Resolute Forest Products Inc (RFP) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the AbitibiBowater second quarter 2008 results conference call.

I would like to turn the meeting over to Mr. Duane Owens, Vice President and Treasurer. Please go ahead, Mr. Owens.

Good morning, and thank you Katherine. Welcome to our second quarter earnings call. With me on the call today are Dave Paterson, our CEO; and Bill Harvey, our CFO. Before we begin, I need to call your attention to the cautionary forward-looking statement language that is contained in our press release and on our website. If you haven't read it, please do so. We will be discussing such forward-looking matters in the call today. You should be aware, due to the uncertainties inherent in such statements, actual results may differ and any such statements are not guarantees of future performance.

Our earnings call as well as additional financial and statistical information including a reconciliation of non-GAAP financial measures used on the call can be found on our website. The call is available to all shareholders via live webcast and replay on our website at AbitibiBowater.com. Today's call is scheduled to last about 45 minutes. I'll now turn the call over to Dave Paterson.

Good morning everyone, and thank you for joining us. On the call today, I plan to cover briefly our second quarter results, current market conditions, and a few key initiatives we have underway to improve our performance. Following my remarks, Bill will go into further detail on the quarter.

For the second quarter, we are pleased to report that through significant realization of synergies and continued price improvements, we have improved the EBITDA generated in our business lines substantially compared to the first quarter. This was accomplished in spite of significant inflationary pressures related to energy and fiber. We anticipate continued momentum in our earnings improvement in the coming quarters as we continue to see the results of additional synergies and favorable market pricing trends.

Looking further at the synergies, by the end of the second quarter, we achieved an annual run rate of approximately $270 million. Some of the major components achieved thus far are improved uptime on our machines, reduced water usage, reduced chemical usage, and lower headcount at the mills and corporate. We continue to work aggressively on synergies and I remain confident that we will achieve the full goal of $375 million annual run rate by the end of 2009. We have made and will continue to make tough decisions that we believe are essential to improving our financial position.

From an operations standpoint, although second quarter is normally a seasonally lighter usage quarter for energy, we faced higher prices for energy and higher fiber costs during the quarter. Offsetting these rising costs is the major focus in the operational level. For example, in newsprint, even factoring in inflation, our costs went down by $5 per ton in the quarter. The synergies are real, and we believe are providing a competitive advantage.

Moving to our key markets and looking first at newsprint, through the first half of the year, total US consumption was reported down 10.4% year-over-year. Industry production was in line with this decline and was down about 9%. Industry exports are about flat year-over-year. We have implemented each of the previously announced North American newsprint price increases through August and expect to implement the announced $20 per ton September increase. Excluding North America, global newsprint demand is essentially flat through May with significant increases primarily in Asia and Latin America. Pricing in most offshore markets has moved up significantly as well. We continue to see growth in these markets.

Vessel capacity and cost of ocean freight have been problematic, but we are addressing these by shipping from multiple locations and utilizing various ports in North America. We are tracking slightly ahead of last year's shipping rate per month and are trending upward each month. Bear in mind, this is without two of our primary export mills, Dalhousie and MacKenzie, which were closed or idled earlier this year. We shifted production and logistics from these sites to others that were primarily North American delivery mills. Ships can be obtained, but the costs are volatile due to freight rates and fuel surcharges. We are working to expand our long-term relationships with carriers servicing key markets.

Along with energy prices, recycled fiber has also experienced significant inflationary pressures. Old newsprint or ONP delivered costs have risen by nearly 30% from the first to the second quarter. Prices continue to rise through August. As this cost has risen, we have been reducing our consumption where possible.

Our customers continue to experience softness in advertising, which is a reflection of the uncertain economy. We also know that they are taking numerous actions to reduce their consumption of newsprint. While we believe there is currently a balance in our supply and demand from our customers in North America, we will continue to monitor our order books and will take actions necessary to limit any working capital investments in inventory on our part.

Turning to commercial papers, according to PPPC, demand for coated mechanical papers in North America is off nearly 4% through June. Print advertising has declined and magazine and catalog publishers have pulled back as a result of paper and postage increases. Magazine ad pages are down 7.4% through June according to the Publisher's Information Bureau. As a result, our inventories have increased, but a correction is expected as we move into the fall printing season. Building on the success at our Catawba site, we continue to review opportunities for similar conversions of newsprint capacity to coated mechanical papers. At this point we have several options regarding the possible conversion.

Total demand for uncoated mechanical posted strong growth of 6.2% in June with a gain of over 5% in supercalendar paper and almost 5% in the standard rates. Year to date, these uncoated rates are up about 4%. Some of the strength, particularly in the supercalendar grades, is due to grade shifting. Excluding idle capacity, the industry operated at about 95% of capacity during the first half of the year. As reported by third party sources, we have announced a $60 per short ton increase on our super bright grade for September 1st. Among our priorities for the third quarter are eliminating low-margin or unprofitable orders that do not meet a minimum threshold as well as taking the opportunity to reduce inventory levels for all our grade families.

Shifting now to global pulp, world shipments continued to be strong. As reported by PPPC, June shipments were at about 3.4 million tons, up 1.4% over June 2007 and nearly 5% year to date. Total industry inventories are in good shape at about 32 days of supply, which is around the 10-year average. We have entered the typical seasonal summer sluggishness in pulp shipments. However, pricing continues to improve with recent announcements in North America and elsewhere. We had a normal annual kraft outage at Calhoun at Thunder Bay in the second quarter, reducing production by 12,000 tons, and we will be taking the annual outage at Catawba in the third quarter, reducing tonnage by 6,500 tons.

Moving to the wood products business, according to the US census bureau, housing starts were at 1.1 million in June, about 27% lower than June of last year. Lumber prices in recent weeks have improved marginally, but remain poor. This slight improvement is due to a seasonal uptick in demand and constrained output across the industry. We continue to operate at about 50% of our capacity. During the quarter, we made significant strides to reduce working capital in the wood products business by lowering our raw material inventories.

As we mentioned last quarter, we're conducting an ongoing evaluation of our business. We are focused on cost reduction and right-sizing our business. During Phase 1 of our review, we attempted to renegotiate one of our major labor agreements in Canada early, but attained little success on a national level. These contracts will be coming up for renewal next year and will be a significant part of our go-forward strategy. Newsprint consumption is down in 2008 more than we anticipated and costs are higher than we anticipated. Recognizing those challenges, we are ready to take the action necessary, including elimination of unprofitable production.

In summary, while we've seen and continue to see accelerated inflation, mainly tied to energy, we continue to see pricing improvements in virtually every grade of pulp and paper that we produce. At the same time, we continue to realize synergies and lower our costs on a sustained basis. We expect continued production costs improvement. I will now turn the call over to Bill Harvey, who will take you through our results for the quarter.

Thanks, Dave. Our reported loss for the quarter was $251 million. After special items, our net loss was $150 million, or $2.60 per share. Special items before tax included a $17 million gain mainly related to the sale of 28,000 acres of timberlands, a $16 million loss due to translating our foreign denominated balance sheet items into US dollars, a $17 million charge related to severances, a $13 million charge for closures, and a $72 million tax adjustment related to the valuation allowance recorded during the quarter due to operating losses in our Canadian subsidiaries. Net of these special items, our operating income improved by $104 million from the first to the second quarter. This improvement, as Dave mentioned, is due both to price improvements as well as significant synergy realizations.

Working capital in the quarter was a cash usage of approximately $59 million. Account receivables increased due to higher selling prices for our paper products. Inventories for coated and specialties increased during the quarter. And accounts payable was also a cash usage as we have higher cash interest payments during the second quarter and approximately $60 million of cash severance payments. In the second quarter, as previously disclosed, we had scheduled annual pulp mill maintenance outages at both Calhoun and Thunder Bay which resulted in increased costs of about $8 million, and removed about 12,000 tons of market pulp production. In addition, as a result of the pulp bulk outages, we had about $8 million higher repair spending, and this was allocated to the specialty product line, mainly at the Calhoun mill.

In the third quarter, we have a scheduled kraft mill outage at the Catawba facility, which will reduce pulp production by about 6,000 metric tons, and we expect to incur repair costs of approximately $5 million. In the second quarter, our results in wood products benefit from continued cost reduction efforts, the idling of higher cost facilities, and a $15 million benefit related to the sale of log inventory previously subject to lower of cost or market adjustments. Our corporate and other overhead costs after severances and impairment charges were $62 million, down from $76 million in the first quarter. We expect this amount to continue to decline as we realize additional G&A synergies.

Our effective tax rate for normal earnings in the quarter was about 35%. Note 5 of our earnings release shows a reconciliation of the effective tax rate excluding special items to the tax rate on reported earnings. We expect the rate to be in this range next quarter.

Capital spending was $47 million in the second quarter, and we continue to expect to be in the range of $150 million to $200 million for the year. From a liquidity perspective, at the end of the quarter, we had $340 million in cash. This amount is broken down into $250 million at our Abitibi subsidiary and $91 million at our Bowater subsidiary. In addition to cash, Bowater had undrawn bank lines of $136 million.

Looking ahead to the third quarter, we expect seasonally higher selling volumes, price improvements in our paper grades, and continued momentum in the realization of synergies. While we are still experiencing higher recycled fiber costs and energy costs, we expect an operating income improvement in the third quarter approaching the same improvement we saw between the first and second quarters. Finally, I would like to point out that the recent financing and asset reconfigurations at Abitibi and Bowater will be reflected in the quarterly statements that each of the entities will file with the SEC. With that, we will open the line up for questions.

Thank you. We will now take questions from the telephone lines. (OPERATOR INSTRUCTIONS) Our first question is from Gail Glazerman from UBS. Please go ahead.

Good morning.

Hi, Gail.

If you could give a little more color on the export markets, particularly I guess if you look at that the industry data, volumes in western Europe are down. You would still think with currency that's attractive? I guess if you can talk about where the upside is and just relative profitability between the different regions.

This is Dave. All the export markets are attractive to us at this point. I think in the case of Western Europe, where it's a large but mature market, and I think as we've mentioned before on the calls, we have -- sell in either sterling or Euros in Europe on a fixed annual price basis. So in relative terms the rest of the world is catching up and I think will surpass Europe by second half of this year in terms of attractiveness. But from a growth perspective, the growth is definitely for us at least would be Middle East, South America, and Asia. And the limiting factor right now is vessel availability.

Okay. And just turning to inflation for a minute, Bill, in your guidance I don't think you talked that much about it, but can you talk about what type of cost inflationary pressures you would see if costs held where they are today and moving into the third quarter?

We've had inflationary pressures, as you know, in energy and energy related areas on price and freight. Those are the two biggest components. Right now we have had some good news on the Canadian dollar. It's stabilized at about $0.95, which is good news. I think what you will see on the cost side is continued synergies. On a month-to-month basis we expect costs to be flat across the company. That being said, on a quarter to quarter basis, there's still an impact of energy on freight especially for the third quarter.

Gail, our big opportunity is to reduce consumption, and that's really the synergies activity. Our consumption of energies and input in terms of absolute units is down. It should continue to be down through the warm months in the summer, and the key is to get total consumption down as the weather turns in the fall. And the other piece for us is how do we use our operating flexibility in our mills to reduce, where possible, the consumption of recycled fiber and increased TMP and kraft, which are the better -- from a cost perspective, the better fibers for us right now.

Okay. Can you quantify that or give any sense of the opportunity there to change your fiber mix?

It's significant. We've got two large mills that are 100% recycled at Coosa and Thorold. In the rest of our system, recycled has historically been a swing fiber. So if you look at a mill like Calhoun or Alabama news or even mills like Ponderay, we have the chance to really minimize the use of recycled and substitute.

Last question. Can you give any update on the status of asset sales or potential timing?

Sure. We're moving ahead on a few different fronts. On the land sale front, that's well underway, both in the Canadian lands and in the US. Our Korean mill, as you're well aware, there was another transaction in Korea and we're waiting for that transaction to settle. But we clearly have done a lot of work, and we're prepared. And then as we mentioned on the last call we are looking at select hydro assets at this point.

Thank you very much.

Thank you.

Our next question is from Chip Dillon from Citi. Please go ahead.

Good morning, guys. This is James Armstrong calling for Chip. Congratulations on a much improved quarter. First question is, I saw there was a large amortization in your interest expense. Will that continue going forward, and can you help us on modeling that amortization?

Sure. There's a few things that went on in interest expense. One of them in the quarter was the unwind of a treasury lock associated with the refinancing of our Abitibi subsidiary, and that was an $11 million -- that wasn't a cash charge, so that was a one-time cash charge in the second quarter. Secondly, as a result of the refinancing we have a large ongoing amortization, noncash amortization in the interest expense line, and that totals approximately $32 million per quarter. And that's related to both the exchange notes that you might remember as part of the refinancing, and amortization of deferred financing fees. So net-net, if you take the amortization out and the $11 million treasury lock out, our interest expense from a cash point of view hover at this point around $160 million.

Perfect. I appreciate that. And second, on the newsprint price front, I mean, are you seeing any excessive push-back? Do you think these prices will continue to hold? In addition, do you see any further pricing going forward?

Well, I think our customers face a challenging market, and we certainly have active dialogue with our customers about their challenges. But given our continued need for financial performance improvement and dealing with all the cost pressures we've talked about, I think we will take appropriate action.

Perfect. I appreciate that. Thanks a lot.

Thank you.

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

To follow up on that previous question -- consumption was dropping meaningfully even when prices were falling, so it's hard to make a clear argument that rising prices are a big factor in demand destruction. How do you think about that, Dave? I mean, again, coming back to the earlier question, are your customers -- is the rising cost of paper really a big fundamental issue for them? Obviously it's not helping right now, but it didn't seem to make a hell of a lot of difference over the last couple years.

They can obviously answer that question better than I can, but I think as a percentage it's not as significant as it had had been in previous cycles, but I believe in absolute spend it's probably right up there with labor costs, or overhead costs. It's significant to them. They're looking for ways to obviously reduce the cost of operating their business. I think this cycle we're seeing them be very aggressive in terms of ways to reduce consumption as their spend primarily from ad lines, or their ad spend from their customers has declined significantly.

So I guess at the end of the day, Mark, I would say that they are getting really aggressive about their future business model and are actively figuring it out. And part of that is size of the paper, number of pages, what the audience they are trying to hit in the paper, and it's -- we're both working on it together, in a very difficult situation. But the price of paper is a significant expense to them, but I think it's really working to figure out the new business model that's driving their actions in the short term.

The one thing we haven't seen, though, is a meaningful change in the amount of inventory they keep on hand. It looks to me like the buyers of newsprint tie up a lot of working capital there, and that that really hasn't changed all that much. Certainly, their overall inventory levels have come down, but you'd think with ten years of supply-chain management, the amount of inventory they carry might go down, and it doesn't really appear to be, from a days supply perspective.

I'll answer from a -- I guess perspective of in rising price market, inventory is generally viewed as a good investment. So I think inventory movements historically indicate shift from buyers to sellers in the marketplace, and right now, I believe -- I assume that they believe inventory investment is a good investment on their part.

Just staying on the inventory theme for a second, it strikes me that newsprint producers have done a pretty darn good job of managing their own inventories, but coated producers over the last couple of months seem to have done just an abysmal job. Can you give us a sense of why, with the big declines we saw in mill inventory ahead of the price hike, it only took two months for coated inventories to go from trough to peak?

Our sense is that the shift in demand in coated was quite rapid and happened late in the back half of the quarter, and our customers made the decision to stop buying and start consuming inventory. So we've seen that happen before in coated. The other thing in coated, of course, is the tremendous amount of grade substitution up and down the spectrum within the coated supercalendar, free sheet, coated mechanical, supercalendar, and some people can even go down to the uncoated grades, depending on the application. So I think it's a combination of the price of coated has gone up quite a bit. They have a certain amount of dollars they're willing to commit to ad spending, and they're doing a combination of looking to the second half of the year and saying, I've only got so many dollars left for ad spending and I can either substitute or cut back. And both of those things -- my sense is those decisions were reached in the second quarter, and we've felt it quite rapidly as an industry segment in the coated papers business. And I think you have seen some public announcements around coated that came quite quickly.

Thank you.

Thanks.

Thank you. Our next question is from Peter Ruschmeier from Lehman Brothers.

Couple questions. I was curious, maybe for Bill, if he could elaborate a little bit on the land sale program. Any figures you can share from the quarter in terms of acres sold, price realizations? And then just the higher level, what's the strategy? Do we have a view that this is land sales will happen over years, or is this over a couple quarters we should expect meaningful sales?

Yes, I think the land sale program is going well. It's really two programs, one in the US and Canada. In the quarter, maybe I'll ask Duane, I think the number is 27,000 acres in the quarter.

28,000.

28,000 acres, and the price was about $814 per acre in the quarter. So that is mainly on the US side, and that continues. We have, as you might know, 1.5 million acres in Canada, and that is certainly a sale of a portion of that is underway right now. You should expect it over the next three to four quarters to try to -- our goal is to have it done in the next year. And that's primarily because it will have to be done in pieces.

And do we have any examples of transactions near your Canadian lands that might give us some clues as to the valuations?

The only one I can think of offhand is we did sell a significant piece of Canadian land approximately 1.5 years ago and got approximately $200 per acre US.

Okay. That's helpful. And how many acres after the 28,000 acres in the US sold in the quarter, how many do you have remaining in the US?

In the US we'll have left about 20,000 acres of freehold and 52,000 acres of long-term leased land.

Okay. That's helpful. I'm curious, maybe a question for Dave, in the direct mail channel, I presume you compete very effectively versus other paper grades. I'm curious on what you are seeing in that channel versus both in terms of demand trends, but also in terms of your share of that channel?

Our share as a substrate?

I guess, qualitatively, if you can comment on how some of the supercalendar/groundwood grades are doing in that channel in terms of paper substrate of choice.

Well, I think the choice is really around ad spend and how many dollars they have. So if you have price movements, they'll substitute. It takes a quarter or two for that to happen from a printing point of view. I guess in general, the bigger hit I think for our customers was really the postage rate increase, and there was a two-step postage rate increase that occurred. There was a significant one, I think it was late in the fourth quarter, and then an inflation-adjusted one this year.

I think -- somebody help me -- the impact of a postal rate increase is like four to one to a paper price increase. It's really the postal rate that's hurting us. And that is a historical fast. Every time the US postal service raises the bulk rate, you see a drop-off in direct mail and catalog. And I do believe there's a dialogue between our customers and the government about bulk rates and how they are going to manage bulk rate pricing going forward.

Okay. But in general, any other -- it sounds like the ad dollars are coming down. Any quantification for how you see that?

--Well, I wouldn't say that. My view is that they have a budget for dollars, and as their costs go up they don't raise their spend, they just say I've got this many dollars left. And they're reallocating those dollars for the second half of the year between all the various advertising channels they have. And clearly in, let's call it May and June, the coated paper segment took a pretty good hit.

Okay. Just lastly, if I could, maybe for Bill, you mentioned, Bill, the working capital drag in the quarter, including some severance payments. I'm curious if you have any near-term guidance you can offer on working capital including potentially severance payments?

I think so -- on the accounts receivable side, like there will be an investment likely in the third quarter related to increased pricing of our products. Severance payments -- at the end of the quarter we had had about $50 million still accrued to be paid. That will be done over the next three to four quarters, so it will come in quarter by quarter. Those are the two biggest components I can think of offhand, Pete.

Very good. Thanks, guys.

Thank you.

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

Thank you. A couple of questions. First, I guess when we've seen the big drawdown in consumption in North America, the importance of the offshore market being much more important, you mentioned the problem of available -- of vessel availability being an issue. Could you quantify for us the outright cost increase that we're seeing with this ocean freight as well? Because it seems to me this option of going offshore is diminishing as we progress here.

I think the issue there is twofold. You've got availability, which drives the base rate. Then you've got fuel surcharges, which is driven by the price of bunker fuel oil. And that is being adjusted now as oil prices come down. I think the key is that you pick your markets and you get into -- on the logistics side, you lock in long-term relationships with your key vendors at mills, and we're in the process of doing that.

I think it was, we mentioned in my comments, but we moved through our system about 1 million tons of orders shifted around, and that, in combination with the logistics moves, took awhile to straighten out. We're still working on it. It's getting better, has a way to go. The other part to the answer is clearly logistics offshore are higher than logistics in North America, and we will price our products to compensate for logistics cost.

Just sticking on this cost theme, you had mentioned about conservation being one of your biggest levers on the energy side. Could you give us an update on -- I assume conservation, a lot of it, is going to be through co-gen projects and substitution. Give us an update on where those are and the magnitude of savings we might expect?

Well, we have two significant energy related projects this year. One is at our Fort Frances mill, where a big biomass boiler is coming online in September, last year, September, and that project is on budget and on schedule. That will get us off fossil fuels and start burning residuals from the forest land. And then we're doing a significant turbine project at our Coosa Pines mill, and also in that late third quarter or early fourth quarter timeframe, which will make us less dependent on purchased electricity.

And we continue to look for those type of opportunities across our system. And we have those, but we have to do it within the context of our capital spending budget, given our needs there. So most of what we spend next year will be energy or consumption related CapEx to drive down those costs.

You had had alluded to the notion that on the potential drawing board in the future again is conversions over to the coated groundwood. I assume that one of the sites would be the Thunder Bay. Is it fair to say that you would have to do a fairly big cogen project there to make that viable, if you were to do a conversion as well?

Well, I think your asking question is, the conversion from newsprint to other grades needs to be based on the fact that you are going to be a low cost producer of whatever grade you choose to make. I think at Thunder Bay we have a number of challenges. One of them is the cogen, or the percentage of energy we buy on the outside market. That is a challenge whether we make coated papers there or newsprint. Conversions don't work unless we end up with a first quartile asset like we did in the case of Catawba. So if we can't get there or if we can't get there with a reasonable capital cost, then it won't happen.

Thank you.

Our next question is from Mark Weintraub from Buckingham Research.

Thank you. First, just wanted to verify -- when you talk about the third quarter operating profit improvement being similar to the second versus the first, is that just as was reported without adjustments, an $85 million delta, or did you have some adjustments in the number you were thinking of?

That was basically related to after special items, and I think the words were -- approaching the improvement from second from first. Clearly, I think $100 million improvement that we obtained second to first was a big step forward. We expect another big step. It's hard to see exactly what the number will be right now, but we think it could approach the same type of number, $100 million.

Thank you. Is it possible for us -- to give us some color as to what the operating profit performance for the Abitibi part of the company was versus the Bowater?

I think both companies -- both our subsidiaries will be filing documents over the next week that will provide that breakdown. I think at a high level, there was a good improvement in both subsidiaries, and you'll have to look at those documents when they're filed.

Then lastly, the $28 million in other income, does that go away in the third quarter? What was that related to, exactly, and did that go away?

That was related to a gain on extinguishment of debt, $31 million of that, so that does go away in the third quarter.

Thanks very much.

Thank you.

Thank you. Our next question is from Christopher Chun from Deutsche Bank. Please go ahead.

Good morning. Just to follow up on the last question about the other, are we saying, then, that the operating income improvement is above that other line, and that other line does not affect your comment about the operating?

Yes, I think on the line -- when we're talking about operating income improvement is really the line that we reference in the press release, which is operating income above interest expense and above other net, and we exclude from that items related to the special items which are consistent quarter to quarter -- severances, gain on sale of assets, we take out -- and those are the two big ones.

Right. But just clarifying, the other line is not considered a special item, but it's still not an operating item, either.

It's not an operating item. It's actually -- on our income statement you'll see a line other, loss income, and that's the line we're referring to. Below that line is interest expense, foreign exchange gain and other net. So the other net is below the line.

Okay. And then I had a question about CapEx. You mentioned that the '08 estimated in the range of $150 million to $200 million. I'm wondering, in the out years, though, whether that amount is sustainable or whether it's really need to go up a bit to maintain your assets and competitive position?

Well, I think it's going to be driven by the condition of the company and the number of mills we're operating.

Right. But if those things don't change, do you think that $150 million to $200 million is a sustainable number?

I guess I would say those things need to change. So as the health of the company improves and we have -- as we go through our continued evaluation of assets, we will evaluate the number. In the near term, I don't think we need to raise CapEx to run the company. I think it's going to be driven by de-leveraging the balance sheet and then having alternative investments that make good economic sense. And right now the two that would fall in that category would be anything that reduces our consumption of fossil fuel energy or conversions, and those things are both actively reviewed on a regular basis.

I think we should, as Dave discussed earlier, the $150 million to $200 million does include some projects that would you call non maintenance level projects, even this year. So it's a broad range, and I understand your question, where you're coming from, but historically we've allocated the capital towards those mills, towards the right mills and tried to focus it.

Okay. That's helpful. And then in terms of your coated paper pricing, the quarter over quarter jump wasn't quite as much as we would have expected, based on industry published prices. Is there a certain segment that's on contract or something like that?

No, I mean, nothing has changed in terms of our customer relationships in coated. So no, there's nothing special there.

Okay. Then on the operating cost side in specialty papers, that was -- the quarter over quarter trend was higher than we expected. Other than the maintenance [shuts], was there anything going on there?

That maintenance side is a pretty big number. That was the biggest single impact.

Okay. Thanks for your help.

Thank you.

Operator, I think we have time for one more question.

Perfect. Our next question is from Bill Hoffman from UBS. Please go ahead.

Good morning.

Hey.

Bill, I'm just wondering if could you talk about the refinancing strategy going forward, combination of asset sales, et cetera, with some of these -- the 364-day facility, and the like.

What we're focusing is the refinancing of the Bowater subsidiary with an ABL line that we talked about before. We're moving ahead on that as well as you saw in the filings in the second quarter. We are in a position where Coosa Pines and Grenada are subsidiaries of the holding company, and that puts us in a position to do a complementary refinancing. So our plan is to address the 2009 maturity up-front on the Bowater facility, and we're moving forward on that. On the 364 renewal, that would be done later this year. We believe there's good collateral supporting that loan, and we'd be moving ahead in the fourth quarter to renew that.

Okay. Thank you. And then Dave, just a question on the asset rationalization. If you could give us an update, I think one of the things you guys earlier talked about was shifting production capacity from site to site. And I know you've really only been at it a quarter or two, but do you see lot more opportunity to pull costs out of the system by moving grades to different mill locations?

There's certainly an opportunity there. I think as we look at some of those opportunities, they are a little more complicated than the first round. But there's certainly opportunities for mix improvement across our system, and that's both from a productivity point of view on the paper machine as well as logistics improvements as we move tons closer to customers. But that's a big part of -- that's what we look at every month, but as the order book comes in.

Does it look like at this point in time that might lead to further opportunities to shut machines?

We are evaluating that.

Anything imminent you want to talk about?

Not yet.

Thanks very much.

Thank you.

Thanks, Bill.

Thank you. This concludes the question-and-answer session. If participants wish to dial into the instant replay, please do so by dialing 514-861-2272. Please proceed by entering the passcode, which is 3265672 followed by the pound sign. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.