Resolute Forest Products Inc (RFP) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the AbitibiBowater third-quarter 2011 financial results conference call.

I would now like to turn the meeting over to Remi Lalonde.

Good morning. Welcome to AbitibiBowater's third-quarter earnings call. My name is Remi Lalonde, Vice President for Investor Relations. With me today are Richard Garneau, President and Chief Executive Officer, and Jo-Ann Longworth, Senior Vice President and Chief Financial Officer.

Today we will review our third-quarter financial results and discuss current priorities. Let me first direct your attention to the note on forward-looking statements in our press release and on our website. If you haven't read it, please do so.

We will be discussing forward-looking matters on the call today and you should note that due to uncertainties inherent in these statements actual results may differ. Our statements are not guarantees of future performance.

You can find additional financial and statistical information, including a reconciliation of non-GAAP financial measures used on the call, in the press release and on our website in the Investor Relations section.

Following our prepared remarks we will take questions from analysts and the investor community. We would ask that the media and others direct their questions to the media relations team.

Today's call is scheduled to last approximately 45 minutes. I am pleased to turn the call over to Richard.

Good morning and thank you everyone for joining us today. As we previously announced, on November 7, AbitibiBowater will be known as Resolute Forest Products; Produits forestiers Resolu in French.

We are excited about this change because it underscores our commitment and determination to build on the restructuring to remain a profitable, sustainable organization.

We are also currently in the process of moving our corporate head office to Duke Street here in Montreal. The move is part of our continuing efforts to reduce costs. Let's turn to our financial results.

In the third quarter we generated adjusted EBITDA of $150 million, a $40 million improvement over the second quarter. Going forward we will present our results in terms of adjusted EBITDA, which is our management's measure of ongoing performance.

We had a stronger quarter, the third consecutive of improved performance since our emergence from creditor protection at the end of last year, driven by the Pulp, Specialty Papers and Wood Products segments. Compared to second quarter adjusted EBITDA in the Specialty segment was up $15 million; Market Pulp up $23 million; Wood Products up $9 million; Newsprint down $7 million; and Coated down $4 million.

Of note, despite very difficult market conditions and the additional 10% export tax applied for shipments through June 30, the Wood Products is EBITDA positive here today.

Let's look at each segment in greater details and review their markets. North American newsprint demand fell 10.5% September and 6.8% year to date, while North American production declined 3.9%. Industry operating rates in North America on a production to capacity basis were at 92.8% in September. Despite the demand reduction, pricing continues to remain stable in the mid-$600s and mill inventories are trending down.

PPPC has not reported September global newsprint statistics, but we expect to see demand down around 5% year to date, with the largest decline coming from China. India, the other hand, is expected to be up over 3% year-to-date, and Latin America to be flat. We continue to expect to see underlying growth in consumption in some of these offshore markets over the next several years.

Our shipments increased over 9,000 metric tons over the second quarter. We are currently seeing price pressure in certain overseas markets due to excess worldwide supply. Just a reminder on our strategy, that it is to produce what our customers order. And our export shipments during the third quarter were 47% of our overall shipments.

Demand for coated mechanical paper was down 8.6% year-to-date and operating rates for the same period were at 89%. The Publishers Information Bureau recorded that magazine ad pages were down 5.6% in the third quarter and 1.1% year-to-date. [The Reci] reported that catalogs mailed in the quarter decreased 4.1% compared to last year.

The $15 per ton increase to our average transaction price in the quarter reflects the benefit of price increases announced earlier this year as reported by third parties. Seasonal demand improvement was consistent with the other paper grades in the quarter. It came later and not as strong as we expect that trend to continue in the fourth quarter.

Our average operating costs increased by approximately $48 per short ton in the quarter mainly on higher cost for chemicals and energy. Uncoated mechanical paper overall continued to weaken, with total demand in North America down [5.8%] year-to-date. Year-to-date operating rates is 89% despite production coming down about 8% for the first nine minutes. In particular we saw flat demand on the [high cost] rates over the first three quarters, turning slightly positive in September.

Conversely, demand in standard and lightweight grades is down significantly this year. On a positive note overall North American mill inventories were down in September compared to previous month and last year.

Our order book throughout specialty grades is currently full through November, and expect to see a slowdown in the second part of December. Global industry demand for Market Pulp was strong in the quarter, with demand 6.6% higher than September compared to the same time last year, and 6.8% year-to-date.

China drove the majority of the increase, while the largest [pie] is Western European market was down 2.3% year-to-date. North America was up 7.2% in September, but down 2.8% in the year.

Pricing pressure in the Pulp segment continues building on the downward momentum seen in the past several weeks, stemming largely from the lower demand particularly in China.

The Pulp segment's operating performance in the third quarter was driven by higher production and shipment volumes and lower manufacturing costs due to no major maintenance in the quarter. And in the fourth quarter we don't have any planned maintenance.

Housing starts in the US were at a run rate of 650,000 units in September, which is up 15% from August and 10.2% year-over-year. We believe that we are well-positioned for an eventual improvement in US housing starts. However, we expect the improvement to be slow and likely 12 months away. Our result in the Wood Products segment reflect the positive impact provided by the lapse of the 10% export tax on shipment from Canada to the US. Our idle capacity stands at approximately 22% of our total capacity.

The province of Quebec recently announced that harvesting rights are located to us and our sawmill partners would be reduced by at least 930,000 cubic meters per year, or a reduction of 11% of our harvesting right in the province. This reduction represents about 374,000 bone dry metric tons of fiber.

The change is set to take effect on April 1, 2013. After the reduction we will continue to meet our internal supply requirements, but the reduction is likely to affect our ability to sell wood chips to others. We expect that the reduction in our harvesting rights will likely increase the cost of wood delivered to our sawmills as well as reduce current lumber capacity.

I also want to thank the province of Quebec and Ontario for implementing the final phases of the pension relief regulations related to the material solvency deficit in our Canadian registered pension plans.

In connection with the adoption, we announced that we made $67 million of additional and accelerated past service contributions to those plans at the end of August. The funding relief has allowed the Company to maintain the same pension benefits to all retirees. Without it the plan would have been wound up and the recoveries would have [left] 25% of their benefits.

We will also continue our focus on further reducing our debt. We previously announced an additional $85 million redemption of the senior secured notes, which will take place on November 4. This will bring the aggregate face amount of our debt -- our planning to $586 million, down $354 million from the $940 million outstanding at the end of the first quarter, and obviously it excludes the nonrecourse debt.

Finally, on October 25, the Board made annual Long-Term Incentive Plan grants to the Company eligible employees, including executive officers. I indicated to the Board that I was declining my award. We face challenges here in the province of Quebec where our head office is located and where we maintain 30% of our pulp and paper capacity and 80% of our wood products capacity.

We will engage in dialogue with employees and the community in which we operate to overcome these challenges, including the reduced harvesting rights, and find the best way to solidify our asset base in the province. I want it to be clear to those with whom I interact that my number one goal is the long-term success of this Company, and I'm prepared to put my personal compensation on the table to make the point.

But in light of the increasingly competitive market for top executive talent, the other members of my team have accepted their annual equity incentive awards. We must be able to attract and retain talented individuals to ensure our long-term viability. I feel that criticism in Quebec undermines this basic reality of business. It is misguided and shortsighted.

I will now turn the call over to Jo-Ann Longworth, to discuss the numbers in more detail.

Good morning everyone. Today we reported net income in the third quarter of $52 million, excluding special items, or $0.53 per share, on sales of $1.2 billion. After these special items, we reported a net loss of $44 million or $0.46 per share.

As mentioned in the press release, $69 million of the $96 million in special items relates directly to the effects of a sharp decline in the value of the Canadian dollar late in the third quarter. The charges, which are non-cash, stem from a $60 million loss on the translation of Canadian dollar net monetary assets and a $9 million in deferred taxes on foreign currency translation gains.

The Canadian dollar closed the quarter at $0.9521, almost $0.09 lower than it where it began at $1.038. It did close above parity this past Friday $0.06 higher than the third-quarter close. The short duration of the dip meant that we did not see an equivalent benefit in our operating costs for the quarter.

For reference, we have approximately CAD650 million of net monetary assets in our principal Canadian operating subsidiary, including deferred income tax assets of about CAD1.2 billion, partially offset by pension and other postemployment benefit obligations of approximately CAD770 million.

The other special items net of tax in the third quarter included a $14 million charge largely related to the partial impairment and restructuring of our mill in Mokpo, South Korea, a $9 million charge for post emergence expenses, a $3 million severance charge related to corporate restructuring, and a $1 million charge related to the sale of assets.

Turning to the income statement, sales were up 2% compared to the second quarter on higher shipments of pulp up 6%, and Wood Products up 5%, with overall paper volumes essentially flat. Transaction prices for Specialty Papers and Coated Papers increased in the quarter on announced price increases earlier in both the second and third quarters, as publicly reported.

Wood prices benefit benefited from a lapse in the 10% lumber export tax on shipments from Canada to the US. Pulp prices, however, trended down from their highs in quarter two on general market pressure.

Cost of sales decreased compared to the previous quarter despite higher overall shipments. This was due mainly to lower manufacturing costs attributable to major annual maintenance in the second quarter, less market-related downtime, and a $7 million benefit from a lower average Canadian dollar.

However, offsetting these benefits was the $14 million retroactive portion of an energy credit that occurred in the second quarter for our Ontario energy conservation and load shedding plan.

Selling and administrative expenses came in at $5 million for the quarter, which included the aforementioned $5 million severance charge related to corporate restructuring. Total severance charges included in selling and administration expenses for the (technical difficulty) three quarters were $11 million approximately. Excluding these charges, selling and administrative expenses year-to-date were $111 million, moving toward our target of $140 million annually.

At this point I would like to reiterate Richard's comment regarding our use of adjusted EBITDA, describe our segment operating results starting this quarter and going forward.

Adjusted EBITDA is defined and reconciled to generally accepted accounting principles in the notes to the financial information in the press release. This change is also reflected in the third-quarter financial and operating statistics published on our website, including the presentation of adjusted EBITDA for all of the periods covered.

Interest expense in the quarter was $19 million, down from $28 million, which reflects the benefits of $260 million in debt repayments at the end of the second quarter, using proceeds from the sale of our interest in Ontario power generation assets. The run rate for interest expense after we make a further debt repayment of $85 million in November will be approximately $60 million per annum.

For the quarter income tax expense was $27 million on a pretax loss of $15 million, reflecting the $60 million loss on translation of Canadian dollars net monetary assets for which no tax benefit was recorded, in addition to $9 million in deferred income taxes on foreign currency translation gains, both relating to the Company's principal Canadian operating subsidiary.

Although volatile, our effective tax rate for accounting purposes is expected to be about 32% on a normalized basis, excluding currency translation impacts and other adjustments. We do not expect to pay meaningful cash taxes in the near term.

For the balance sheet the reduction in many of the numbers on the balance sheet during the quarter can be attributed to the nearly $0.09 drop in the value of the Canadian dollar. As I previously described, the most significant items affected by movements in the Canadian versus US dollar are deferred income tax assets net of pension and other postemployment benefit obligations.

As to cash, we had $295 million on hand, approximately the same as the second quarter. Cash provided by operations was breakeven during the quarter, this despite the additional $20 million of past service pension contributions, as well as $47 million of accelerated past service pension contributions. This latter amount will satisfy required contributions to Canadian pension plans covered by the funding relief regulations in Quebec and Ontario for the remainder of 2011 and for the first six months of 2012.

Again, this quarter, the timing of the collection of indirect tax reimbursements in Quebec adversely affected our working capital by approximately $50 million. Finally, third-quarter capital spending was $23 million.

Before turning the call back to the operator for questions, I would like to point out that as announced in our press release, we recently amended our asset-based revolving credit facility, or ABL. The amendment extends maturity by almost 2 years, reduces our cost of borrowing and eases many covenants, including the restriction on dividend payment and share repurchases. The ABL is undrawn, except for some minor usage for letters of credit. With cash on hand at the end of the quarter, our available liquidity is in access of $800 million.

Let me close by highlighting that on September 30, Standard & Poor's raised our long-term corporate credit rating to BB minus from B plus. In its rationale S&P pointed to our strong market position in North American newsprint, uncoated and coated papers sectors, a much improved cost structure, and significantly lower debt levels and fixed charges after emerging from creditor protection.

Operator, we will now open the call for questions.

We will now take questions from the telephone. (Operator Instructions). Joe Stivaletti, Goldman Sachs.

I had two things. One, on the coated paper front you made the comment that the seasonal pickup was not as significant and was later than expected. And I wondered if you could talk a little bit more about how things have been trending in the fourth quarter. Is it going to stay a bit softer than expectations or is it the case that some of that that was later carried over into the fourth quarter a bit? And just trying to understand how that is trending.

I think that it is also slower than expected in the fourth quarter. So we saw in the third that it came late. And I think that so far what we see is certainly less orders coming in. And I think that I would certainly relate this to the uncertainty. So consumer spending are lower than -- I think that we certainly see the evidence of an economic slowdown.

And I think that -- as a result, I think that the advertisers are more prudent and are spending less, and it is showing up in coated as well as on the uncoated mechanical grades.

Okay, thanks. And the other question was just maybe following up on your strategic comments about how you have been very focused on reducing debt, and you have made a lot of progress in that. I wondered how you look at that going forward. I think when you came into the Company you said you weren't looking to make acquisitions during the first year or so at least. And I wondered how you're looking at things going forward in terms of debt reduction versus other uses of your free cash flow?

Well, I would like to, and if you look at our CapEx in the third quarter they were lower than what we had in mind, $125 million. Obviously, we are looking at all the projects now and the improvement that we have to make. And I think that our capacity is going to be lower this year and probably higher next year, because we have ordered some piece of equipment to improve our quality -- paper quality -- that will be delivered only next year. So I think that certainly will help on the quality side and this project also is going to help somewhat on the efficiency. So we are certainly focused on this part.

And there is an ongoing also effort to reduce our costs. And as an example, if you look at the this quarter we had a mill closure cost of $17 million. And it is mostly related to the restructuring that we completed at our Mokpo in South Korea mill, where we reduced manning by a 110 people. And we all know how difficult it is to make that kind of restructuring in South Korea.

And we are also -- because as probably as some of you are aware -- the most modern mill in South Korea. And that we focus also the equipment that we needed to operate, and there is also some other cost savings, because we are going to use less equipment.

We had two drum pulpers on the recycle side, and we are going to run only one. The other change that we have also done at this mill is the -- basically we used our production and have decided basically to run on 100% local ONP. That is of better quality, so we have a better yield would explain what we have been doing. And it is here in North America, continue to optimize our assets. Obviously, the adjustment costs went up during the quarter because of higher wood costs, higher power costs, especially in the US South, and also chemical.

And I would just move to the debt side. As we just mentioned, we are going to make another repayment of $85 million -- very focused on reducing our debt. Our target and objective has not changed. We would like to be almost debt-free within 3 to 4 years. So I think that just strengthen our balance sheet and reduce our fixed cost as much as we can.

And, obviously, the acquisition I think that is not high on our priority list at this point. But if we were to have the right opportunities, we would certainly look at them. But I think that overall we still have challenges that we need to address that -- and we're trying to focus on it.

Great, thank you.

Bill Hoffmann, RBC.

Richard, I wondered if you could finish on that comment, you were talking about the capital spend 2012 being higher. I just wondered if you give us some kind of sense of where you're going to go with the capital spend?

Then, also, to put that into some context, if you can talk about your Newsprint and Specialty Papers assets today and what you think over the next year or so, how much further consolidation you may -- and rationalization you may have to do to keep the markets relatively balanced?

Okay. Well, on capital spending, we have, I think that I announced some of the projects. We are going to replace formers and dilution headbox on some of the machines, so we have a few projects that have been identified to improve our quality.

So I think that this year we are going to be below the 120 -- that we -- $120 million that we had indicated. And I think that the overall -- and I have mentioned it many times -- that the objective is to spend about $55 million to $65 million of depreciation on what I call maintenance and business projects. So I think that even with the delay in spending because of the long time that it takes to fabricate those equipments, I think that we are going to be in that range.

Regarding the consolidation, and the adjustment to the declining demand on newsprint, I think that -- obviously, I think that (inaudible) very strong balance sheet and the lower-cost mills that we operate are providing certainly an advantage for long term. But I think that where I see more risk is certainly where we had more exposure to recovered paper. So ONP and old magazine, as we all know, is very costly and especially in North America. On top of high cost, we have now declining yields. So we have more trash or material that we have to send to landfills. So I think that certainly our mills that have an exposure to recovered paper, I think that it is probably fair to say that they are more at risk.

In term of virgin fiber mills I think that we are ready made the closing machine at the Comeau, and I think there is not much else that we plan to do at this point in term of capacity closure. I think that we are certainly going to monitor what is going to happen with demand, and continue to work on -- with a strategy that we have to balance our production with the customer demand.

On the Specialty site, I think that certainly when we look at demand on the uncoated mechanical, it is down 5.8% this year. But certainly on this side, on this product I would not jump too quick to a conclusion. I think that certainly the economic slowdown is probably responsible for a big part of it. I think there is certainly some of the advertisers that are moving to the electronic media, but I think the economy is a big part of it.

I think that when you look at coated mechanical and [SCE], there is certainly other producers that have closed mills lately. So I think that when we look at the operating rates, certainly going to watch it, but I don't think we have any plan at this point to remove capacity or reduce capacity.

We may have -- we certainly are looking to continue to look at our assets and try to find the best balance with the asset that we have to optimize our costs. So it could mean that we restart the machines presently idled and close another one, but our total output should not change -- our total capacity should not change as a result of it.

Thanks. If I could just ask one more question. Just in regards to the export business, I just wonder if you could just talk a little bit about what you think you could potentially do in the export market as you look forward, assuming you get some kind of Chinese demand back?

Well, it is a difficult question to answer. That is one we -- and when I look at spending in the third quarter [up] 47%, and 30% of this 47% is going to Asia. And, obviously, China demand has been down quite significantly this year, and I think that no one can explain exactly why. So I think that (inaudible) was the impact of the tsunami and the earthquake in Japan, but now there is certainly an indication that in China the economy is slowing down.

But I think that we are certainly more focused on India. And I mentioned that India demand is -- we don't have the numbers for September, but I think the indication that we have is the demand is up by about 3%. And we are also -- when you look at Latin America, where we also ship about 40% of the volume that we export, I think that this year, again, certainly because of the economy, we are very concerned that over time this market is going to continue to grow. And if you look at the rest of the world, there is certainly -- Turkey, for example, is where there is significant increase in demand.

So I think that the question that I would have is it not on the (inaudible) of our asset. We are very well-located to serve this market, but it is how much world overcapacity is going to hit this market going forward. And the currency, certainly, is going to have a major impact in itself.

Obviously, when you look at -- the weaker US dollars provide us an advantage. We are certainly all in the better position to be able to export more, but -- and it a reason why we are investing so much on our cost possession to be able to basically take advantage of this market. But there is a need to be very cost competitive.

Great, thank you. That is very helpful.

Tarek Hamid, JPMorgan.

I guess maybe following up on that last question on the export side and competition in newsprint. Can you talk a little bit about the timeline, how sensitive do people get to changes in the euro? (inaudible) some of your competitors starting to bid a bit more aggressively on some of the export business? Just give us a sense of how quickly that market can change.

Well, I think it could change very quickly. We saw that when the euro lost value compared to the US. And I think that the (inaudible) changed almost overnight.

Okay. Then I guess back to the coated paper business for a sec, the cost increase of $48 a ton, could you maybe give us a little bit more detail of what drove that and what your expectations are on costs in coated in the fourth quarter?

Well, I think that most of it was power, then in chemicals. And also we had some -- to be able to meet our customer requirement we had mix -- product mix changes that we use more chemicals.

So I think that based on our other plans for the quarter, I think that we should see our costs coming down. But there was significant pressure on chemicals. I think that the power costs in the South is always higher during the summertime, but I think that now that we are in fall and approaching winter that the rates -- the power rates are going to come down and cost is going to come down too.

Great. And then I guess finally on Market Pulp, backing into the numbers it looks like the maintenance expense in the second quarter was on the order of $20 million to $30 million, is that right? Is that the number we should think about coming back [in 2Q] 2012?

I think that it is going to be in the same range, because we always do the same type of maintenance. It was probably a bit higher this year because of the time that elapsed, and to take advantage fully of the [black liquor] of credit, but I think it is not going to -- I think that using it as a reference is the right approach.

Great, thank you very much.

Stephen Atkinson. Please state the name of your company and proceed with your question.

In terms of the pension deficit, are you able to tell us where we are and any expected contributions in the near term or next year?

The pension for accounting purposes right now is showing about mid-80s in terms of funding. So the Canadian plan is a little bit less than 80% for the US plan.

For the rest of the year, as you know, we made the large pension payment in August for the Canadian plans covered under the relief -- funding relief in Quebec in Ontario, which is about $50 million per year. Which is -- so that has been relieved for the rest of the year. We won't be making any payments for that for the balance of 2011 and for the first six months of 2012.

However, as many of you know, the discount rates used to calculate solvency deficiencies in Canada, and Canada alone, those rates are dropping. We are watching those rates carefully. The relief funding measures we have with Quebec and Ontario require the $50 million over 10 years. Plus there is a portion of up to [$50] million that takes effect, starting only in 2013 if our solvency ratios drop below specific level. So that doesn't kick in until 2013.

However -- again, another however -- if the solvency rates get below a much lower level at any time during the next 10 years, then the parties have to meet and discuss corrective measures that may or may not need to take place.

Okay, so odds are if I assume things are normal then there wouldn't -- there may not be anything in 2012? Am I reading it right?

There won't be anything for these Canadian plans covered by the relief measures for the first six months of 2012.

Okay.

Okay, so we are looking at a normal rate this year where we have expensed or cashed out more than $146 million more than our expense this year. You would expect that number for the first nine months, that number would be reduced by $20 million that we did as a voluntary this year, and $25 million that we accelerated for 2012.

Thank you. In terms of the working capital is there room to lower the working capital between now and the end of the year?

We will certainly be working on it, yes.

Our inventory is certainly going to come down. I said at the end of the second quarter that we build some strategic inventory, and now if you look at the inventory it is coming down. And I think that the only reserve that I would have is on the pulp side, depending on how the (inaudible) is going to basically to evolve in the fourth quarter with the slowdown in China. But I think that overall our strategy -- I would just remind you our strategy is not to build inventory, so to adjust our production with our customer demand.

Okay. In terms of the wood fiber deficit or -- let me put it this way -- the reduction -- 11% reduction in fiber in Quebec, is it in a specific region or right across the province?

It is almost all across the province. And if you look at the information that was posted on the website of the Chief Forrester of the province, so you have -- there was a small differential depending on the region, but overall it is about 11% -- in our case it is about 11%. So it is quite significant, as I mentioned, so 930,000 cubic meters or 375,000 tons of fiber.

So that -- I am not going into any specifics, but I guess your strategy would be to shall we say balance your production with whatever the fiber base is available. Like if you have to knock out a machine or something then you're going to have to do that. Would that be a good way to look at it?

Yes, it is a fair comment. And I think that when -- don't forget that also in 2008 our wood supply went down by 18%, and now we are going to have another 11% on the tail of it. So I think that when you look at the networks of sawmills that we have, we need to have a look, and it is a reason that I mentioned that we need to solidify our base.

So I think that we need -- we are going to need less sawmills to process a smaller volume of wood. And I said that we have all the chips that we need, all the fiber that we need to supply our own pulp and paper mill. It is an important qualification that I want to make, so it is really the sales to other parties that could be -- that would be impacted here.

Okay. So what is your situation in Ontario in terms of fiber supply and the -- how would you call it -- the percent of chips you have in-house versus buying outside?

We are -- in Ontario we are in very good shape.

In terms of the -- well, we have had the closure of Port Hawkesbury, how does -- how has that affected your own market?

Well, I think that, obviously, we have only one machine, (inaudible) [Columbia] mill. So when you close a large machine like this one it certainly helps to balance supply and demand. So I think that so far the closure on supply and demand side has certainly been positive.

And does it help you at all on the lower -- the high bright grades, and the other high bright?

Well, I think that it is more of the -- certainly when we look at high bright, the demand is up about 3%. Super high bright, it is down 8% or 9%. I think there is -- it is probably more of a -- it is specific to advertiser. So I think that because of the uncertainty they are just basically switching to lower grades or less expensive grade of paper. So it is what I would read in the numbers in the third quarter.

Okay. And one last question. I know it is not a major market for you, but can you talk about the situation in directory?

Well, directory, as we all know, it is coming down, and year-to-date it is smaller than 20%, so we have only 60,000 tons of directory. Our machine is running full. And so far we haven't seen the impact, so I think that there is less capacity that has been closed. And I think that the -- all the [owners] are profitable. So we are certainly going to monitor the situation and when it turns negative, this machine is probably going to be affected. So it is a decision that we are going to take in due course.

Okay, after that I have one more question. On Catawba, where there is the big jump in cost, is that a permanent affliction or can you do something about it?

Well, the increase in cost, especially on coated and newsprint, the power has a significant impact in the third quarter because of the very warm weather that they had in the South. So the power rate just jumped quite significantly and the other part is the chemical cost then went up also significantly.

So I think that in the fourth quarter the power rate are going to come down, and I expect that we are going to come to a more normal level. But don't forget that this is a northern mill, so when it started to be cold you have the heat and there is some additional cost. But I think that we should see more -- we should be at more normalized level.

Okay, thank you so much.

Paul Quinn, RBC Capital Markets.

Just a couple of questions. One on -- you reference a declining fiber supply available in Quebec, and you've got two idled mills at Gatineau and Dolbeau. Maybe you can give us an update on the status of those two mills.

Well, I think that the intent here at Gatineau and Dolbeau, we are still looking at how to optimize and solidify our asset base in Quebec. So if those two mills were to restart I think that capacity will have to be closed elsewhere. So it is not going to be a net increase in terms of production.

Okay, and just secondly on the change in your debt covenants, how does that affect your ability to start a dividend or share buybacks?

It is Jo-Ann. The ABL we had prior to the amendment limited payments of dividends and share buybacks to $5 million in any 12-month period. The new ABL has covenants on payments of that nature, but they are more related to our excess availability as well as our pro forma fixed coverage charge ratio. As long as we've got access availability and as long as we continue to do well on our fixed charge coverage ratio, then the dividend and share repurchases could be made.

Great, that's all I had. Thanks, guys, good luck.

Operator, we will stop it there. We are over time already.

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