the prices are set for a year, but we'll probably see some kind of correction for '08.

Okay. Great thanks very much, guys.

Thank you.

All right. We're going to close off right now.

Thank you. That conclude -- perfect.

I just want to thank everyone for joining us. And we'll speak again in July for the second quarter results. 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 great day.