Resolute Forest Products Inc (RFP) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the AbitbiBiowater third quarter 2008 results conference call.

I would now like to turn the meeting over to Mr. Duane Owens, Vice President of Finance, please go ahead Mr. Owens.

Good morning. Thank you. Welcome to our third 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 matter on the call today and 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 release as well as additional financial and statistical information including our reconciliation of non-GAAP financial measures used on the call can be found on the website. The call is available to all shareholders via live webcast and replay on our website at AbitbiBiowater.com. Today's call is scheduled to last about 45 minutes. I will now turn the call over to Dave Paterson.

Good morning, and thank you for joining us. Today, I plan to cover briefly our third quarter results, current market conditions, and the significant financial improvement we expect to see in the fourth quarter with lower energy costs and a weaker Canadian dollar. Following those remarks Bill will go into further detail on the quarter and our financing strategies.

For the third quarter, despite energy and fiber inflation pressures we have improved the EBITDA generated in our business lines $47 million compared with the last quarter. By the end of the third quarter, we had achieved a synergy annual run rate of approximately $320 million. As mentioned last quarter some of the major synergy components we achieved are improved up time on our paper machines, reduced water usage, reduced chemical usage, and lower head count at the mills and corporate. I remain confident that we will achieve the full goal of $375 million annual run rate by the end of 2009, if not before. As mentioned in our press release, the third quarter was negatively impacted by significant increases in the costs of energy and recycled fiber.

Looking at natural gas as an indicator, our costs went up by 20% from the second to third quarter. In October, we have seen gas prices decline by 20%. Returning to the second quarter levels. Recycled fiber costs also increased by about 20% in the third quarter compared to the second quarter. In October, recycled led fiber costs have declined by 40% to levels lower than the second quarter. In addition to decreases in these costs factors he Canadian dollar has declined significantly since the beginning of October. As you know every penny equates to $29 million of annualized EBITDA. The declines we have seen in our costs as a result of these factors alone lead me to be optimistic about the fourth quarter. Bill will discuss our outlook in more detail shortly.

Moving to our key markets and looking first at newsprint, world wide newsprint demand rose 1.1% in September. For the first nine months of this year, world demand is down 1.6%. This includes the nearly 10% decline reported for North America. Excluding North America, newsprint demand year-to-date is up about 1%. The US dailies have shown weak consumption in 2008 with circulation down almost 5% with the weak economy. Exports for North America to other parts of the world are up 3% through September. The month of September was up 11%, the highest level seen since 2002. Many of the offshore markets have experienced substantial growth in demand such as Brazil which is up 21% for this year.

Our shipments outside North America for the quarter were up just over 15,000-tons compared to the second quarter, and now represent approximately 40 excuse me, 47% of our total shipments. We have implemented each of our previously announced North America newsprint price increases through November and expect to implement the announced $20 per ton December increase. With the increase in recycled fiber costs, and domestic demand declines we have announced various curtailments in production.

During this third quarter we took 28,000-tons of down time, in the fourth quarter we expect to curtail about 100,000 tons. These outages are being taken at sites that use recycle fiber. Based on input from our customers, our view is that we expect North America newsprint to continue to decline in 2009. As a result, we anticipate taking approximately 50,000 tons of monthly down time. At this point the curtailments are temporary and are being taken at a variety of sites. We will be making a more definitive decision in the future. At this point, the cost of energy, recycled fiber and the Canadian dollar are too volatile to make those decisions on a more permanent basis. We will however, continue to monitor our order books and make the appropriate production decisions as it relates to our inventory levels.

Turning to commercial printing papers, according to PPPC, demand for coated mechanical papers in North America is off 11% through September, across all segments. With the uncertain economy in the US, advertising has declined dramatically, significantly impacting the consumption of coated papers. Magazine ad pages are down 9.5% through September according to the Publishers Information Bureau, September statistics also show a continuation in the decline of imports of coated mechanical particularly from Europe which is down 17% for the year. Total demand for uncoated mechanical has grown about 1.5% through September according to PPPC. Standard grades of uncoated mechanical which include superbright and book grades are up almost 10% through September excluding idle capacity, the industry operating rate at 94% of capacity to -- industry operating at 94% of capacity during September. As reported by third party sources we have announced a $50 per short ton price increase on our high bright and book grades for January 1.

Shifting now to pulp markets, world shipments as reported by PPPC for September were about 3.2 million-tons down 4.5% from September, 2007, mainly driven by a decline in shipments to China. Year-to-date global shipments are up about 2%. We had normal annual craft outages at our Catawba, Fort Francis, and Coosa supplying mills in the third quarter, reducing production by 16,000-tons. During the fourth quarter, we did not have any scheduled maintenance outages, however we do anticipate removing approximately 35,000-tons of our pulp through market related curtailments.

Moving to the wood products business, according to the US Census Bureau, housing starts were at 817,000 units in September, the lowest level in about 17 years. Lumber demand and prices remain poor. During the quarter, we continue to curtail production, operating about 50% of our capacity. We expect to continue to operate about this level in the fourth quarter.

In summary, while we have seen accelerated inflation during the third quarter, mainly due to energy and fiber, we expect to see continued -- significant improvements in our cost position during the fourth quarter as O&P and energy come down. We continue to realize synergies and are lowering our cost on a sustainable basis. We expect to continue production cost improvements. I will turn the call over to Bill Harvey who will give you more details on the results for the quarter and our outlook for the fourth quarter.

Thanks, Dave, and good morning, everyone. Our reported loss for the quarter was $302 million, after special items our net loss of $104 million or $1.81 per share. Special items before tax included a $5 million gain on the sale of 940 acres of timber lands, a $6 million gain due to translating our foreign denominated balance sheet items into US dollars, a $7 million charge related to severances, $148 million charge for impairment and closure costs. And a $65 million tax adjustment related to the valuation of allowances recorded during the quarter, due to operating losses outside the United States. Net of these special items our operating loss improved by $41 million from the second to third quarter. This improvement was primarily due to price improvements in our key products.

Our noncash impairment charge related to Donnacona, Quebec and Mackenzie, British Columbia facilities. These mills were indefinitely idled in the first quarter as part of our Phase I review. During this third quarter we made the decision to permanently close these sites. In the third quarter, we had the high degree of maintenance. We have scheduled annual pulp outages at Catawba, Coosa Pines, and Fort Francis and in our newsprint mills.

Our Corporate and other overhead costs excluding severances and absent impairment in the quarter was $66 million our selling and admin expenses declined by $7 million compared to the second quarter. We expect these amounts to continue to decline. Interest and expense for the quarter was $187 million, of this amount, $36 million related to noncash amortization and deferred financing fees, debt discounts and debt revaluations. Working capital required an investment in the quarter, accounts receivable increased by $63 million alone. And payables offset this by about $30 million. Our effective tax rate for normal earnings for the first nine months of the year was 36%, and we expect that rate to be in, our rate to be in the range for the year. The Canadian dollar averaged $0.96 for the third quarter, and it averaged $0.85 for October. As Dave mentioned every penny movement impacts EBITDA for our Company on an annual basis by $29 million. It has been highly volatile, but the current $0.10 decline from quarter three to now would improve our EBITDA by about $290 million on an annual basis, or $72 million per quarter.

Capital spending was $45 million in the third quarter and we expect a similar amount in the fourth quarter. We announced last week, the intention to sell approximately 189,000 acres of Timber lands that our Abitibi subsidiary owns in Quebec. From a liquidity perspective at the end of the quarter, we had $295 million in cash. This amount is broken down into $195 million at our Abitibi subsidiary and $100 million at the Bowater subsidiary.

We are currently finalizing an amendment to our Bowater bank facility to waive the third quarter financial covenants and put in place a boring based facility. I expect this will be completed early next week. At that time, we will have access to draw about $70 million under this facility. Our the pension plan side, although we have not finalized our assumptions for next year we do not expect any material increase in contributions. In fact we could see a modest decline.

Looking ahead to the fourth quarter, we expect seasonally higher selling volumes, price improvements in newsprint and continued momentum in the realization of synergies along with lower energy and a significantly lower fiber cost especially for recycled fiber. We expect a very significant improvement in our financial performance in the fourth quarter, although some of this will be offset by lower pulp prices and market downtime at Pulpa newsprint. In total, depending on the Canadian dollar, again, we expect to sea a very significant improvement in operating results. Operator, we will now open the line for questions.

(OPERATOR INSTRUCTIONS) Our first question is from Gail Glazerman from UBS. Please go ahead.

Good morning.

Morning.

Can you, just starting on newsprint pricing there seems to be a bit of a divergence between the East and the West Coast. I was just wondering if you can give any insight into that?

Well, I think, the West Coast and East Coast prices have settled in at different levels for the quarter. And we are seeing Western producers ship tonnage East to fill their order books.

Okay. And but you still aren't seeing that impact your ability to push through the fourth quarter pricing base?

I don't think it is affecting the fourth quarter. I think people are looking to see what, what next year is going look like but no not on the short term.

Okay. And can you talk a little bit about what you are seeing in export markets in terms of demand changes over the last couple of months and if there's any, any changes you are seeing from what I would presume are lower freight, ocean freight rates and the currency moves?

Well, currencies around the globe have been highly volatile and certainly some of the high growth markets like Brazil and Turkey are seeing significant currency devaluations on their part. So I would say that the international consumer is watching very closely what pricing levels are going to be realized in Europe, remember the European prices are going to be negotiated over the next 45 to 60 days, and I would say that they're only mining requirements at this point. So, they're being cautious, partially because of currency but partially trying to understand where prices are going to settle out early in the year.

Okay. And shifting to cost for a minute I think you mentioned that the mills that you are taking down currently are waste paper based facilities and I am just wondering given what you have seen in the O&P markets in the last month or so how much would be attractive to kind of shift your fiber back to waste paper and how much opportunity you would have to do that?

Well, the good news is we have a lot of arbitrage opportunities between different sources of fiber and we have arbitrage opportunities between the border between US and Canada. I think you've said it well, it is really this currency and O&P phenomenon has been a, really started very light in September and accelerated into October. So, when we made our third quarter decisions, we had record levels of O&P. I guess I would argue that our decision to take down time in our waste based mills probably helped change the view of the O&P market in terms of what reasonable pricing was. So we will have to be flexible based on currency and waste paper prices in terms of which machines or which facilities we take down time, but the world from end of September to to today we have seen both O&P and currency just change dramatically.

Okay. And final question, can you talk a little bit about asset sales and specifically maybe your hydro assets in terms of any hurdles that there would be in terms of being able to dispose of some of those?

Well, I think on the asset sales front, we have big initiatives both in land and hydro, and there's always hurdles in any asset sale and we are well aware of those, I think with the current disruption in capital markets it has slowed up some activity but we continue to get unsolicited offers in both of those areas and we are optimistic that we can make significant progress over the next six months.

Okay. Thank you.

Thanks.

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

Morning.

Morning, Mark.

Dave, first on the pulp side, it looked like you were generating about $88 a ton of EBITDA in the third quarter, I just wondered, given the reports about where pulp rights are right now, it would seem to me that you might wind up being EBITDA negative in that business by some point here in the fourth quarter. Am I missing something?

Well, no, pulp prices are highly volatile as you point out and I think it is really a demand issue. I think, we don't know what the price is because demand particularly out of China is so low right now. That's why, in my comments I said we are taking curtailments in our system to balance our inventory. Prices are under tremendous pressure, but I don't think that is unusual in the pulp sector. The offset, I think, Mark is we have got to think through is the currency issue at $0.85 versus $0.96 our Canadian assets at Thunder Valley and Fort Francis are much more competitive. The other thing that we are looking at is how do you internalize more of that fiber in our system, remembering that our pulp assets are in paper mills. So that is again a little weighted to moderate our exposure to pulp in the short term and just swing more virgin fiber into paper products that we sell in the market.

I guess the net of all of that, Dave, is how comfortable do you feel about that 35,000-ton number you gave us or could that be a little larger?

Pretty confident. I think we have, I think our guys have been realistic about what volume they can sell in the fourth quarter, without really having to chase the low end of those prices that you are alluding to.

Okay. You raised the second issue I wanted to talk about which is the Canadian dollar and I just, is there a way in which this is a mixed blessing to you?

Well, first, I would be interested in what do you think it is actually going to settle out at because we have seen in the last four weeks we go from $0.96 to $0.77 back to $0.87. I think it is at $0.85 today. It is highly volatile. The mixed blessing you are referring to of course is the change the cost structure of the Canadian industry. I think, I just think for reference for the people that follow the Company at $0.85 Canadian, the pressure point moves south of the border into the US asset bases because from a cost position, Canada gets very competitive at $0.85. So internally, we have to look at the whole system to make sure that where we do take down time or curtailments that we are doing it at our highest cost facilities and $0.85 changes that dynamic. So Canada is very competitive at $0.85, Mark.

Are you seeing any change in behavior particularly among smaller Canadian newsprint competitors with the currency having tanked the way it has? --

Well, I think part of the reason you are seeing some of this West/East movement is currency.

Okay. And then finally for Bill, is it possible just following up on Gail's question, to give us a sense of what is out there in terms of remaining land and also what the potential is in terms of various hydro assets?

Well, I think on the land, there's approximately 50 million, 50 million acres left.

50 million or 50,000?

50,000, excuse me. I wish it were 50 million. Make my life easier, Mark.

Yes, we have managed about 50 million.

50,000 acres left, and I think on the hydro side and the land side we are optimistic we can make progress. The hydro side of course is big numbers, Mark, as you are well aware and the land side of that amount, about freeholding Canada is about, it was what we talked about earlier 1.5 million acres and US there's leased land of about 67,000 acres, and there's still some fee land left in the US.

Okay.

But Mark, I guess I would add a little color on the hydro, I don't think given all of the volatility in the market there's any diminished interest in high quality hydro assets.

Okay. All right. Sounds good. Thanks, guys.

Thank you.

Thank you. The next question is from Chip Dillon from Dillon Research Associates, please go ahead.

Hi, good morning, guys.

Hi, Chip, good to hear from you.

Thank you. A couple of question, first, is just on the coated groundwood market we have noted some of the larger come competitors taking substantial amounts of down time while we've also seen magazine ad pages and it's pretty clear catalog mailings are going down as well. How is pricing holding up there, and are you seeing any evidence of increased imports, either from Europe or Asia?

Well, we really haven't seen the import issue pop up, but it could. Currently, the I think the euro is down, around 1.30 I think or sub 1.30 so you have to watch the euro exchange rate. But no evidence as of yet of improved or increased imports from Europe. I this I the numbers were a little clouded earlier in the year when the duty has been put on the coated free sheet segment out of China and they started exporting mechanical coated and it showed up in those statistics but that seems to be behind us now. I think, again I think in all of our paper products the real pressure point will probably come in the first quarter as people watch to see how inventories settle out and see how prices are set in Europe and that is true both in newsprint and coated mechanical. So at this point in time I would say we are getting a lot of discussion about price, but it is geared toward first quarter price.

And I would imagine newsprint in Europe the discussion is still attempting to be upward. Is there any evidence that the discussion is downward in coated?

Well, I think in Europe, the gap, two years ago, we were talking, about how Europe was relative to North America, now we're talking about how low Europe is relative to North America. So really, it is how much of an increase will the industry achieve and you'll set a big tone for the marketplace on newsprint and on coated, I think it's the other way. It is what will prices settle out at on, remember in coated in particular you will have a lot of volume contracts tied to sort of six month pricing or things like that as they go out and bid business in the advertising world. So, those prices will get set December time for the first six months of '09 and that will set the temperature, but I think, I think the buyers are pushing for a decline like they always do, and it is going to be a function of the operating rights and inventory levels in coated which are too high entering the fourth quarter. Typically you would see coated mechanical inventories dropping this time of year but it is a very weak advertising environment which is a long winded way of saying yes, there is price discussion going on in coated papers.

Got you. Then lastly for Bill, looking at the balance sheet there, is about $1 billion, throughout the corporation, that you trounced it by a short term. Can you talk a little bit about where that debt is both on the Bowater or Abitibi or even on the parent company side and sort of what your initial plans are for handling beyond the Bowater issue you just discussed.

Sure. Of that short term debt, there's the $248 million debenture coming due on the Bowater side on August 1, of next year. We were on the route to replace the Bowater bank facility with an asset backed loan and combine that with a secured debt offering, in order to address that maturity. We are with the current capital markets over the last month we have delayed or we are ready to go we have just delayed and we will address that as soon as the capital markets recover to some degree. The -- on the other side there's a $347 million 364 day line coming due March 31, in the Abitibi subsidiary. That is supported by accounts receivable that are not in a securitization program, inventory as well as some other assets and we would be getting ready to roll that facility over, and finally there's an AR securitization facility coming due in July of next year. Those are the big ones that we're moving on right now.

Got you. Okay. Thanks very much.

Thank you. The next question is from Peter Ruschmeier from Barclays Capital. Please go ahead.

Thanks, good morning.

Hey, Pete.

Dave, I was curious if you could care to comment on how much of a decline in pulp demand that you have seen recently you think may be attributable to counterparty issues, financial issues related to letters of credit and things of that nature opposed to real demand declines, and I think that may affect newsprint as well?

Well, I -- let's talk about the -- I have no evidence that it has affected newsprint at this point in terms of ability to finance purchases. On the pulp side, I really don't know the answer to the question, but I think, my sense from talking to our salespeople is that, that there's sufficient inventories in the major export markets that they can sit and wait to see what happens to pricing and that with the currency volatility out there that people much like they're doing here in North America are hoarding cash and they're holding on to their cash. That will be by sense. I don't know if any particular customer can't open LCs or banks aren't willing to be counterparties on an LC transaction with their customer, I just don't know the facts.

Okay. Okay. That's helpful. And maybe a question for, for Bill, Bill, would you care to quantify very significant improvement, and even if you want to put brackets around it I know it is always difficult to forecast in this business.

Yes, no, it is--.

The currency is--.

It is very currency dependent, Pete, but in the end when you talk very significant, we have improved in previous quarters by over $100 million EBITDA quarter to quarter and that's a significant improvement. So, I think there's upside to, to improvements that we have had in the past.

All right. So $100 million plus is at least possible with an $0.85 dollar?.

It is very possible with the dollar, yes.

And O&P prices coming way down.

Okay. And remind us if you could O&P Company wide I guess both O&P and OMG. Are you also seeing OMG be come down and what's your total purchases?

We consume about 2.5 million-tons annually of recycled material and all -- I'm not aware of any grade of recycled material that hasn't significantly dropped OCC, OMG, O&P, they are all, I mean, you have all read the reports. You can be willing to take it. You can pretty much, if you're willing to take it, you can certainly name your price right now. Go ahead.

We collect about 500,000 of that 2.5.

Okay. Just to clarify it wasn't much of a benefit in 3Q but it should be in 4Q; correct? Well, I would describe it this way.

The world, something happened the last week of September to recover paper prices and currency and they have just gone straight down, which, so once again when we made our third quarter decisions to idle some capacity, our O&P driven mills were higher cost. If we made that decision today, we would make a different choice.

In fact, Pete, in the third quarter our costs went up by about $10 million because of the escalation price in O&P.

This is a one month phenomena today but it has been an incredible four weeks in waste paper prices and currency.

Understood. Last question, if I could, I was curious if maybe Bill you could comment on the cost of the outages of Fort Francis, Coosa Pines, and Catawba? And are you planning any outages at Catawba for 4Q?

On the pulp side the repair spending was about $6 million in the third quarter. We have a lot of newsprint outages too and those added up, there were substantial repairs spending about $12 million spent in the third quarter. So we will see much, much smaller amounts there in that repair spending. We have talked about taking Catawba down for ten days.

We have talked to our employees and I think it has been reported in some of the trade press we have indicated that we may take an outage from Christmas through New Year's.

Thanks very much. Good luck with the quarter.

Thank you. The next question is from Mark Weintraub from Buckingham Research. Please go ahead .

Thank you. Two questions. First, as you look at the third quarter performance, it wasn't, doesn't seem to be quite as strong as what you had been hoping for at the end of the second quarter. Was that just a function of the demand fall off that we saw toward the end of the third quarter, or were there other things that surprised you relative to what your original expectations had been?

I will give you my answer from a market point of view. One O&P prices peaked and that was peaked above where we thought they would and the other thing that happened to us, and you probably see it when you look at the newsprint line, is 20% of our sales in newsprint are not in US dollars. They're either in euros, pounds, primarily and of course some Canadian dollars. Those were all unhedged and I think all of those currencies moved against us in the third quarter in the sense they got weaker relative to the dollar. So we convert our UK sales and our European sales back to US dollars. That worked against us. Now that was certainly more than offset here recently by the decline in the Canadian dollar.

So, 20% of our newsprint sales and non-US currencies hurt us a little bit in terms of the translation effect. Other than that, I think that those are the two things in my mind, Bill.

The only thing I would add to that is the general energy inflation, we can't forget that the energy was inflation that occurred in the second quarter and partway through the third quarter, we underestimated the impact on us across the Company, and in effect it is not so much the direct purchases. That's quite easy for us to forecast. Part of it was due to things like wood costs because of the increased costs of cut and haul to pay people to bring wood to the sites. So we got hit in many different places by inflation. It is nice to be in an environment at least on one side of the equation where we're seeing that reverse so quickly.

Okay. Great. That's helpful. Then as you look to the fourth quarter and I realize that there are some variables that are significant and very hard to predict, but do you expect to be free cash positive in the fourth quarter?

Well, I think if you, I think with, with the stable working capital, we were very close to it and we could be very close to it in the third quarter without any of the other benefits. So definitely we expect that we can be free cash flow positive in the fourth quarter. And hopefully, hopefully, we won't be talking just free cash we will be talking about bottom line net income.

Right. Thank you.

Thank you.

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

Yes, just two things to follow-up. One is, have you done a lot of currency hedging with this recent decline in the--?

We are unhedged.

Okay. And you are thinking on that, are you just going to, are you planning to just stay that way or do you have some sort of target?

We think, in the end it is a double edged sword about when to lock in in a falling market. I mean in a currency market, to be able to lock in a substantial amount takes time and we really are looking at it more from the point of view of risk management across the Company. Dave has talked earlier about some of our down time decisions will be driven by currency. Our actual costs, how much we spend in each country will be dependent on those type of decisions. So we are looking at it but we have no definitive plans at this point to do financial hedges in currency.

The other question on the asset sales front, you in the past had shared, earlier this year, had shared some forecasts or some estimates on asset sale target proceeds for '08 and '09 I wondered if you might, based on what you are currently doing maybe update those numbers or give us some feel for when anything might be happening?

Sure. We had originally talked about $500 million target and we moved that to $750 million. We still have that as a target. I think the capital market disruptions have slowed up to some degree what can occur but I still think $750 million by the end of next year is a very, very viable target.

What is your progress so far, do you have a number in terms of where that stands today?

Yes, I just have, I think it is about $200 million. So we'll just look that up. We have both the Snowflake sale as well as Landspills.

A couple of small.

And some small saw mills. We will get that for you probably as this call continues.

Okay. Thanks.

Thank you.

Thank you. The next question is from Jeff Harlib from Barclays Capital. Please go ahead.

Good morning.

Morning.

I am wondering if you can break down the EBITDA at Abitibi and Bowater I am coming up with $165 million excluding the severance. Do you have the break down?

That will be filed with our 10-Q which we file separate reports with each Company, so over the next week you will be able to get that.

Okay. Just remaining cash restructuring costs for the restructuring actions over the next few quarters?

There's $60 million left of severances in the--?

6-0 or 16?

16, excuse me, 1-6.

Okay. Thank you. And any natural gas hedges as you're--?

There's a very small amount, not a, not a -- nothing significant.

Okay. And just coated paper, can you just talk about if you have seen some recent pricing pressure given the weakness in demand there?

Well, as I said earlier, yes, there is certainly a lot of price discussion on coated paper. It is driven, again in that sector is a lot of six month pricing driven by ad spend by major advertisers, and those prices are, will be set in December for the first half of '09. So yes there's a lot of price discussion and in general I would say the price discussion is down not up on coated papers.

Okay. And just with the Bowater refinancing you're looking at, are you still looking at an asset base financing that will provide some flexibility with respect to the mills that are at the, going to move to the holding Company level?

Yes, we were, we have two, we were at a two prong approach to putting an asset back line and we were far along. In fact we were in a position to implement that. We would combine that with some type of secured loan or secured debt offering using those two mills you, under the holding Company, and the markets and mid October that we were unable to implement that.

Okay. And on the ABI term loan, is that something you are going to start to talk to holders now on extending that, or are you looking into early '09?

Very soon probably as late as early '09 is how you should think of it. That would be as late.

Okay. And you would look to roll that facility?

Yes.

Extend it. Okay. Thank you.

Thanks.

Thank you. The next question is from [Tarik Tamid] from JPMorgan. Please go ahead.

Morning, guys.

Morning.

So, you talk to the $320 million annual synergy run rate can you give us a number on how much of that was actually achieved during the third quarter and what you would expect to achieve in the fourth quarter?

On a run rate basis, about, a little over, and I am doing an an annual basis, a little over 270 was in place at the -- for the entire third quarter. We did have a lot of down time maintenance down time in the third quarter which in essence slowed up the realization of that, of it, but we expect to get to the final number 375 by the end of the fourth quarter.

So we should think about third quarter as holding something like $50 million of benefit roughly?

Yes, on an annualized basis, yes. And then on the pension front, the net pension expense during the quarter was roughly $75 million on a cash basis, could you talk a little bit about where was that spent, was it in ABI and BO and what you expect for the fourth quarter and 2009 on the pension line? On the pension line, there won't be a significant change in the fourth quarter, and we will, and you can get the break down of that in the separate filings by companies. We talked, I mentioned earlier on the contributions side we expect a slight, a modest decline next year. Pension expense we have not finalized the accounting of pension expense number for next year. Earlier in June, we, or in June we, we shifted our pension plans from about, as a whole about 40% fixed income to about 70% fixed income and that puts us in a position to have, to moderate or in fact lower contributions for next year.

Okay. Then just one last question, and this is a little bit more general, but how should we be thinking about with the outages during the third quarter, and then the curtailments you are going to take during the fourth quarter. How should we be thinking about fixed cost absorption for just unit cost performance in the different businesses?

I think there was significant, maintenance down time in the third quarter, there will be down time in the fourth quarter. There will be fixed charge absorption, typically that runs from about 150 to $200 per ton in most businesses. What we will be avoiding is the significant repairs we had spent in the third quarter which were very material because the third quarter down time was truly maintenance down time.

Spending will be lower.

Spending will be lower, expense and cash.

And our head count and other SG&A continues to come down.

Yes.

So the fixed component of SG&A continues to come down. In absolute dollars.

That's right.

Great. Thank you very much.

Thank you.

Operator, we have time for one more question.

Thank you. The next question is from George Staphos from Banc of America.

Hi, George.

Thanks for letting me on the call. One quick question, one bigger picture question. Bill, did you say what the pretax amount of the FX gain was on the, in the quarter? I was trying to go get at the operating tax rate in dollar terms.

I think I -- why don't you ask the bigger picture, George.

Okay.

We will look that one up.

All right. We will give you some time then. While cyclical, your lumber businesses, your magazine paper business, your pulp business, arguably grow over time, and operations like Catawba are world class, no one knows with certainty but newsprint looks like it is going to continue to decline over time and in recent years it has been pretty significant. Do you think that, as you're managing this transition, managing the balance sheet, managing the newsprint decline, that maybe your long-term impairing or worsening the position of your better growth businesses for the future? Said differently, might you need to do a more radical restructuring and transformation in your product mix more quickly to manage through this downtown and demand, as you are saying to save the other businesses?

I will take a crack at it. I think you are asking the question we ask ourselves, what investment should we be making to change our product mix. And when is the appropriate time to make those investments? Clearly we would like to grow pieces of our pulp business. We would like to grow pieces of our coated business. We have talked a lot about that. I think until we begin to delever our balance sheet and have sustainable free cash flow, it is going to be difficult to do. Though we have got to deliver on the promises we have made to our investors and that is our primary objective in the near term. We clearly, we have an internal road map that has been well defined in terms of what our current capabilities are and what we could do in a rapid fashion to address the issue that you have raised. So, I think step one is have sustainable free cash flow and operating earnings, prove that we can begin and continue to delever the balance sheet and then begin making those investments to address the very issue you're talking about because our base assumption is that North America newsprint demand will decline significantly in '09, we feel that we are ready for that. From a strategy, near-term or tactical point of view for '09. And that we will continue to be in that mode until the North America newsprint market levels off or plateaus off at some level that no one knows where that is. So we have to plan accordingly.

I guess I just worry about the cash strain that you have in newsprint, as you try to continue to right size the business.

I think if we haven't been clear our goal is to make newsprint not a cash drain, in fact, to make newsprint a cash generator, with positive earnings, and in fact I think that has been proven by our actions this year and the way we intend to manage the business.

Okay. On the shorter term question?

On the pretax foreign exchange was a gain of $6 million, and again, and on again as I mentioned in the, my earlier discussion an $18 million gain, after tax again, that relates to the, the foreign currency impact on our balance sheet, and the actual tax impact relates to the, some of our taxes are in statutory and Canadian dollars.

Okay. I will try to try the pretax, or the operating tax write-off off line. Thanks. Good quarter, guys.

Thanks, George.

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Thank you, everyone.

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