Resolute Forest Products Inc (RFP) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the AbitibiBowater second-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, Matt, and welcome to our second-quarter conference call. With me today are Richard Garneau, our CEO; Jo-Ann Longworth; and Bill Harvey.

Our plan this morning is to cover the second-quarter financial results and our current 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 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 in the notes to the press release and 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 Richard Garneau.

Good morning, everyone. Thank you for joining us today. As we previously announced, Bill Harvey will be leaving the company at the end of this month. I would like to recognize him for his dedication and valuable contribution. Bill played a very critical leadership role in this restructuring process. I wish him the best in his future.

I would also like to take this opportunity to welcome Jo-Ann Longworth to the company. She is currently serving as a special advisor to me and will assume the role of CFO upon Bill's departure. She brings a broad range of experience to our organization.

Now, to our financial results -- for the second quarter, we generated aggregate EBITDA of $107 million compared to $81 million in Q1. This includes special items of $4 million of net expenses described in our press release, and that also will be covered later in this presentation.

During the quarter, we completed the sale of our investment in ACH Limited Partnership, resulting in net proceeds of about $300 million. We used the proceeds to repay $179 million in principal of our $850 million senior secured notes and completely paid off the $90 million note owed to our former partner at the Augusta mill.

This is a major step in reducing our debt. We will continue to focus on even further reductions in the future. Operating results for the second quarter have improved over previous quarter despite cost pressures from a stronger Canadian dollar, higher retail costs related to several annual outages, and higher distribution costs.

Turning to our markets and starting with coated paper, industry-wide demand for coated mechanical was down 2.4% in June and 7.1% year to date. Operating rates were strong at 97%, primarily due to capacity closures. The Publishers Information Bureau reported that magazine ad pages were up 1.2% in the first six months of the year. As reported by [Reese], catalogs mailing in the quarter also increased 1.2% compared to last year.

We achieved most of the reported April price increase during the quarter, and we are in the process of implementing the reported July price increase. We have not yet seen the seasonal fall improvement in the coated business.

On coated mechanical papers demand, for the industry is weaker than anticipated, and it's down 4.8% year to date. However, demand for SCA and hybrid grades are up 7.2% and 3.5%, respectively, for the first six months of the year. Directory continues to decline as expected, where [out of] uncoated mechanical is also weaker than forecasted.

Industry operating rates fell slightly, but are still considered healthy at 90% in June, and should improve with the announced closure of the competitor's mill in Michigan.

In line with our strategy not to build inventory, we took 26,000 tonnes of superbright paper production downtime in the second quarter.

Although North American newsprint shipments have continued to decline compared to last year by production has remained in sync. Demand in North America was down 8.9% in June while shipments took capacity ratio at 96%. Milled and consumer inventory are down month over month as well as year over year. North American prices remain stable in the mid $600.

Globally, newsprint demand was down 5.1% through June. Demand is down in all regions of the world except Eastern Europe.

Western Europe demand has held up better than North American demand, and the largest decline is coming from the Asian region, where demand is down about 9% year to date. The majority of Asia decline can be attributed to Japan, the tsunami and the earthquake related and to China. And if we remove those two, demand for Asia is down less than 1%.

India continues to do well with demand up 3.3%. Latin America is down only 1.2% year to date. Although volatile, we continue to expect underlying growth in consumption in many of these offshore markets, and we will continue to grow with our customers. We are seeing higher prices in many areas around the world.

Global industry demand for market pulp continued to be strong, increasing over 3% in June. Year to date, shipments are up 8% with much of the increase coming from China. However, as we entered the third quarter, pulp buying around the world, and particularly in China, began to slow. We have seen the price weaken modestly up its record high in June, but we continue to expect demand and pricing to stabilize later in the year.

During the second quarter, we took annual outages at several of our kraft sites. These outages impacted our costs for pulp and somewhat the paper grades during the quarter.

Maintenance spending for these outages was about $24 million, or $77 per tonne, which resulted in [30,000] tonnes of production curtailment. This completes all of our annual kraft outages for the year.

Moving to the wood product business, housing starts in the US were at a run rate of 629,000 units in June, which is up 15% from May and almost 17% compared to a year ago. We believe that June may include some weather delayed starts from April and May. While US demographics support higher levels of housing starts, our expectation is still for a slow recovery.

In summary, even though we continue to see inflation pressures on the cost side and much uncertainty in the economy, we do expect to see improvement in our profitability in the second half of the year.

I will now turn the call over to Bill Harvey, who will walk you through the numbers in more detail.

Good morning, everyone. Our reported net income for the quarter was $61 million or $0.63 per share. After special items, our net income was $69 million or $0.71 per share. Special items after tax included a $4 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 $3 million severance charge related to our continued SG&A cost reduction initiatives; a $2 million mill closure charge; an $8 million expense for ongoing post-emergence reorganization; and a $2 million gain related to asset sales, which was primarily the ACH transaction.

In addition to these special items, during the second quarter, we also benefited from a $44 million or $0.45 per share tax reserve adjustment. As a reminder, beginning in 2011, we have allocated all of 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 the product line information prior to 2011.

During the second quarter, we were approved as a participant in a power program in the province of Ontario. We earn rebates on electricity purchased and consumed based on the implementation of energy management plans at our Ontario mills from April 2010 to March 2013. During the second quarter, we recorded a rebate of approximately $19 million, of which $14 million related to prior periods.

Our manufacturing costs were impacted in the second quarter primarily due to three things -- first, the stronger Canadian dollar negatively impacted costs by about $11 million. Second, our maintenance and repair costs were higher due to the scheduled kraft outages which raised our repair costs by $18 million in the quarter, and lowered pulp production by 30,000 tonnes. Additionally, we had 57,000 tonnes of market and maintenance downtime in our paper grades.

Distribution costs were higher in the quarter due to timing and volume of export newsprint shipments. Recycled fiber costs are up over 25% from year end, which raised our cost per tonne by $21. Overall, our recycled content has decreased. We are currently about 80% virgin fiber and 20% recycled across our paper volumes.

As you may recall, in March, one of the paper machines at our Clermont mill was idle due to roof damage at the site. Production on this machine resumed in June, and the machine has had an excellent start up (technical difficulty) well.

SG&A expense for the quarter was $40 million, which includes a $3 million charge for corporate severances. We are well on our way to reach our annual target of $140 million of SG&A before short-term incentive plans.

Interest expense for the quarter was $28 million. With the completed sale of our interest in ACH and the subsequent repayment of debt, we expect our interest expense to be approximately $75 million annually, including 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 nondeductibility of deferred tax asset. Although volatile, our normal accounting tax rate is expected to be around 32%, excluding currency translation impacts. However, we do not expect us to pay cash income taxes for the foreseeable future.

Looking at the balance sheet, our trades account receivable increased by $104 million in the quarter, in part due to the timing of reimbursement of $66 million of GSC and ASG tax payments. These funds were received in July, and our cash position improved to almost $400 million by the end of July. Our inventory declined during the quarter, almost entirely due to a decline in raw materials, mainly log inventories.

Cash usage from operations was $43 million in the quarter, due to a $63 million investment in working capital. This investment was primarily due to the accrual of the $66 million of reimbursable GSC and [PSC] receivables that I previously mentioned and the $50 million interest payments made in the quarter.

Our debt levels decreased by $269 million in the quarter. As mentioned earlier, we used the proceeds from the sale of our ACH interests to repay $179 million of our senior secured notes and paid off the $90 million note related to our purchase of our former partner's interest at the Augusta newsprint mill. As a reminder, we have the ability to repay an additional $85 million of the senior secured notes at a price of $1.03 beginning in the fourth quarter of this year.

Capital spending was $70 million in the quarter, and we expect spending levels to increase to an annual level of $120 million for 2011.

In summary, while there was uncertainty in the economic conditions, and softness in some of our grades such as coated and pulp, however we do expect our performance to improve for the balance of the year. Operator, we will now open the call for questions.

(Operator Instructions). Bill Hoffmann, RBC.

Good morning, Richard and Bill. Just a quick question, Richard, on the mix of your business in the export market and newsprint, just wondered if you could just talk about that, whether you've seen any shifting in the current quarter.

And then the second piece would be just with regards to the pulp markets, also, what you are seeing there from a flow of business here in the last month or so.

Thank you for the questions. I think let's start with the newsprint, so I think that when you look at the second quarter, we export about 47% of our volume overseas. And when we look at the details, I think that we are still at the same level for Latin America; it's about 20% that is going to Latin America; 20% in Asia; and about 10% -- 8% to 10% that is going to Europe and also the Middle East. So I think that obviously, it has been a shipments overseas business slightly higher in the second quarter. It's a bit slower than in Brazil particularly, but we expect to see continued growth in this market.

On the pulp side, it's -- I think that certainly when you look at the June and year to date, the demand year to date is certainly up 7.7%; as I mentioned in June, was also up 3.2%. I think that typically, when China is -- when they had high inventory, they had a tendency to stop buying for a while, and I think that it's probably destocking that we are seeing now on pulp. As I said, I think that we are -- we believe that the market is going to stabilize in the second half, certainly in the fourth quarter where we're going to see the Chinese buyer coming back.

And I think that on the pricing side, again, we have seen a small decline in pricing lately, but again on pricing, when you look at the operating rates on pulp, I think that the indication that we have is that we should see a continued need for pulp, and volume should not go down significantly.

Thanks, and just a final question -- with the $400 million of cash, what is your strategy on your capital structure going forward here?

Well, as Bill mentioned, we have this -- certainly priority to continue to reduce our debt. I think we have the potential and the flexibility to pay another $85 million in Q4, so -- and certainly intend to do it. I think that we have certainly some capital spending improvement that we need to do on some of the machines to -- and we're looking at the mill that is well positioned for export that needs some improvement on formation. So we're going to focus the capital on those few projects.

Certainly, also, going to continue to make or pre-fund a small amount on the pension obligation, so our plan is to try to get our solvency ratio in the mid-80%'s, 82% to 85%. And we just hope that the market is going to help at some point, but I think it's -- part of the cash is going to be used for that.

I think at some point -- and we have to prove ourselves here -- but it's certainly another use would be to return the cash to shareholders, and also looking at opportunistic M&A as we have -- we can find the right opportunity.

So I think it's a long list, but I think that priority is really on debt reduction, make sure that we have the -- our mills.

You can see -- if you look at the capital spending, our plan is about $120 million this year, so it's less than 50% of our depreciation. So -- and I think that some of the mills certainly need some improvement. And we're looking at also capital expenditure of what's a quick payback. So we're looking at projects that have a payback between 30 and 36 months.

Thank you, and good luck, Bill.

Joe Stivaletti, Goldman Sachs.

Good morning. I was just, first of all, wondering just to follow up on your comment on the coated paper market, you said that you weren't yet -- if I understood right, you said you weren't yet seeing the seasonal pickup that I guess has been talked about in the press -- and this comment. I wondered what your outlook was for the back half of the year with coated. We continue to read from Reese and some others that they think the market will tighten up a fair amount here in the next few months. I wondered what your perspective was or what types of orders, what the back half looks like so far.

Well, I said that we haven't seen the surge, the full surge on coated, so we're still expecting that when you look at the stat -- the catalog mailings is high -- is higher than last year. But I think that the (technical difficulty) that we have from our customers and printers and the retailers that they are just probably taking their time to invest into advertising at this point; try to evaluate or to assess how the economy is going. We still expect to see an improvement, but we really don't have (inaudible) now and we don't see this surge.

We have increased slightly our inventory on quartered -- if you look at the segment because there is always pre-make, and the customers that are coming back with the same size rolls and the same orders than previous years. So we have made a small -- we have built a small volume of inventory, about 7,000 or 8,000 tonnes basically to be able to respond to increased demand when and if it materialized. But we're still waiting to see the indication. I think that it's going to happen, but it's slower this year than it used to be.

Okay, that's helpful. And then on the Newsprint front, I know that your company's approach was that there wasn't yet time for a price increase when some of the other companies announced earlier. I wondered sort of how you are looking at that and what you think needs to -- what conditions need to exist for you to be comfortable that a price increase would be able to happen?

Well, I think that we certainly -- we have a cautious view. We're always looking at the economic indicators. I think that we look at print advertising, the pages and circulation.

But I think that as I said before, we're focused on cost. And at this point, if you look at our segment -- and I've mentioned that before, I think that the best price increase at this point is a cost reduction. And we're working on it as diligently as we can to bring our costs down. We are fortunate enough with this restructuring to have mills that are cost competitors, but we have identified opportunities.

And I'm not going to tell you that it's easy to implement the opportunity that we have identified, but we are focused on cost reduction at this point. And I just -- I think that our employees and management -- they are all working on it and it is -- it's the first item. It's priority one, two and three, it's cost reduction.

Yes, yes. Okay. And just one final thing -- you made reference to opportunistic M&A activity as a possible use of cash, realizing that debt reduction is a big priority. But when you think about opportunistic M&A, what area, what product areas come to mind that you would consider; which areas might be ones that you wouldn't consider?

Well, I think that it's -- and I don't want to speculate on it, so I think that the -- and it was the last item on the list when I give you -- I answered the previous question.

So I think that there is probably -- on the lumber side, I think that there is certainly a need from for some consolidation. We still have saw mills that they don't have enough wood to run on three shifts. And I think that what I would have in mind is if, if, and it's a big if, there is opportunity, would probably be on that side to start with. So I don't think that there is anything else at this point.

Great. Thank you.

Tarek Hamid, JPMorgan.

Good morning and thank you.

Just a quick question -- when you look at the energy benefits you quoted during the quarter of $14 million I think, roughly, in total, if you talk a little bit about what those relate to, and sort of how we should think about those as recurring or nonrecurring?

Yes, it relates to a program that was put in, in Ontario, and by developing energy plans at our sites, we are eligible for the program. It was $19 million in total, of which $14 million came from work that had been done in prior quarters. And the plan was officially implemented in the second quarter, but $14 million of the $19 million had actually been as a result of prior quarters. And then the difference -- the $5 million -- is a Q2 item, and that will be ongoing. We will continue to take advantage of that program and expect to generate equivalent type of cost savings going forward.

Great. And then on the working capital front, very, very large build in the quarter on accounts receivables. Can you talk a little bit about that?

Yes, the accounts receivable was primarily due to an increase in the GST, [QSC] and HST receivables, and that was due to delays with the taxing authorities. We are reimbursed for that. And $66 million of that was due to this accrual that grew. And actually we were reimbursed in July. So it was a timing issue more than anything else. And then there were some other small items.

There's nothing related to our customers. Our customers are paying on the same terms. And as you can see from our volumes, it's not volume related. It was primarily due to that unique item.

I guess finally, one last question -- more just big picture. You're starting to see customers think about substitution between some of your sort of -- you're coated groundwood and specialty grades yet, or you started to see sort of -- or the buying pattern relatively normal between grades?

Well I don't think that we are seeing big substitutions here. I think it's -- what we get from a customer is some uncertainty on the market and when you look at the customer confident customer or less confident, and I think that the advertisers and the retailers are probably more prudent than usual on their advertising program. So, again, I don't think that when you look at certainly [SCE] is up in terms of demand in June and also year to date and I worried.

But when you look at magazines, the pages -- pages is up. There is some [title] -- that situation is down. But I think that overall, it's -- I would say -- and I don't know for sure, but the economy and the uncertainty -- or where the economy is probably the explanation for the delay basically and this surge that we normally see in the third and fourth quarter.

Okay. Thank you very much.

Owen Quinn, RBC Capital Markets.

Hopefully that's me. It's Paul Quinn here. Just a question on Q2, Q3 price increases. You put through a number of price increases. Just wanted to see which ones are tracking well and whether you could give us a recap on that.

Well, the one on coated that I mentioned, if you look at quarter over quarter, so our coated price went up by $28, so we had the $40 pricing announcement. So -- and I think that -- as you know, we have six-month contracts, so some of those are going to the price increase related to these contracts are going to be implemented in the third quarter.

And I think that the second one that we had to rely on coated is also in the process of being implemented. And we also had a $40 increase in April on [SC] grades and on one in July. If you look at the uncoated, we had $26 price increase. If you look at the sequential price increase, $26, so part of it is also included. So we chose that implementation is well underway. And I think that we are still confident that we're going to see the July price increase being implemented in the third and probably in the fourth quarter, depending of the agreement that we have with the retailers and commercial printers.

Okay.

And then just maybe if you could give us some additional color on the specialty paper markets; it looks like the middle grades, SC grades are doing very well, but the low end, sort of the directory aren't. And quite confused on the super hybrids, why they are so weak versus sort of what we are seeing for uncoated freesheet.

Yes, well, this -- super grade is also -- it's weak at this point, and we don't have a good explanation on the weakness because when you look at uncoated freesheet, it's uncoated freesheet substitutes are -- we expect that it's going to pick up. So, I think that the grades that we are certainly seeing a significant reduction in [comes from] -- in demand it's directory. It's down 18%, I believe year over year. And book also is down.

We only have a small capacity in these two grades, but obviously the book business -- hard cover and soft cover, I think that there is certainly a significant impact of the electronic readers. And I think that when you talk to the book publishers, they were surprised to see that the sales of electronic book is holding and continue to grow, so I think that book is certainly going to continue to be affected on the demand side [in] directory.

Well, thanks for sharing. And just a question for you, Bill, just on the feature energy benefits. Is there some seasonality to that, i.e. can we expect higher benefits in the winter months versus the summer quarters?

There is some seasonality, but a lot of it is due to the load shedding so you do get a little bit more in the summer, but the seasonality -- but when we look at our history, it's muted seasonality.

Okay. Best of luck, Bill. Thanks.

Jeff Harlib, Barclays Capital.

Good morning. Can you talk for 3Q what your planned downtime is for maintenance and market downtime, and how maintenance costs overall should trend versus Q2?

Well, the maintenance on the pulp mill -- everything has been done now. And I think for the second half of the year, we're going to run full.

And on the paper side, I think that you are aware that the machine at Baie Comeau has been closed permanently. It's a closure that we announced in the first quarter, but now took place at the end of April.

And the machine -- the Clermont machine as Bill mentioned has been restarted and is running well. So I think that unless our customers orders less, I think that for the second half we are -- basically we plan to run full. But it's -- we're really looking at our inventory and we have -- our coach is not to build any inventory unless it's pre made that we know it is going to be bought by our customer. But I think that we should basically run full as the economy continues to hold.

In specialties as well?

In what?

In the specialty segment?

Yes. Yes. Yes.

Okay.

And just input cost trends entering 3Q versus 2Q?

Well, obviously the -- on -- there was inflation pressure of -- Bill mentioned the -- when Peter recycled fiber that was up significantly in Q2, it was $21 per tonne. I don't think that we see really an improvement on this side -- on the cost side. It's still very high.

And the other part, especially on the recycled fiber, is the quality of the material that we receive. So what we are seeing is the reject always is -- continued to go up because of contamination, glass, plastic and metal and other contamination. And so I think it's adding a significant impact on our costs.

Obviously in the second quarter, we didn't have the full harvesting operation, but it's [Orie] continued to be high. There are always a surcharge related to Orie. And I think that chemical -- we have also affected because of the price of energy.

So -- but I think that we knew that we are not going to have the maintenance. Bill mentioned $18 million more in the second quarter, then downtime about $15 million. So if the market holds, that we're going to run full, so I think that we may see some slight improvement on that side. But obviously the value of the Canadian dollars is the other item that is affecting our Canadian operations. And it's $22 million per penny and it's having a significant impact also on our cost.

Okay.

And just lastly, the pension contribution from this year, have you quantified that roughly?

So, it's about $120 million that we plan to do on a normal basis. We're probably going to make a small -- a contribution to the pension plan with the sales of hydro assets in Ontario. We have indicated to both Quebec and Ontario government that we're going to accelerate the payment and make also a special contribution of $20 million. So -- but normally year over year should be around $120 million, $125 million, $130 million, if we don't take into account the special payment that we plan to do probably in the third or the fourth quarter of this year.

Okay. So it could be $140 million, $150 million total?

Yes; this year with the special -- the accelerated payment, would be about $140 million, $150 million.

Okay, thank you. Good luck, Bill.

Thanks, Jeff.

And Matt, we have time for one more question.

Joseph Stauff, Susquehanna.

Good morning. Obviously a very cyclical industry and so -- I mean clearly pressure on pricing going forward, etc. But if you can kind of step back and just talk specifically about the industry, the landscape in general obviously is sort of ridden with distressed competitors. Can you discuss, Richard, how this affects sort of the landscape in the near term? I would imagine that especially your distressed competitors are really pushing pricing up to the extent they can; and then what you think could happen in terms of just overall industry pricing integrity if some of those start filing for bankruptcy?

Well, that is a difficult question. You know, you always have to look at your customer and how much they can afford to pay for your product. I think that if -- and it's a reasonable way we're looking at our costs here because if the price of our product goes up too fast, too quick, we're going to see probably situation going down or even print advertising going down. I don't think that it's -- it is what we -- what -- as a company that we should bank on. It's the reason again that we are insisting and that we are talking to our managers or to our mill people to bring our costs down and be able to extract more value with pricing, and I think that's more -- what is really important is that we have -- and I knew that it's cyclical -- but pricing stability I think is important here. And again, I just want to stress on the costs, the pricing at this level and we squeeze the cost down. And I think that's where you want to be in a cyclical business.

You want to be able to make money at the bottom of the cycle. And when you have a commodity and it's all commodities that we have, we need to have a -- low-cost mills. And I think that by large, we have certainly now mills that are cost competitive, and we are very competitive cost-wise on the coated. We have the best facility in North America, and we're also working to improve our newsprint network and our specialty network, so I think that that's where we're going to continue to focus, on the cost side.

And we will certainly monitor the indicators and look at it, but certainly not -- it's not an item on our radar screen at this point; we're -- it's really focused on costs.

That makes sense. And then with respect to newsprint exports in particular, Norske obviously is a bigger international competitor for you. Their business model, just given where their cost structure is relative to their sales, is obviously under considerable strain as well. Is there any commentary you can share with us regarding, say, the risk, the theoretical risk that them -- maybe other competitors that supply the export markets could all of a sudden start kind of dumping some supply in those import and export markets for you?

Well, there's always a risk on export, but let's look at the market that we have; in Latin America, for example, it's 20% of our export volume. And I think that when you look at Brazil and when you look at the infrastructure we have with the mills that are right on water and using large great bulk ship of more than 20,000 tonnes and adding an infrastructure in Brazil where we can basically add the inventory and serve our customers, we have a significant advantage here compared to, generally speaking, the competition.

So -- and I think the other point also that is important to mention is that those -- these markets wants to have virgin fiber. And it is the other point that is key. So -- and we are having discussion with customers in Europe, and that want to have more by virgin than recycled, because you know that virgin is absolutely needed to be able to mix with recycled fiber. So we have this advantage. And you know, we operate mills in one of the areas of the world where we have the right trees, we have the right species to produce newsprint.

So I think that overall, if you look also at Asia, it's -- I would say that most of the capacity is recycled, and certainly we have cost pressure on recycled material. We cannot import as much [ONT] and ONG from the US because of the decline in consumption and demand. So I think it's still -- it's an opportunity for us and for others. Because we are virgin, I think that there is -- we're certainly going to try to capitalize on it. And as I said, it's a commodity. If we're lower cost than anybody else, that's certainly a risk that we can probably manage to a certain extent.

Got it. And then final question -- you've been there for just over seven months now as CEO. You had mentioned this a little bit earlier in terms of your commentary and how you are trying to think about allocating capital, but specific to the capital investments that you will be making internally, can you give us a refresh in terms of where you are aiming that capital? Is it sort of upgrading some of your existing production facility, obviously, that probably was under-investing because of restructuring? Are you building new capacity in any particular grade?

No, I think that the first objective that we have is all going to put money in our lowest-cost mill and the mills that have the highest efficiency. And I think that we have [identified] investment where at these mills, so it's the first -- really it's the choice that we have to invest. And those mills are going to -- certainly to have the money -- the capital that is going to be allocated to that. And part of it that's a machine improvement to be able to improve quality and meet the requirement of our export customers.

Great. Thanks very much.

That completes our Q2 call. We appreciate your interest in our company.

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