Resolute Forest Products Inc (RFP) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Abitibi Bowater first-quarter 2011 financial 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, Valerie, and welcome to our first-quarter conference call. With me today are Richard Garneau, our CEO and Bill Harvey, our CFO.

Our plan this morning is to reintroduce you to AbitibiBowater, cover the first-quarter financial results and our current strategic priorities.

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 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.

Additional financial and statistical information, including a reconciliation of non-GAAP financial measures used on the call, can be found on our website under Investor Relations.

Following our prepared remarks, we will take questions from the analyst and investor community. We would ask that the media and others refrain from asking questions during the call. Today's call is scheduled to last about 45 minutes. I'm pleased now to turn the call over to Mr. Richard Garneau.

Thanks, Duane. Good morning, everyone. Thank you for joining us today.

This is our first full quarter since we emerged from a restructuring in December of 2010. I will discuss our first-quarter financials, accomplishments and strategy.

First, I would like to thank our employees for their efforts during our restructuring phase. The wage reduction has helped to improve overall competitiveness and offset to some extent the impact of the stronger Canadian dollars.

For the first quarter, despite the headwinds of downtime of some 57,000 metric tonnes due to seasonally slower volumes, the strong Canadian dollars and higher energy prices, we generated EBITDA of $96 million from our product lines, which was impacted by $7 million due to fresh start accounting. After capital spending, we generated positive free cash flow of $43 million. We believe we are on track to achieve productivity improvement in the future.

Since becoming CEO about four months ago, I have visited 17 of our 18 pulp and paper sites. We have good sites, but still have some opportunities to improve further. While we have accomplished much, I believe there are important incremental cost savings that can still be obtained. We are benchmarking our sites against one another to better focus on improving our cost structure. There is work to do, but I expect we can deliver lower costs as we continually optimize our sites.

During this quarter, we finalized the purchase of our partners ownership possession at our Augusta, Georgia newsprint mills for $105 million. This deal has been initiated during our restructuring.

This is a large 407,000 metric tonne low-cost newsprint facility currently supporting domestic customers with the potential to service export markets as well.

As I mentioned, the first quarter tends to be a weak volume quarter. As a result, we took approximately 19,000 tonnes of newsprint and 29,000 tonnes of super bright paper downtime during the quarter. Our strategy is not to build inventory.

We are also focused on reducing our fixed costs and our breakeven point. One of those fixed costs is our interest on our long-term debt. We intend to reduce our debt levels to lower our interest burden. Our [balance] count in features that allow us to repay up to 10% each year with our cash flow. We expect to take advantage of these features.

Other fixed cost is SG&A. During the restructuring, we were able to reduce our annual SG&A to about $160 million or at of what it used to be. We continue to take steps to lower this level even further. First-quarter SG&A was $37 million and included $4 million of severance charges. We are on track to approach the best in class performance in terms of corporate overhead.

Turning to our markets, we saw the normal seasonal pattern of weak advertising early in the year, which is typical following the year-end holidays. As we moved into the spring months, volumes began to improve.

Now let's take a look at paper market. Coated markets improved materially during 2010, driven by consumer spending and advertising, and a reduction of supply. For the first quarter, demand was down 5.5% and operating rates were 87%. There were some industry capacity closures in the first quarter and we expect better operating rates going forward. We have announced a $40 increase in our coated grades effective April 1.

Published industry reports showed that on coated mechanical papers demand was weak during the first quarter, down 4.7% for the industry as a whole. Demand for the super-calendered grades were almost flat for the quarter, while standard grades and directory declined.

For the first quarter of industry operating rates were 86%. In line with our strategy not to build inventory, I mentioned earlier, we took 29,000 tonnes of super-brite paper production downtime in the quarter. Super-brite paper demand has been particularly weak. However, the second and third quarters are normally stronger and we expect to see demand improvement. We have announced price increases of $40 per tonne most of our specialty grades, and $70 per tonne for our directory grades for June.

On directory, most of our volume is annual contracts, but we have openers for the second half of the year.

As previously announced, we closed the specialty paperboard machine at the Coosa Pines, Alabama, mill during the quarter. The machine had been a newsprint machine, converted in a pilot paperboard project in 2010. Although we had market acceptance for the product, the capital commitment required to make the machine cost competitive in packaging was too large, and we made a decision to permanently close.

Turning now to newsprint, North American newsprint demand is down about 6% for the first quarter. And for the first quarter of -- the industry operating rates were 89%. Inventories are down at the mill and publisher level, and newsprint prices remain stable in North America.

As I mentioned earlier, downtime at two mills and the roof damage at the Claremont, Quebec, facility, reduced production by 19,000 metric tonnes during the quarter. In addition, we announced the permanent closure of paper machine no. 2 at our Gatineau, Quebec facility. This machine was closed on April 26. This machine had annual capacity of about 120,000 tonnes of newsprint.

Closing this machine will allow the other machines at this site to operate more efficiently and lower the cost at the site.

We also had labor disruption at the foundry mill during the quarter affecting our costs at this mill. Globally, newsprint demand was down 5% through March, mainly due to de-stocking in Asia and particularly in India. We continue to grow with our customers in many of these offshore markets, and although volatile, the underlying consumption is expected to improve.

Global shipments of Market Pulp is a record of nearly 5 million tonnes in the month of March. Shipments are up about 10% for the first quarter with much of the increase coming from China. We announced increases of $30 per metric tonne in March and also $30 per tonne in April for various grades of pulp. We had the annual kraft maintenance outage at Catawba in Fort Francis during the first quarter. We expect to take annual outages at our other kraft sites during the second quarter. The outage at Catawba impacted our costs in coated paper and pulp in the first quarter. In addition, we had production difficulties at Catawba during the quarter, also impacting our costs, as well as unusually cold weather for the South that affected the pulp mills.

Moving to the Wood Products business, housing starts in the US were at a run rate of 549,000 units in March, which is up 7% from February, but about 13% below March year ago as a result of the effect of winters and foreclosures, leaving a higher inventory of unsold houses.

Our expectation is for the slow recovery in housing starts. Lumber markets in North America are focusing on Asia with Japanese demand -- with Chinese demand and an expectation of Japanese rebuilding. However, the impact on the market remains uncertain. Lumber demand in North America remains low, and they have an impact on pricing.

In summary, while we have seen cost pressures mainly tied to energy and the Canadian dollars during the first quarter, we expect improvements in our profitability in the balance of the year as seasonal volumes improve, and we realize our previously announced price increases. We will continue with our strategy of not building inventory.

Now, Bill Harvey will provide more details on the financials for the first quarter.

Thanks, Richard, and good morning, everyone.

Our reported net income for the quarter was $30 million or $0.31 per share. After special items, our net income was $24 million or $0.25 per share. Special items after tax included a $29 million gain as a result of translating our foreign currency denominated balance sheet items into US dollars, which is primarily related to the tax attributes we have in Canada.

A $6 million charge for impairment and closure costs related to the Coosa Pines paper machine; a $6 million severance charge related to our closure at Coosa and continued SG&A cost reduction initiatives; an $8 million ongoing post-emergence reorganization expenses; and, finally, a $4 million impact from the fair value of our finished goods inventory in fresh start accounting.

At the end of 2010, we implemented fresh start accounting, and the balance sheet of the company was adjusted to fair value. This has resulted in significant income statement effects in the first quarter. The change resulted in significantly lower depreciation expense. Additionally, as mentioned, our finished goods inventory was adjusted to fair value at year end, and this inventory was sold in the first quarter at its fair value. Operating income was, therefore, reduced by $7 million pretax.

Additionally, during the first quarter, from an operating income presentation perspective, we have allocated all of our corporate SG&A back to the product lines, excluding severance-related charges. Prior to 2011, we allocated only direct selling expense to our product lines. In order to facilitate comparisons, we have provided additional disclosure on SG&A included in product line information prior to 2011 in our financial and operating statistics.

Our overall manufacturing costs were higher in the first quarter as compared to the fourth, primarily to three things. First, the stronger Canadian dollar impacted costs and raised our US dollar costs by $15 million compared to the fourth quarter of 2010.

Second, our furnace costs of wood fiber and ONP were higher in the first quarter. Recycled fiber alone was $7 million higher than the fourth quarter. Finally, market downtime as a result of weakness in demand, partially seasonal, especially in white paper, combined with the planned maintenance outage at our Catawba mill, had a significant impact on our costs. We incurred repair costs of approximately $7 million and lost approximately 5,000 metric tonnes of pulp and 2500 short tonnes of Coated Papers at the Catawba mill. Of these, the maintenance costs in coated paper were about $5 million.

Due to ice buildup and snow, the roof over one of our newsprint paper machines at our Claremont, Quebec, mill collapsed in March. Thankfully, no one was injured. However, the paper machine was damaged and production is expected to resume only in June. The lost production of about 10,000 tonnes and higher fixed costs at the remaining machine increased our costs in the quarter by approximately $3 million. We are insured for the property damage with a $1 million deductible for the loss.

SG&A expense for the quarter was $37 million, which includes a $4 million charge for corporate severances. Although this is higher than the $30 million of SG&A in the first quarter of last year, last year's number benefited by a $17 million reversal of a bonus accrual. On an apples to apples basis, we have seen a reduction of $14 million in SG&A compared to the first quarter of 2010, and we are well on our way to reach or better our annual target of $140 million.

Interest expense for the quarter was $30 million. Of this, $21 million relates to the $850 million debenture, $1.5 million to the $90 million note related to the Augusta acquisition, and $4.6 million to debt in our ACH subsidiary. There also was a small amount of amortization of financing fees and credit facility fees. Our tax rate for the quarter for accounting purposes was impacted by several tax adjustments and the non-deductibility of the exchange gain on the deferred tax asset. Our accounting tax rate for the full year is expected to be around 30% to 32%. However, we do not expect to pay cash income taxes in the foreseeable future.

Looking at the balance sheet, our trades account payable increased by $26 million. We expect this trend to continue as we regain normal terms with our trade vendors.

Finished goods inventory declined modestly in the quarter. There was an increase of raw materials as we built wood inventory in the Northern regions to prepare for the spring breakup.

Our debt levels increased by $90 million in the quarter as a result of the purchase of our former partner's interest in the Augusta newsprint mill. We now own 100% of the mill. As part of the transaction, there was a last distribution of the cash on hand in the partnership of approximately $15 million each. We expect to close on the ACH hydro facility sale in the second quarter. This asset sale will result in cash proceeds of almost $300 million to the company. We intend to utilize almost $200 million of these proceeds to repay debt, lowering our interest burden.

Capital spending was $15 million in the quarter. We expect spending levels to increase to an annual level of $120 million for 2011. We initiated several excellent high return capital projects in the quarter, including a turbine, which will be funded primarily by the Canadian Green Energy Transformation Program.

During the second quarter, we have planned kraft outages at our remaining kraft pulp mills and expect repair spending of about $25 million and lost tonnes of about 23,000.

In summary, we put many items behind us in the quarter, and although the second quarter is a heavy maintenance quarter for our kraft pulp mills, we expect our financial results to improve as compared to the first as a result of the realization of the announced price increases and improved manufacturing costs in our paper grades.

Operator, we will now open the call for questions.

(Operator Instructions). Joe Stivaletti, Goldman Sachs.

I wondered if I could ask you a couple of questions to better understand what's happening in your coated segment with Catawba. I was wondering if you could update us on the April 1 price initiative, how that seems to be going, and also wondered if you could shed any light on the preliminary numbers from the AF&PA for April, which appeared to be fairly weak. I wondered if that was consistent with what you are seeing or if you think there's some anomaly there.

Well, I think that the indication that we have is that the price increase is going to go through. So we're confident that that's going to be implemented, and I think that when you look at the permanent closure about capacity in the industry, I believe that the operating rate is going to probably creep up.

Obviously on the consumption side, it's still that we have anecdotal information that some of our customers see better demand at our consumption and others are seeing weaker consumption. I think that's probably still early in the second quarter really to conclude on where the demand is going to be. So obviously, when you look at the overall economy and the pressure of very high oil costs and there's probably pressure building into the economy, but I think that so far, as I said on price, we believe it's going to go through and going to wait to see the result of more complete statistics on demand consumption.

So can you give us any guidance on what your expectations are for your coated paper volume in the second quarter versus the first in terms of direction?

The volumes for the quarter will be slightly better than -- we expect to be slightly better than the first. We were impacted in the first quarter, primarily on the cost side from an outage, and pretty significant repairs -- $5 million of repairs in that mill just in Coated Papers. So we expect on the cost side the number to go back to what it was more last year.

And don't forget also that I mentioned that during the call that we had for the South, very cold weather and we had interruption of production a couple of times and we had also difficulties with frozen chips and fiber that has impacted the performance of the pulp mill and, directly, the performance of the three coated machines that we don't expect that we're going to see in the second quarter.

Right, right. So just finally on that point, the -- you mentioned the maintenance and the pulp mill, the machine outages and whatnot in the first quarter and some of the cold weather. Can you quantify the EBITDA impact of those things -- what EBITDA in the first quarter for coated would have been if you didn't have those? I know you said repairs was about $5 million. I wondered if you could quantify some of those other things that you view as non-recurring.

Well, I think one of the issues, of course, Joe, is that we don't want to throw a lot of non-recurring items out there because simply our job is to manage through non-recurring items. The big ones are the pulp outage at Catawba, and that was big -- the big one. We had some other unique items, but in the end, we expect that the second quarter will be relatively clean except for in the kraft pulp area, where all the other sites are down. So I think what we can do is indicate what happened in the first quarter, but it primarily was at the Catawba mill, the big impact.

Okay. Thanks a lot.

Tarek Hamid, JPMorgan.

Can you talk a little bit about some of your newsprint export markets during the quarter, any sort of changes in buying patterns? Sort of any update on kind of just growth in those markets for you?

Yes, the export market for the first quarter was slow. I think that we saw destocking certainly in India that has affected basically our shipments in the first quarter.

And we also had some weather-related problems at one of our mills on the St. Lawrence River because of the very difficult weather that we had in February, we were forced basically to delay shipments. So I think that when we look forward for the second quarter, we should -- we are optimistic that it's going to go back to normal levels.

So I think that, again, India was -- we started destocking, but an indication in the second quarter so far is that the demand is -- and our shipments are back to normal.

Okay. And then I guess kind of any early thoughts on market downtime expectations in newsprint or specialty papers in the second quarter?

Well, we don't have any definitive plans at this point. I think that based on our order files at this juncture, we don't have any plan to take downtime, but obviously as I said, the strategy is to avoid to build inventory. And depending on how the other [foz] is going to be filled in the next two months we're basically going to advise.

Okay. And I guess just one last one for me, on the working capital side, a little bit of success building some trade credit. Kind of any expectations on sort of trade credit and/or just networking capital over the next couple quarters?

Well what we have done is we have instituted 60-day terms starting April 1 with all our suppliers. Of course we understand we have to communicate with all the suppliers and make them -- and focus on the cash generation in the company, the reduction in debt, but I'm optimistic that you will see over the next couple quarters, the same -- at least the same size improvement on Accounts Payable.

Right. Thank you very much.

Sean Steuart, TD Newcrest.

Thanks. Good morning, guys. A few questions -- Bill, wondering if you can give us an idea of how much the ACH assets contributed to EBITDA in the first quarter.

The ACH assets contributed about $11 million to $12 million in the first quarter, Sean. Now as I know you are aware, but there's also an interest offset that I mentioned on the call too, and that is a gross number. That's including -- the $11 million to $12 million is the EBITDA; you have to subtract the interest expense and then the partner share.

Understood. And Bill, can you confirm that this quarter gave full credit for the labor cost savings you negotiated through the restructuring process that would have been fully reflected in Q1. Is that right?

Well, the 10% reduction is fully reflected. I think that we are still finalizing the other 4% savings, and efficiency that we are going to have the full benefit in the second quarter.

Okay, understood, Richard. And then on the newsprint shipment volumes, your -- and I'm just looking at the quarter-over-quarter number, your volumes compared a little bit worse to what we saw for the industry overall quarter over quarter. And Richard, you touched on some of the export market conditions. Can you help us reconcile that versus the industry number given how big a part you are of the industry?

Yes, well I think that our shipments were probably lower than the industry. We had the impact of Claremont with the roof collapse, about 10,000 tonnes. And I think that basically our strategy is to produce what are customer orders.

And I think that in terms of market share, I think we're pretty close to when I compared the other players; we're pretty close. I don't think that there is -- that we were overly affected by the downtime.

Okay. And then just one last question, Bill, you ran through some of the numbers pretty quickly. The Catawba repairs you said were $5 million. And then you gave another downtime figure I think with respect to Catawba that was $7 million. Was the $5 million in that $7 million number, or are those mutually exclusive?

No, those were -- the $5 million -- the $7 million is the Catawba repair spending for the whole site, of which $5 million was in Coated Papers. And $2 million was in pulp, which is, as you know, was a little abnormal, but that's just the reality of that annual outage.

Got it. Okay. That's all I had. Thanks, guys.

Paul Quinn, RBC Capital Markets.

Thanks. Good morning, guys. Just a question on debt repayments and the use of proceeds from ACH sale. You mentioned $200 million towards your debt. Can you just remind us under your terms of your $850 million senior notes, what you can pay and what the price is?

Sure we can -- under the terms of the note if the asset is sold within six months from when the note was issued, we can have $100 million of the proceeds of the sale at $105 million. And then in any given year, we can repay 10% of the issue, which would be $85 million at $103. So together that's $185 million.

Okay, great. That's all I had. Thanks, guys.

Joseph Stauff, Susquehanna.

Good morning. A couple questions -- do you guys expect to hedge at all, I guess with respect to your cost structure? And then I have got a couple of follow-ups.

The only -- the hedging on the cost -- on the Canadian dollar we think that the way to manage it is actually taking downtime or making asset decisions in Canada with the strong Canadian dollar. At this point, we do hedge sales to Europe in euros and in pounds sterling. They're moderate sales, and we have hedged on occasion natural gas, et cetera. We don't have anything in place right now. We have a policy set up, but that's one area that we do hedge on the cost side.

Okay, thanks. And just, can you just comment I guess about the overall seasonality of your business from a consolidated perspective? As a result of emerging from bankruptcy, obviously there's a certain amount of [REM] as you normalize earnings overall, but just simply trying to kind of run rate your first-quarter results as it relates to full year plan projections and so forth. Can you give us some background there, please?

Well, I think it's difficult to really give you guidance on that. I think that Bill has given the breakdown of the one-time items that we had on the Catawba maintenance, the Claymont roof, the recycle cost increase, the fuel surcharge. So I think that obviously I believe that the second quarter and third quarter normally are seasonally a lot stronger. And I think that if you look at the numbers from last year than even previous year you're going to see this trend. And I think that we have -- we are considering that it's also going to be the trend in the next two or three quarters. Obviously there's the demand in the first quarter has been probably -- has been weak and there is a part of it that is related to the economy as a whole, so there is certainly the impact of the events that are taking place in the Middle East. They certainly have an impact on the overall economy that has impacted, and it's very difficult to know how much it is, but it has certainly impacted paper consumption at the sizing level.

Okay. And Richard, with respect to I guess the additional areas above and beyond, again, what was sort of highlighted within the planned projections, can you talk a little bit more about sort of additional sources of costs that you think you could take out here over the next 12 to 18 months? I know you had mentioned historically maybe some additional corporate overhead I believe on the last call, but can you -- is there more operating costs that you think is attainable?

Well certainly we have -- having discussions; I said that we are still working on the 4% efficiency gain that we believe we can have with our labor force, so it's going to be completed on the second quarter. I think that I also said that we are benchmarking our mills, and we are looking also at many levels, some mills that are probably higher manning level than needed, so we're going to have a look and come up eventually with plans to address it.

Obviously, we are also looking at our equipment itself, and trying to identify the other efficiency gains that we can basically achieve to reduce our costs, improve the yields on fiber, improve the consumption of chemicals. So I think that there is still a number of items that we need to look at and there is potential here to continue to reduce our costs. And I am confident that there is certainly opportunities here to bring our costs down even further, so we're working on it very diligently.

We knew that the impact certainly on the Canadian mills of the strong Canadian dollars is affecting our profitability and it's certainly an opportunity to have a dialogue with all the stakeholders to identify what could be done to improve on the cost side.

Fair enough. And last two quick ones. If at all possible, can you give us a possible update on at least the competitive landscape, maybe white birch in particular and if there's been any movement and/or decision based on that mill for white birch and how it could affect you.

And then finally, any additional professional fees that you still need to pay out beyond the quarter? Thanks very much.

Well I think that on white birch, you know probably as much as we know. I'd say it's all public information, and we don't have access to any specific that is not public. So I think that we look -- let's say it's impossible for us to come, and we don't specifically know what is going on.

On the professional fees, as you noticed in the quarter, there was $10 million spent there, approximately $10 million. And that will continue this quarter in the second quarter and then wind down in the third quarter. So we have a quarter and a half left at that pace, and then that should be behind us.

Thanks very much, guys.

Sean Steuart, TD Newcrest.

Actually all my questions have been answered. Thank you.

Kevin Cohen, Imperial Capital.

Thanks for taking my question. Richard, I'm wondering if you could comment on how the rise in the Canadian dollar and input cost inflation in general might have changed how the company thinks about consolidation and perhaps where the best opportunities might lie for the company?

Well, obviously, when you look at the impact of a change, $0.01 impact or bottom line by $22 million a year, so it is quite significant. But I think that when you look at our facilities in the US, they are not affected. I think that we have low-cost mills when you look at the six mills that we own in US and the one that we own 40%. So I think that with -- certainly with the impact of Canadian dollars, it's an opportunity for us to continue the dialogue with the stakeholders. We have a significant impact on fiber costs and I think that we need to have dialogue with our contractors, with our workers, and even the companies that transport the wood. So I think that we need to continue to identify opportunities that affect our mills.

I think that the decision also to close Baie Comeau, close these 120,000 tonnes machines, I think that it was market related. But at the same time we can't back up the wood that is more expensive; that are producing less, we can get the wood closer to the mill that is going to have an impact on costs. And obviously we're going to identify basically in Canada the machines that have the best potential, and we're going to announce the session when we -- if we determine that there is machines that are not going to be cost competitive with the stronger Canadian dollar. So I think that overall it's the view that we have has to be pay more attention to our Canadian assets now that we have very, very strong Canadian dollars.

And I think we should add that there are Canadian mills that function very, very well at this Canadian dollar level. And that's Canadian mills that have been taking the steps necessary to compete, so it's not just US versus Canada; it's site-specific.

Sure. And I guess maybe just to sort of clarify the question, when you think about industry consolidation in the context of M&A and/or deploying CapEx toward growing in different product grades, does the current client in terms of the C dollar and input cost inflation change perhaps the grades that the company would like to get bigger in? Or how do you sort of think about those dynamics?

Well, I think that we're going to be very prudent on any grade that is worth investing on new products. I think that certainly like the SCA and soft-nip product, but I think that when you look at last year, those grades are -- they grew only by 2%, so -- and I think that when you look at the increase in demand, it's only 40,000 to 50,000 tonnes of additional demand per year. So we have to be very cautious before making any decision to basically modify machines to produce higher value.

I think that now we're really focused on cost and we're focused on repaying the debt with the cash flow that we believe we are going to generate. And if opportunities come, we're going to look at it, but we're not after the opportunities. We're looking at our operation. We have been basically out of bankruptcy for a quarter, and we need basically to prove ourselves that we can deliver on the expectation.

That's very helpful. Thanks a lot, guys.

Jeff Harlib, Barclays Capital.

Hi, good morning. In Uncoated specialties, can you just talk a little bit more about -- you talk about [SC] holding up okay, high brites weak. Can you talk about some of the end markets and what you're seeing, and how your backlogs look going into Q2?

Well, I think that when you look at the first quarter overall, so I think that of coated demand was down by 4.7%. I think standard was really slow and high brite and superhigh brite demand was really slow.

I think that when we look at the second quarter, I believe that we are going to see some improvement. Obviously on directory, if you look at the details, directory demand in first quarter was down by 21%, but we have a pretty small exposure that's about -- it's less than 100,000 tonnes, and I think that if you look at the public announcement or some equipment or machines that have been closed on the directory and that could probably help on the site, but I think that when we look at the overall, the second quarter and third quarter of this demand, we should see -- we're optimistic to see improvement on that side.

It's very difficult because of the impact of what is happening in the Middle East; it's having an impact on the economy in North America. But I think that the anecdotal information that we get from our customers, especially the retailers, is that it seems to see a pickup in business, so normally with a pickup in business there is a pickup in print advertising. So I think that we need to -- really need to wait to see how the May and June is going to basically -- to come out.

Okay. And how about the price increases in super-calendered and other uncoated grades in April? Are those being realized?

Yes, I think -- we are considering that the uncoated basically, we have a [$40] increase for June, and I think that it's certainly (inaudible) supervisor it's going to be implemented.

On a [CD] a $40 price increase in April that's going to be implemented over time because we have also a six months contract with some of our retailers here. But I think that we're going to see the impact in the second quarter and then also the third.

On directory, the increase is on June 1. And again, I mentioned that we have openers because normally you have -- it's a yearly contract, but we have openers and we'll probably have an opportunity to have discussion and see some improvement on pricing. So, and coated, I think that the price increase in April, as I said, is going to be also implemented over time.

Thank you very much.

Operator, we have time for one more question.

Jason Alper, BTIG.

Good morning. I was hoping you can go into a little more detail on the impact on your financials from fresh start accounting. I think you might have briefly mentioned that, but I was wondering if we could understand the impact perhaps on a product basis. Thank you.

Yes; it's really through the product-line information; there's $7 million of inventory that was fair valued at December 31, that as you sold in the quarter, you got no margin from. So that's in the product line information and is in the operating income information.

On depreciation, we provide the financial and operating statistics, and that we posted on our website. And you will notice in those statistics, depreciation has come down very significantly. So that will be in front of you.

We also, because of how we are presenting now, we used to only put SG&A -- we used to have two buckets of SG&A. One bucket per product line and one bucket at the corporate level; in the first quarter, we have allocated back all the SG&A to the product lines. And in order to help you make comparisons, if you go to the financial and operating statistics, we've got -- we have broken out SG&A last in last year's quarter, so you can actually see and look at the cost ex SG&A in order to give you some ability to see which way our costs are moving.

Okay. That change in depreciation going forward, is that going to be the new level of depreciation?

Yes.

Okay. All right.

And one last question about your newsprint shipments and downtime, it looks like when you add those two numbers together you get some measure of your capacity. It looks like that number has come down dramatically from Q4. Is this --

I think you have to look at Q3. In Q4, our inventories came down in Q4 as they always do because Q4 is typically a very big quarter for shipments. So if you look at Q3, which is about the $700,000 level, that's a better number to look at.

Okay. So what's your newsprint capacity going forward then?

Well, if you look at the third quarter, about $700,000 is a pretty good number to look at per quarter.

On a capacity basis, not on an (multiple speakers)

On a capacity. And we do have some machines that can make both specialties and newsprint, but if you look at $700,000, that's a pretty good indicator prospectively.

Okay. So multiply that times 4 annually, that's about 2.8 million metric tonnes. Is that correct?

That's correct.

Okay, great. Thank you.

Okay.

Thank you.

That concludes our first-quarter call. Thank you for your interest in our company.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.