Resolute Forest Products Inc (RFP) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the AbitibiBowater third quarter 2007 results conference call.

I would now like to turn the meeting over to Mr. Duane Owens, Treasury and Investor Relations. Please go ahead Mr. Owens.

Good morning. Thank you, Chris and welcome to AbitibiBowater third quarter earnings call. With me on the call today our John Weaver or Chairman, Dave Paterson our CEO. Bill Harvey our CFO and Pierre Rougeau the Head of our North American Newsprint Business. Before we begin, I need to call your attention to the cautionary forward-looking statement language that is contained in our press release's and our on Web site. 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. The Bowater and Abitibi third quarter earnings releases as well as additional, financial and statistical information along with reconciliation of non-GAAP financial measures used on the call can be found on our Web site. The call is available to all shareholders via live webcast and replay on our Web site at AbitibiBowater.com. I'll now turn the call over to Bill Harvey.

Good morning. This is the first conference call of AbitibiBowater and an exciting time for our new company. The combination of Abitibi and Bowater took place just a week ago. In this context I'll briefly cover Bowater's third quarter financials which for accounting purposes is (inaudible - background noise) then I'll pass the call over to John Weaver and David Paterson to cover their plans and their priorities for the newly merged AbitibiBowater and outlook for our business.

For the third quarter, Bowater reported a net loss of $142 million or $2.47 per share. Net of special item the loss was $60 million or $1.05 per share. The special items after tax included the following - - a $28.4 million loss related to an arbitration award, an $11.3 million gain on the sale of assets, a $29 million loss due to the translation of our foreign denominated balance sheet items into U.S. dollars, a $14.1 million U. S. for severance in merger related costs, and $21.5 million tax charge related to the valuation allowance recorded during the quarter due to operating losses in Canada.

In September, we issued a press release detailing an arbitration award which was the result of a ruling pertaining to the 1998 sale by Bowater of our former drive in Ontario site. This payment which totaled C$44 million occurred in the third quarter. Overall, Bowaters operating results in the third quarter were negatively impacted by the rapid rise in the Canadian dollar and our decision to take significant production curtailments to match our production to our customer demand. On average the Canadian dollar in the third quarter was C$0.05 higher than in the second quarter. Compared to the second quarter, Bowaters costs in the third quarter increased by about $14 million as a result of the higher Canadian dollar. Without the currency impact, Bowaters manufacturing cost would have been flat with the second quarter while Abitibi's manufacturing costs declined by C$10 million. In the first nine months of this year, we made significant strides that reduced in our controllable costs. Working with the unions, this year, the combined AbitibiBowater has reduced it's work force by nearly 800 people or 10% of its total.

In market pulp, in the third quarter, Bowater took its annual [inaudible] mill outage at Coosa Pines and during the outage complete a major capital project. During the third quarter, we spent $6.8 million of capital and curtailed 7,000 tons of production during this outage. In addition the combined company prevailed a total of 153,000 tons of newsprint and specialty production in the third quarter. Because of the decline in pricing and the impact of the Canadian dollar on our production cost Bowater incurred an inventory lower cost market adjustment in newsprint of $5 million, in lumber $4 million; while Abitibi incurred charges of about C$13 million of which 2 million relates to newsprint, 5 million relates to CPP and 6 million relates to wood products.

Bowaters capital spending in the third quarter totaled $21.5 million and Abitibi's totaled C$30 million. We expect capital spending in the fourth quarter to be approximately $70 million for the combined company, or about 50% of depreciation. Looking to the fourth quarter, in the context of a Canadian dollar at record levels with continued cost reduction efforts significant improvements with pricing for some of our products and seasonally stronger shipment for many of our products we expect a flat to modest improvement in operating income for AbitibiBowater. I will now turn the call over to John Weaver.

Good morning, everyone. I'm pleased that you are able to join us for the first earnings call for AbitibiBowater. Abitibi-Consolidated and Bowater both have long and deep histories. I'm very excited at the prospect of bringing these two companies together. Having worked on the integration planning over the past several months I'm confident that we will be able to create a stronger, more globally competitive company that we will be able to better meet the needs of our customers and importantly deliver significant additional value to our shareholders. Of course, there is much work to be done, to effectively integrate our operations. Many of the markets in which we operate remain challenging but our goal is to take the best of both of these two great companies and to create a leaner, financially disciplined organization with increased focus on value-added products and growth markets. Already we have made tremendous progress in creating this new organization and we expect that the integration will proceed very quickly now that the transaction has closed. In short, we know where we are going and we have a clear road map on how to get there.

Let me set out a few examples of the progress we are making. First it is clear that if we are to create a stronger, leaner, more efficient organization we must deliver on the 250 million of synergies we have already identified and work to exceed that 250 million target. Our original goal was to achieve these synergies in two years but with intense effort on the speed of implementation we expect to achieve this targeted run rate early in 2009 at the end of the first quarter. I'm very pleased by the progress we have made in the critical area and I'm confident that we will surpass our original synergy target. To this end we have embarked on a company-wide, thirty-day strategic review of every business. As part of this review we expect to have the following - - an internal view of supply demand outlook for each of our products, an asset evaluation, a capital spending plan for 2008, a preliminary 2008 operating plan for each business, and revised synergy forecasts. And we will be looking closely at which machines should produce which products. We expect this assessment to be completed by early December. At this time, we will come back to you with specific actions that we will be taking to improve our operations of the company. We will be decisive in the actions we implement.

Synergies and operating plans are just one area we are looking to improve our business. We are also carefully examining our product offerings, we intend to focus on creating a broad range of value-added products while continuing to improve our competitive position in newsprint, particularly in the export markets where demands continues to grow. Year to date, global newsprint market excluding North America are up about 2.5%. We will also work to improve our overall financial stability and flexibility. Our current debt levels are too high and as such, cash generation and debt reduction are priorities for the new company.

In terms of financing we plan to launch a new credit facility this quarter which will allow to us address our near-term liquidity requirements. We have established a goal of reducing our debt by $1 billion over the next three years, an ambitious goal but one we believe is achievable. So as you can see we have a clear vision for where we want to be and are already making significant progress for achieving our goals. Before I hand it over to Dave, let me say a few words about our new board which we announced a couple of weeks ago. I'm very pleased that we are able to bring together board members of both companies to create such a strong and experienced group of directors. I look forward to working with them to establish a global leader that will deliver greater value to all our stakeholders. Now I hand it over to Dave who will talk more about the details of the initiatives we have already implemented and our markets. Dave?

Thank you, John. As John had said we made great progress over the past several months. Which meant that when the transaction finally closed we were able to hit the ground running. As part of the Department of Justice approval process we agreed to Snowflake, Arizona Mill. This is a highly competitive mill but AbitibiBowater has many other highly competitive mills in its portfolio of assets. Under the terms of the agreement we will have 120 days with up to an additional 60 days to market the mill. Should we not be able to sell it during agreed time frame, a divestiture process will be transferred to a trustee. We have already been contacted by various interested parties and we will act quickly to the get this behind us. As a new company we are highly focused on achieving and surpassing the synergy targets that we have set in the areas of production, SG&A costs, distribution and procurement. I am pleased that while we are waiting for the regulatory approval we are able to keep moving in terms of identifying synergies and as a result expect to be able to achieve these savings more quickly than we had anticipated.

I would now like to briefly cover our key markets. Looking first at newsprint. Through September, total U.S. consumption was reported down 11% year-over-year. During the quarter, as a result of a decline in customer orders our combined shipments in newsprint were down about 10,000 metric tons. As John mentioned excluding North America, global newsprint demand is up about 2.5% through September. We continue to take advantage of the stronger global markets by shipping more newsprint out of North America and into the areas where market conditions are growing or stable. Newsprint end user and mill inventory spell about 140,000 tons or 10% from August to September which is the largest one month decline since 1985. Effective November 1, we have fully implemented the $25 per ton price increase that was previously announced by each company.

Turning to commercial printing papers. Coated mechanical markets have improved dramatically in recent weeks. Reductions and supply from some of our competitors, import duties on Asian paper and seasonal demand pickups have led to customers searching for supplies. We have implemented two $60 per ton price increases in the second half of the year and have announced a third increased on all new orders and shipments effective December 1. Demand for the coated mechanical papers in North America is up 7.4% in September. Super calendar demand increased 10.7% in September driven largely by the lack of supply of coated mechanical paper. Standard uncut mechanical shipments were down 2% in September. Demands for lightweight or directory grades continues to improve at a rate of 6.4% through September. We currently have price initiatives for most of the various grades of commercial printing paper. We have informed our customers as of December 1, $60 per short ton increase of super calendar grades and as of October 1, $60 per short ton increase on high-rise. Shifting to go market fall. World bulk shipments continue to be solid up nearly 3% through September. Total inventories are low. Soft wood inventories are at about 26 days of supply in September. Hard wood inventories at 32 days of supply are three days lower than September 2006. We have implemented several price increases this fall. The markets are in good shape due to the demand improvement and the week U.S. dollar.

Global markets continue to be weak with U.S. housing starts remain under pressure. According to the census bureau, housing starts for September were down 10% from August and 31% from September, 2006. An annual rate of 1.3 million units in September, this is the lowest level in about 14 years. We are not anticipating any significant improvement before late 2008.

In summary for the markets although lumber remains weak, pricing trends are positive across all grades of pulp and paper. I'd like to reiterate John's comments. As AbitibiBowater we are now poise to execute on our plans, to create a more dynamic and competitive organization will create long-term value for our shareholders. On behalf of the Board of Directors and all the employees of AbitibiBowater you can look for us to do the following - - concentrate on delivering synergies, build a financially stronger company and focus on debt reduction and deliver quality products to our customers, be expecting to hear back from us in early December with the result of our strategic review.

Chris, we will now open the lines for questions.

(OPERATOR INSTRUCTIONS) First question, Gail Glazerman from UBS. Please go ahead.

Good morning and congratulations on finally getting the deal closed. I was wondering if you could talk a little bit more about the newsprint markets. Looking at the September data and obviously your comments on pricing it seems like there's been a change in the market in the last few months and I was wondering whether that's just your customers recognizing the impact of the CAnadian dollar near $1.08 or what's been going on there?

Well, I think from our perspective I think demand in North America has continued to disappoint, that in combination with the Canadian dollar rate is an impact with supply side of the marketplace which really drove the decline in inventories. At the same time, the export market continues to be pretty robust and if prices are fairly attractive, particularly if you are shipping from a U.S. mill given both the Euro exchange rate as well as the general weakness of U.S. dollar our exports continue to expand and as we go into '08 I think those trends will continue.

This is John, I would just add one point. I think there's, it's seasonally strong time of the year and the market actually feels fairly tight and I think that some of that is related to production curtailments and some of that is-- orders are up somewhat and it looks been it has for the first nine months certainly at this time.

Okay. And in terms of the export markets I've been hearing a little bit about issues with availability of shipping given it's a more competitive U.S. export economy. Have you had any trouble and do you think that could impact your export plans for 2008?

I think in the near-term the issue is really in pricing. I think the ability of the shippers to charge more, just given the general increase in export activity out of North America is problematic but we have not been unable to get shipping at what I've called competitive pricing.

You have to remember also a lot of newsprint which is our primarily, our primary export in ship bulk and it's more on the container side where we seem to have some tightness.

Okay. And switching gears just quickly on dividends policy, I guess that's something that the board is reviewing at the combined entity, is that something we would expect to here kind of early December as well.

The Board of Directors will be reviewing the policy for the new AbitibiBowater and we should finalize that this year and we will be back to you in, sometime in December.

Okay. Thank you very much.

Thank you. Next question, Peter Ruschmeier from Lehman Brothers.

Thanks, good morning. I was curious as you enter this thirty-day review period if you could comment on the criteria that you'll use to review capacity issues? And related to this, I'm curious if you care to comment, obviously your financials are North American financials if you care to comment if the Canadian business is EBITDA positive?

John, you want to handle that one?

I think on the thirty-day review process, supply demand is sales versus production. So we are going to be looking at where we can, what it takes to match our sales to production but also of course focusing on having every asset return positive cash flow and move toward profitability. Certainly the Canadian business overall EBITDA positive is kind of, I don't know if we have the answer to that one for the new AbitibiBowater yet but we have some very good assets in the company and some marginal assets and that's part of the thirty-day review. We will have a better position on that I think in 30 days.

Just one add to Johns comment, I think it's not just currency in Canada. We are also looking at wood and energy prices in Canada that are above competitive rates in North America and the world. So we've got to look at currency, energy and wood, all three components to Canada.

Okay. And, John, I would be curious if you could share some of your perspective. It's certainly been difficult to rationalize capacity in Canada in the past due to some political pressures and I'm curious if you can share whether those pressures have eased or changed at all as you see it.

I think if you look back on the history of the last five years, Abitibi-Consolidated has closed some capacity. One, two, three, four, four or five Canadian mills have been closed. And so I think it certainly is a possibility. Everybody recognizes the changes in the marketplace and some assets have not competitive. We've also closed the U.S. assets. So it's just a question which have assets are competitive.

And last question if I could, before passing it on. On non-strategic assets, can you comment about how, in addition to Snowflake how Korea, the U.K. and some of the remaining timberlands both in the U.S. but also north of the border that are owned timberlands how those assets fit into the strategy going forward?

I think both companies, the combined company will continue to liquidate the timberlands including the timberlands that we can in Nova Scotia. There's going to be-- bill significant timber sales in the fourth quarter for the combined entity and going into next year. And then [motoco] we said as Bowater and we continue to say is AbitibiBowater is a non-strategics assets and we look to divest it and John you can have it on U.K.

I think the U.K. just like [motco] is outside of our core business which is North America and all depends on the price.

Thanks very much, congratulations on the combination.

Thank you.

Next question, Mark Weintraub from Buckingham Research.

Thank you. First, how much newsprint did you export in the third quarter? Is that something you could share with us?

Speaking from -- we know the independently from both companies and I don't think we have in front of us the combination but from a Bowater perspective 40% of our newsprint was exported and I think Abitibi, 300,000 comes from Abitibi. So about 30% from Abitibi. So we are somewhere as a company around 35% or so.

And that's increasing. It has increased year-over-year.

Every quarter it's increased.

What do you think is a realistic target that you might be able to get to in whatever the time frame you think is appropriate to look at?

I think we have to clear the thirty-day review because that will determine how many tons of each product we are going to make and then we will put a market plan against it, so I would say let us come back to you in thirty-days.

On top of that I think historically both companies have been speaking of in the 30 to 40% range of exports of our total capacity and I think the trend will be to look for that to increase rather than decrease.

Sure. When you look at mill nets business that you are exporting versus the tonnage which is staying domestically how big a spread, and I realize that there's variation from place to place but roughly speaking what's a typical spread you might be seeing between the domestic versus the overseas, mill net?

Well, thanks to foreign exchange it's, it hasn't been unusual this year to have export mill nets actually better than North American mill nets and I don't know that typical trend is that they tends to run, exports tends to be a little lower but certainly the more recent year and a half or two years is that the export mill nets are higher.

Our experience is the average export mill net is higher than the average domestic mill net in today's market but there's a lot of variation depending on where your shipping it to and who the customer is .

Okay. Then just lastly can you give us an update on the sensitivity to the Canadian dollar to a $0.01 move? I think historically Bowater used to talk about $15 million and then Abitibi was kind of somewhere more in the order of 25 to 35 million. When you look at it now what's the type of sensitivity analysis that we should be thinking of?

If the change has been some of the cost reductions and closures that have reduced both of our companies exposures. Every $0.01 move in the combined company is $33 million on an annual basis.

Okay. Great. Then lastly obvious with many you're giving the guidance for the fourth quarter, that obviously suggests that you expect a lot of improvement to overcome the big move in the Canadian dollar which would have a negative impact. Is that a fair assessment?

That's correct, both on the cost side and pricing. There's some significant price improvements as you are well aware in both coated and pulp and we've implement a newsprint price increase November 1.

Okay. Thank you.

Next question, Bill Hoffman from UBS.

Good morning. I wonder if you could talk a little bit about the specialty side of the business and the potential for grade there is something that we are interested in. And the second thing is you did take quite a bit of downtime in the quarter. I was wondering if you could help walk us through about where you were taking the downtime?

Well, let me take a crack at the second question first. I think at Bowater we took our downtime essentially in the newsprint sector and certain parts of the specialty sector. We tried to tie into where we had mill maintenance time to instill mill maintenance because as you know it is expensive downtime a lot of it is just the up and down part of it. So predominantly in newsprint but a little bit on the specialty side in Canada.

For Abitibi we took no newsprint downtime. All our downtime was on the specialty side and we of course had the Fort William Mill idle then on top of that we took about 14,000 tons of additional downtime, so about 45,000 total CPP. So this is in the last week we learn of the synergy here.

Those decisions were made independently because we were both independent back then. What was the first question, I forgot?

Just I want to do get a sense about how your thoughts on the specialty business, grade mix and thing that you could do on that side between the two businesses.

Well, I think there's a lot of synergy in our commercial printing papers business. Some of it is getting unified grade codes and grade descriptions and basis weights and a lot of it is is addressing the cost structure of the specialty business and getting those specialty grades on lower cost machines to operate. That will be part of the thirty-day strategic review.

And we expect to finds some synergies as we look because most of the Abitibi specialties are made in Canada and most of the Bowater specialties are made in the U.S. So there should be a north-south synergy there as we dig into the detail.

And if I can just ask for one more question, you talk about $1 billion of debt reduction and I know there is some asset sales that you talk about. Could you just walk us through some of the sort of cash targets for asset sales you might have over the next couple of quarters?

I think, Bill, all we can mention at this point is we have the Snowflake mill, of course, will be sold, as well as timberlands that you're well aware of. Bowater has approximately $100 million of timberlands that we are going to monetize over the next few quarters and I think Abitibi has the remaining 30 to $35 million.

Okay. Thank you.

Your next question is from Chip Dillon from Citigroup. Please go ahead.

Hi, yes, good morning. I want to do ask you a little bit about when you look at the pricing initiatives in the uncoated specialty realm, could you just confirm how much does the combined company have in the directory area?

Well, Bowater is about 40,000 tons of directory, 30 to 40.

So Abitibi is about 125 or 130.

And that's probably the only business action cross your entire company I would imagine where you are somewhat locked into 2008?

I'd say and the other piece that has to get fixed early in the cycle is the European export on newsprint which I think the guys are right in the middle of the contract negotiations for '08 right now.

Got you. Then when you look at the coating -- I'm sorry, the balance sheet, where was the Canadian dollar on the Abitibi side on September 30, what Canadian dollar level were you using to value those U.S. dollar, the U.S. dollar debt?

The closing Canadian dollar was one -- 0.9746, the month end rate or if you wanted to it the other way, 10078.

In other words, the Canadian dollar was, I'm sorry --

It's just above par and the way you would be dealing with it is 1.0078.

Gotch you. Okay. And could you just talk a little bit about your, the availability under the current revolves? Any kind of shape as to what you think it will, the, do you expect to get a new bank agreement and how you think that will look in terms of availability.

Sure. The availability as of September 30, was under-- the unused capacity under all credit lines in both companies was 748 million, as well we had 181 million of cash on hand. What we would be doing, and the best kind of course to be talking about refinance something after you've done it so we are getting a little ahead of ourselves but given the timing of this call I can tell you is that we are in the process right now of putting together refinancing that encompasses both company at the AbitibiBowater level. We are dealing with the key relationship banks and we have a lot of, we've done a lot of progress, we've didn't a lot of work over the last two months. Clearly until we can share all information between the two companies that's the that's delayed us somewhat but what we would be trying to do and will do is put together a line that covers both companies. We would, in effect, remove the credit facilities that are in place now and put a longer credit facility, longer-term credit facility over both companies. I feel very confident we will get that done and put in place by year-end or early January.

And the current facilities on each side when are they currently set to expire.

On the Bowater side the main facility is set to expire in 2011. On the Abitibi side they expire the ends of next year.

Then, when you look at your maturities you are telling me right now or at least at September 30, had you 930 million, roughly, of both available revolver plus cash and I believe your maturities between now and the end of '09 are somewhere around 600 million?

Yes, that would include both the bank and the debentures that come due, yes.

For both sides?

For both sides, yes.

Okay. Great. Thank you.

Your next question is from Christopher Chun from Deutsche Bank.

Thank you, good morning. Following up on the question about the Canadian dollar sensitivity can you give us an update on can what type of hedging program you use?

The hedging program in place, Bowaters hedging program has been directed to the pound sterling. We have no hedges in place on the U.S. Canadian dollar. Abitibi did have hedges in place as of September 30. The value of which would be approximately $66 million mark-to-market. Given the sensitivity I gave you, that's the unhedged sensitivity.

Right. Then following up on the Abitibi hedging program, can you give us an idea of what the practice is? I mean, is there a systematic practice to a hedge a portion a portion of your cost save, six months forward or one month forward or something like that?

There has been in the past. Abitibi had a systematic process. We are evaluating and putting in place a new hedging program that we will be taking to our board at the end of this month and that will replace the current programs of both companies. So we will update you in December as to what the new hedging program will be.

Okay. Then in terms of doing your strategic review can you tell us what sort of exchange rate you are going to be assuming going forward?

We've instructed the business units to use par as the benchmark exchange rate until further notice.

So the current exchange rate?

We just said use one, one to one. The 1.07 or 1.08 I have not seen what it's trading at today, is an all time high but for the year let's do it at par and we will see what happens.

And we can run sensitivities off of that, of course.

And then at a one to one ratio, can you give us an idea of on average what the cost differential is between Canadian mills and U.S. mills?

I think at the end of the day we have some very good Canadian mills and some very good U.S. mills. As we've seen historically as the Canadian dollar strengthens or weakens the relative strength of each company tends to change. I think that historically the cost of each mill becomes more or less equal at around $0.90 or so. And so you could say that certainly in today's world Canadian operations are disadvantaged but that doesn't mean that all U.S. operations are better than all Canadian operations. Certainly that's not the case, necessarily the case in AbitibiBowater.

Right, well that makes sense. Then in terms of evaluating what the right amount of capacity should be for newsprint, are you surprised at the fact that the second tier players have not done more to date in terms of rationalizing their capacity? Do you have some thoughts on why that might be?

They have to make their own decisions. There's nothing else.

Okay. And then on a combined basis were you talk about what the maintenance level of capital expenditures will be?

Are you talking maintenance dollars or CapEx dollars?

CapEx dollars going forward. What do you need for maintenance level of CapEx.

Just to maintain the business?

Right.

I think part of that is going to come out of a thirty-day review and I think own a pro forma basis we had talked about spending about the $300 million level as AbitibiBowater but we are going to, we have asked, we are asking that or asking that question of our operation leader to say come back to say, what do you need to run the business and what do you need to grow? But we will know that and we will report out on it once we have the strategic review done.

And put it in perspective this year the combine company would spend approximately 220 million. So if that could give you a feel of how low it could go.

Okay. Thanks for your help, then.

Thank you.

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

Good morning. Just a couple of follow up things, on the refinancing, I was just wondering if you, in terms of the scope of that, if you're currently thinking about just dealing with the revolvers and your '08 securities or if you think it could be a more comprehensive or a more significant refinancing than that.

It would be more significant, we are planning to do something more significant than that but the base or foundation of it is the bank facilities and credit facilities. So we are putting that in place right now and we of course would want to enhance liquidity still further after that by reducing, by either terming out or reducing some of the drawn amounts under the facility we had already talked about.

So in terms of the size, though, initially what you hope to do in the next couple months, it would be more to encompass the size of your existing revolvers and maybe some '08 maturities and then will you try to deal going down the road with some of further out maturities or?

Yes, I -- yes, Joe, except the way we are viewing the road is a short road. We would like to be dealing with 2008, 9 and 10 over the next year.

Okay. And then just to clarify, when you talked about your $1 billion of debt reduction target, and I know you're still working on the details, but should we be thinking about that as primarily from asset sales or is that something where you're saying that's a target that would also include, are you assuming a significant amount of free cash flow from operations in that number?

I think the goal is to generate cash from operations in a significant am and so we want all our assets to be able to generate cash. That's part of the thirty-day review process.

Well, we are a for profit corporation so that's the goal.

Right. Okay. And just lastly you mentioned the expectation for improvement in the fourth quarter versus the third. Is that netting out all the non-recurring unusual items, so more on an EBITDA basis, is it fair to think about it like that?

Yes, more on an EBITDA basis. Again we said flat to slight improving and then an EBITDA basis after netting out severance and things like that.

Thanks for the clarification. Good luck.

Next question, Don Roberts, CIBC World Markets.

Yes, David , a specific question first on the market side. You had mentioned that coated ground wood was looking strong. We have two good size Japanese coated ground wood machines coming on in the second half here, have you see negative impact of those on your markets and if not yet, do you

I think from a currency point of view and historically you don't see a lot of coated mechanical papers coming from Japan. We are not an exporter of coated mechanical. The U.S. market is pretty robust. So even with the price increases that we've announced, if you convert that into Yen or Euros I don't think it's going to entice a lot of tons into North America. In fact we've seen imports from coated mechanical particularly from Europe drop significantly which is part of the reason why we've seen U.S. prices move even at the new prices I don't think you are going to attract a lot of volume. If I was a Japanese producer I would probably looking to to Europe and sell in Euros before I sold in North America in dollars.

Now that you have sort of stepped back and you've had a chance to look at the full range of your value-added paper portfolio, and I know will you get into more of this in your business review but is there a sense in terms of which statements look a little more attractive because I'm sure will you look at more conversion down the road given, if newsprint stays on this trends? Any guidance you could give there?

Nice part when we looked at those markets that John and I both had dispositions that were complementary in many cases. I think the high-brit arena on unmechanical opportunity from a production point of view as well as marketing and then of course on the coated mechanical side I think our opportunities downstream for further investment and possible conversions. But we will have to discuss that as a new management team as well as the Board of Directors. John, you have any comments?

I think that very well summarized it, the real value is in the high-end grade, mechanical and super high brit.

Just lastly the (inaudible) identified some of the potential asset sales, I just want to do verify that one that wasn't mentioned was the remaining portion of perhaps the hydro assets. Is it safe to assume that that's not on the table in this review?

As we said when we formed the hydro asset corporation we see the hydro business as a core asset and we want to unlock value but we are not interested in divesting of the hydro assets.

Thank you.

Next question, Bruce Pike from Credit Suisse.

Good morning. I was wondering just on again the $1 billion again recognizing you haven't finished but I'm assuming the Snowflake and the timberlands is built into that number, that $1 billion. Is that a fair assumption?

Yes.

Is any other sort of material like those two items type of asset sales built into that number?

Not built into the number but of course we will act on as we talked about Bridgewater and other facilities, [motoco] we will act to realize value wherever we can but it's not built in specific to that number.

And then the bank facility, one of the facilities was reduced, I think, from 550 to 510. What was behind that? I didn't quite catch that.

I think that was reduced, the Abitibi facility was reduced to 7 [ par] combined and that was done in June, June of this year.

Okay. What was the purpose of that?

I think it was part of an overall negotiation. I don't have anything in particular, it just was sized to be 710 would be sufficient given the current assets available.

And just remind us on the financials do we see separate financial going forward all in U.S. dollars? I wasn't sure about that.

Going forward it will be in U.S. dollars combined financials.

U.S. GAAP. U.S. Corporation.

Combined only?

Well, there will be financials for each company due to the, we have outstanding debentures for both companies but the financials we will be talking about specifically on these calls will be the combined financials.

Then just remind us the maturities in '08, in '09 if you have the break out, maybe which, I think it's much heavier on the Abitibi side?

I will, there are bank facilities, I will ignore the bank facilities for now, in '08 there is 350 million-- or 346 million of maturities combined. In '09, I don't have it in front of me but I think it's 500 million in '09. And we can get back to you, but it's 250 on the Bowater side in '09 and 150 million on the Abitibi side.

And we kind we have a chart out there on the maturities before.

We have a chart on some of the previous presentations on the maturities. In the 10(Q) we will detail it.

The '09, though, I think you said 250, 150, which is 400, there is another piece to get to the 500, you believe?

No, it's 400.

Okay. Thanks. Then do you know what the sensitivity is with the hedging? I imagine it's a small change versus the 33 million regarding $0.01 change equals 33 million unhedged, do you---

It's very small, probably $1 million or so. It's a very small number compared to the exposure of both companies.

And then the last question was just the thirty-day review period you expect to put out a release or have a call after that or any of the above regarding when you finish that process?

We will certainly plan for a release at the end of the thirty-day review; press release.

Thanks a lot, guys.

Thank you.

Thank you. Your next question is from Christopher Miller from JP Morgan. Please go ahead.

Good morning, just a couple follow up questions. One, when you talk a little bit obviously the $1 billion of debt reduction is there any thought process potentially for issuing equity part of your review or is that not on the table as a way to raise cash to meet these maturities?

We are looking, we've set a target of $1 billion we are in the middle of a bank financing, et cetera, but I don't have any comment at this point.

Primarily we really are focused on cash flow from operations and possible asset sales.

Operator, we have time for one more question, please.

Thank you. The last question will be from Kevin Cohen from Banc of America Securities. Please go ahead.

Good morning and congratulations on the transaction closing. I have just a couple of follow up questions. I guess in terms of the $1 billion debt cut target how much are we assuming in terms of synergies on that front? It sounds like the number is higher than 250 and I'm wondering what you guys model in there.

We haven't modeled anything in there as of yet but as we said on the call we are really focused on how fast we can get to the 250 and then following the thirty-day review we will be looking at from the operations whether or not there's additional synergies to be had.

Great. And I guess in terms of conversions versus closures in newsprint I think it was touched on a little bit earlier but how do you guys kind of juggle between those two as you think about liquidity and where the cycle is going and your outlook in '08 on newsprint?

I recollect the big part of the thirty-day review we want the management team -- I think John and I have our views on that question but we want the management team to come back to us then we will have an active back and forth on it. But I think in terms of capacities in general, you look at conversion, you look at conversion both to other products and services as well as upgrading the cost position of different grades and different machines and ultimately on the total number of tons you want to produce. Those are the sort of the core issues we've got to address in the thirty-day window to come to an agreement on pretty quick. In terms of investing, I think we would like to invest if, I think both companies bring into the merger some business that are worth expanding and growing in the future but we've got to stabilize the financial picture of the entity first.

Great. And then I think as a prepared comments you guys had indicated there has been some interest in the newsprint in the Snowflake Mill. Can you share any color in terms of the strategic buyer or financial sponsors or both of those and what kind of buyer interest, maybe overseas buyers in the week U.S. dollar?

Our door is open.

That's all you can say, I guess.

You new that was going to be the answers.

I thought I'd ask any way. And then in terms of the minimum liquidity I guess is the current number that you guys have today do you think that's kind of the trough in term of on a going forward and also in term of your comfort level? Do you think this is kind of the trough level that you guys are comfortable with or any thoughts on that?

I think we would like to enhance the liquidity higher than that so we clearly are part of the roll-- part of the goal over the next six months is to increase liquidity.

Great. Then I guess just lastly in terms of the European newsprint market any preliminary thoughts in term of the 2008 contract season? Obviously demand there has been kind of flattish year-to-date which is fine. There has been displacement of the local producers with imports up pretty significantly from North America. How do you think of '08 versus '07 direction until on newsprint prices there?

I think in Europe we've seen a couple producer that have announced some capacity closures coming to market like all the western European market is fairly flat or mature but there is certainly a lot of growth and the former Soviet block countries, I guess it falls in southern Europe. Where our participation is that the Euro dollar rate will stay very strong, the Euro will stay strong and that prices should be flat I would think in a Euro basis. And, of course, from our point of view from a U.S. perspective the Euro is much stronger today than it was a year ago so we are in fact going to have a chance to get a dollar, U.S. dollar increase with flat Euro pricing.

I think the thing to remember is that although the new Abitibibowater is a big player in the UK we are not the prize center you might say in Europe and so we are not going to be setting, doing much in terms of pricing leadership in Europe.

We would expect I think both John and I would expect export position to grow next year in line with the growth we saw this year.

That's great. That's my last question. Is there any internal sensitivity number for oil and natural gas given the rise in energy prices, kind of where we stand on that front?

I don't have one here. We both, both companies have it.

I just don't have it available for you at this point, I would just from an operations point of view I would ask the answer the question, a big part of our '08 plan has to be around energy efficiency and the consumption of energy to make these products. I mean 99, I just read what we all, $90 barrels of oil is here it doesn't seem to be going away any time soon.

Great. Thanks a lot for your thoughts. Good luck. Appreciate it.

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