Resolute Forest Products Inc (RFP) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products third quarter 2012 earnings call. I would now like to turn the meeting over to Mr. Remi Lalonde, Vice President for Investor Relations. Please go ahead, Mr. Lalonde.

Thank you, Valerie, and welcome, everyone, to Resolute's third quarter earnings call. I'm joined by Richard Garneau, President and Chief Executive Officer, and Jo-Ann Longworth, Senior Vice President and Chief Financial Officer.

You can follow along with the slides we'll be using for today's presentation by logging onto the webcast using the link in the Presentations and Webcasts page under the Investor Relations section of our website. The slides are also available for download.

Before we begin, I direct your attention to the note on forward-looking statements in this morning's press release and the slides accompanying this presentation. We will discuss forward-looking matters today. Due to uncertainties inherent in these statements, actual results may differ. Our statements are not guarantees of future performance. You can find additional financial information and statistical information, including a reconciliation of non-GAAP financial measures, in the press release and the slides.

We will take questions from analysts and investors following our prepared remarks. We ask that media and others please direct their questions to our communications department following today's call.

Richard?

Good morning and thank you for joining us.

We reported adjusted EBITDA of $91 million in the third quarter, compared with $120 million in the second and $150 million in the third quarter of last year.

By segment, we generated adjusted EBITDA of $44 million in newsprint, down $6 million from the second quarter; $12 million in coated, down $1 million; $37 million in specialty, down $2 million; and $14 million in wood products, down $7 million. We lost $9 million in pulp, down $12 million from the second quarter. Year over year, newsprint adjusted EBITDA is up $8 million and it's up $9 million in wood products, but it's down $15 million in coated, $2 million in specialty and $53 million in pulp.

Excluding Fibrek, volume explained $20 million of the decline from the second quarter and $51 million from the third quarter of 2011. This was driven by weak international newsprint markets as a result of the strong US dollar against a number of local currencies and low ONP prices, by a sudden drop in lumber shipments during September and by our efforts to continuously work to optimize our asset base to adjust to market conditions, having idle of closed marginal machines and invested in (inaudible) enhancements on the successful one.

Our underlying principle is simple and it guides everything we do; sell profitable tons, manage production and inventory levels and maintain the world-class operational standards. This is how we will improve margin and market share to mitigate a gradual structural decline in paper grades and how we'll implement our corporate strategy to gradually retreat from certain paper grades and to use our strong financial position to act on opportunities to diversify and grow.

So, the last few months we have closed our idle marginal machines, closed the export-focused Mersey newsprint mill, and the restructure of a number of mills to introduce more efficient manning models and to put more focus on achieving absolute efficiency targets on every machine.

We also took more market and capital improvement related downtime in the third quarter compared to the second for these initiatives, as well as for estimated 5-week outage at the Saint-Felicien pulp mill as we announced during the last earnings call. The purpose was to carry out some much-needed work to improve its operational and environmental performance. Between lost production and actual costs (inaudible) with this outage, there was a $14 million unfavorable adjusted EBITDA impact compared to the second quarter.

Going forward, we will benefit from growing external power sales at the Saint-Felicien facility, though the effect may not be fully seen until we complete the balance of our ongoing repairs over the next two quarters, expected to be another $15 million.

We are sensitive to price changes. Based on today's capacity, a $25 per ton change to pulp pricing and a $25 per 1,000 board feet change to lumber pricing would have a $45 million and a $41 million effect, respectively, on segment EBITDA on an annual basis.

Pulp prices decreased by about $83 per ton since the third quarter of last year, but we gained $74 per 1,000 board feet in the lumber segment. These changes essentially cancel each other out in our results, both compared to 2011 and the second quarter of this year.

We focus on what we can control, which is why we feel strongly about our guiding principle of selling profitable tons, managing inventory and maintaining world-class operational standards. Our cost focus strategy is critical to these efforts and it is what has allowed us to deliver (inaudible) margins. This is the second consecutive quarter where we have reported adjusted EBITDA margin above 10% in paper and wood products. We generated $99 per ton in specialty papers, $87 per ton in coated paper, $71 per ton in newsprint and $41 per 1,000 board feet in the wood products.

Pulp underperformed by this measure, but we continue to believe it is, in its long-term future and we are well positioned to benefit from an eventual return to healthier and more normal market conditions. We're also confident that we will see a meaningful improvement from coated papers in the coming quarters as the result of our optimization efforts at Catawba, including the elimination of 154 positions begin to bear fruit.

Total North American newsprint demand declined just 0.6% through the first 9 months of the year, but the average operating rate on a shipment to capacity basis remained elevated at 92% as overall capacity has fallen by about 700,000 tons since the beginning of the year.

Domestic shipments -- market shipment -- domestic market shipments have remained constant, declining a marginal 0.5% here today. The grade-switching trend down from specialty paper continued with demand for end users other than newspaper picking up 26% in the first 9 months of the year, making up for the 6% slide in demand for a newspaper publisher.

Global demand for newsprint is down 2.7% through September, including an 11.4% drop in Western Europe and an 11% increase from China. Indian demand remains weaker this year, falling 8.6% through September, the result of currency-driven cost pressure on local publishers and the weaker local economy.

In Latin America demand has picked up in the third quarter and it's down 1.5% year to date. As we noted last quarter, the effect of the strong US dollar is clear when you compare the reported increase in exports to Asia and India from Western Europe to the drop in these exports from North America. This is why we close our export-focused Mersey newsprint mill at the end of the second quarter.

North American demand for coated mechanical paper was down 4.1% in the first 9 months of the year. It was outweighed, however, by a 7% reduction in industry production, resulting in a shipment-to-capacity ratio average of 94% year to date compared to 91% in the same period in 2011 and the first half of 2012. We are confident that our optimization efforts at our Catawba facility will position that mill for greater overall profitability and we expect those results to be reflected in the upcoming quarters.

Total North American demand for uncoated mechanical paper declined 17% through September, including a 25% drop in high-gloss grade, 17% in lightweight and 8% in standard grades. The shipment-to-capacity ratio averaged 93% over the same period as producers reduced capacity.

Faced with these steep drops in market demand, it is imperative that we focus on having the strongest possible competitive position. That is why we recently restarted the Dolbeau facility. We are confident that it will be a world-class facility benefiting from external sales of energy, from the power cogeneration plant itself supplying a very competitive source of steam using a wood supply of wood waste from an adjacent sawmill. All of this will give the facility an unmatched cost position. With our focus on running for profit, not for tons, we continue to access our network of mills to ensure that we produce only the tons our customers order.

Overall, chemical and market pulp demand rose 2.2% through September, due in large part to a 12% increase in demand from China against a decline of about 4.3% in North America and 3.4% in Western Europe. Global demand for softwood pulp, which represents about 80% of our virgin fiber capacity, is up 1.8%. Hardwood pulp is up 2.7% because of a 3% increase in (inaudible) pulp demand.

Despite the continued challenge in this segment resulting from the impact of the worldwide economic slowdown, we continue to remain optimistic with the long-term outlook, but the timing of any meaningful improvement continues to be uncertain.

Interestingly, we have had success in applying the Resolute operating model to the two recycled bleached kraft mills we acquired with the acquisition of Fibrek. We lowered production rates, reducing furnace costs and eliminated a negative margin customer to improve overall profitability. Both mills were profitable in the quarter.

Seasonally adjusted US housing starts reached 872,000 in September, up 35% from last year, driving pricing in our wood products segment up for the third consecutive quarter. Results were down slightly as a result of irregular buying patterns in September, an increase in stumpage and transportation, which increased costs.

Jo-Ann?

Thank you, Richard, and good morning, everyone.

Today we reported net income of $31 million or $0.32 per share for the quarter ended September 30th on sales of $1.2 million. Excluding special items, we reported net income of $7 million or $0.07 per share.

Special items during the quarter net of tax included a $21 million gain on the translation of Canadian dollar net monetary assets, a $6 million credit as a result of reorganization-related and other tax adjustments, and other gains of about $2 million as described in the press release, and a $4 million charge related to the start-up costs at Dolbeau.

Total sales in the third quarter were $1.2 million, down 1% from the second quarter. Volume rose 12% in the pulp segment, reflecting 3 months of volume from Fibrek's two RBK mills compared to only 2 months in the prior quarter, as well as a 10,000 ton increase in Resolute shipments. Despite that, we experienced lower shipments overall resulting from our down time driven efforts to be more selective with certain markets, our continued focus on asset optimization and a September dip in sales in the wood segment, wood products segment.

There was a significant price increase in wood products this quarter, approximately 9%, on the continually improving data on US housing starts. Average transaction price in the coated segment increased by $10 per ton, while pricing in newsprint and specialty remained stable. Pulp prices slipped another $5 per ton in the quarter and about 83 million -- $83 per ton compared to the third quarter of 2011.

Cost of goods sold was up 1% compared to the second quarter, due largely to an increase in the Canadian dollar and $10 million attributable to the maintenance costs at the Saint-Felicien mill, offset by lower volumes and the benefits of asset optimization and restructuring initiatives, mostly in the form of better labor costs. Cost of goods sold also included $5 million in start-up costs for the Dolbeau facility.

Distribution costs were down 1.5% quarter over quarter as a result of lower shipment volume, particularly international shipments, while depreciation and amortization was up 1.7% as a result of Fibrek.

Third quarter selling, general and administrative expenses were $41 million, consistent with the second quarter and $4 million less than the third quarter of 2011. There was no positive impact from group benefit premium refunds in this quarter, which were $2 million in the second quarter, but there was also no transaction costs associated with the acquisition of Fibrek compared to $3 million in the second quarter.

Closure costs and related charges were $5 million stemming from our restructuring initiatives, including the indeterminate idling of paper machine number 1 in Catawba.

The $1 million decrease in interest expense to $17 million reflected the repayment of all of Fibrek's interest-bearing debt during the quarter. Interest expense going forward will also benefit from the October 10th $85 million redemption of our 10.25% senior secured notes.

We recorded a $3 million income tax benefit in the quarter, primarily as a result of a non-cash credit related to reorganization and other tax adjustments, as well as foreign currency related items, both of which are discussed as part of the special items affecting net income. We expect our effective accounting tax rate to be approximately 30% on a normalized basis, excluding currency translation impacts and other adjustments. We do not expect to pay meaningful cash taxes in the near term.

Newsprint unit operating costs rose 2% compared to the second quarter as a result of the stronger Canadian dollar and the lower volume, but our continued asset optimization efforts kept them well under the 2003 -- 2011 average.

Unit operating costs rose 1.5% in the coated papers segment as a result of the lower shipments, despite the improved labor and maintenance costs due to the restructuring efforts at our Catawba mill.

In specialty, operating costs were $8 million lower in this quarter due to the lower shipments and gains from restructuring initiatives, mainly in labor costs again. Operating costs per unit was unchanged.

Unit operating costs rose $36 per ton in the pulp segment, most of which comes from the $10 million of costs incurred in connection with the Saint-Felicien outage. In wood products our log costs were higher due to increased stumpage and transportation costs. Together with the lower shipment volumes, these items accounted for most of the $42 per unit increase.

Turning to the balance sheet and cash flow statement. Cash and cash equivalents decreased by $167 million in the quarter, closing at $343 million. Important elements included $97 million to repay all of Fibrek's interest-bearing debt; $33 million as part of our share repurchase program, pursuant to which we repurchased 2.6 million shares in the quarter; and $10 million to complete the acquisition of Fibrek. Even though cash decreased by $167 million, ABL availability rose by $57 million, bringing our available liquidity to $872 million, down from $982 million at the end of the last quarter.

We generated $19 million in cash flow from operating activities in the third quarter, down $97 million from the previous quarter for a total of $192 million year to date.

Pension contributions were $21 million higher in the third quarter, most of which was the result of the $25 million prepayment in 2011 from which we benefited in the first half of this year.

Funding in excess of expense of $36 million in the quarter and $71 million year to date. We expect contributions to be approximately $28 million in the fourth quarter, of which $8 million will be expense.

Working capital increased by $9 million on the cash flow statement because of a $41 million increase to trade accounts receivable and an accumulation of road construction credits and a seasonal increase in raw materials at our saw mill. The increase was offset by higher payables, there being no interest payments on our senior secured debt in the third quarter.

Capital expenditures were higher than in the second quarter which benefited from a $20 million credit from the Canadian Black Liquor Capital Assistance Program on installation of equipment to produce renewable green electricity at our Thunder Bay plant. We continue to expect maintenance of business capital spending at 55% to 65% of depreciation and amortization on an annualized basis. This range does not include value-added projects such as the capital improvement on our machines at the Augusta mill, which will significantly improve the quality of our sheet and open new markets for the mill.

As I described earlier, in the quarter we spent $10 million to complete the acquisition of Fibrek, $97 million to repay all of its interest-bearing debt, and $33 million as part of our share repurchase program; in each case from cash on hand. So, the -- through the end of the quarter we have spent $45 million of a possible $100 million in the share repurchase program for a total of 3.7 million shares, more than offsetting the 3.3 million shares we issued as part of the Fibrek acquisition.

As we've previously disclosed, we established a share reserve for claims remaining in dispute on our emergence from creditor protection in December of 2010. That reserve initially held over 23 million shares and we've reduced it over time as claims were resolved or dismissed down to approximately 19 million shares at the end of the second quarter.

We recently settled litigation relating to the largest of these unresolved claims. We therefore expect to distribute a total of about 10 million -- 10.4 million shares from the reserve to holders of allowed unsecured claims, including many former bondholders. In addition, we will distribute concurrently 4.6 million shares that directly relate to the settlement for a grand total of approximately 15 million shares. This distribution will occur once all the conditions precedent have been satisfied, which we expect shortly. After these distributions the share reserve will stand at about 3.8 million shares. I want to emphasize that these distributions do not affect our outstanding share count as the shares in the reserve have been deemed outstanding since our emergence.

I would like to close by noting that Standard & Poor's recently affirmed its long-term corporate credit rating for Resolute and upgraded its rating of our senior secured notes to BB from BB-. We believe this speaks to our efforts at strengthening the balance sheet and paying down debt while, at the same time, emphasizing our commitment to deliver value to our shareholders.

Thank you, Jo-Ann. And Valerie, we would now like to open the call for questions.

Thank you, Mr. Lalonde. (Operator Instructions). Our first question is from Bill Hoffmann of RBC Capital Markets. Please go ahead.

Yes, good morning. Richard, I wonder if you could talk a little bit about two things; one, the coated markets. Obviously, the price increase appears to have gone through here in Q4. Just want to get a sense from you on the sustainability of that price increase go into next year. And then the second question has to do with the specialty business. And I just wonder if you could give us a little more color on your thoughts for looking forward on -- obviously, a 17% decline in demand this year, what you're expecting maybe for next year and what you intend to do with your assets to deal with that market.

Well, on the coated side, I think that we are fully sold until the end of the year and I think that the -- certainly we are expecting a market that's going to remain balanced when we look at the first quarter. But, it's always difficult to make a call on demand with the uncertainty that we have on the economy.

So, I think that when you look at our mill in Catawba, we have restructured the manning, the labor at the mill. We're going to by -- it's going to be complete by the end of the year, 154 less people and really well positioning this mill to -- and lower our costs overall. So, I think that -- I can say that I am more confident on the coated market than specialty. Obviously, when you look at the start on, the specialty market will be a significant demand on uncoated mechanical, 17% and specialty and high-gloss, and considering the restart of a large machine in Eastern Canada. So, I think the cost position is going to be really significant here.

As I mentioned during the call, our restart of Dolbeau, it's a capacity of about 140,000 tons a year. The reason for the restate is that we -- this mill is going to be very competitive, very cost competitive. The advantage that we have now that we own the cogeneration and that we can feed the mill with very cost-competitive steam, that we get all the wood waste from the adjacent saw mills provides an advantage that is, in my view, unequaled. So, it's an advantage that we have that cannot be -- or very difficult to obtain anywhere else.

So, I think that when you look at demand, obviously we have seen the switch from SC to newsprint. And the commercial printers and retailers decided to downgrade their paper quality. Are we going to see the continuation of that next year? I just don't know. But, I think that certainly the -- we are certainly going to see a fierce competition if the situation does not change on demand next year. And again, we are well positioned to -- basically to compete and we don't see at this point in time any -- we don't have any plan to take more capacity out at this point in time. But obviously, we'll have to monitor the market and demand.

Yes. Just a follow up with the Dolbeau restart. Any thoughts on placing that paper in the market and whether you need to get price competitive to do it?

Well, I think that the -- as I said, that the fourth quarter is -- demand and consumption is always higher. So, as far as demand and (inaudible) is concerned, we are booked full at Dolbeau. But, don't forget it's not a big capacity. It's 150,000 tons a year. So, that's not enough really to disturb the market. And if you remember, we closed a machine in Kenogami last December to -- basically, it was in preparation with the restart of Dolbeau, but the timing was unfortunate. We were not able to make it happen at the same time. But, I think Dolbeau we are booked full. And as you are probably aware, this machine was built in 1999. It's a new machine, brand new machine by North American standard and the customers really like the quality and the paper is running really well. So, we certainly do not expect any issue with being able to sell (inaudible) of paper from Dolbeau.

Alright. Thank you.

Thank you. Our next question is from Sean Steuart of TD Securities. Please go ahead.

Thanks. Good morning, everyone. A few questions. Richard, hoping you can give a little bit more context on the slowdown you saw in lumber shipments in September. I guess, just given the strength in pricing, that was a bit of a surprise from our perspective. Is this something we can expect that there'll be some follow through to better than normal results in the fourth quarter? Any context you can give there would be appreciated.

Well, I think it's -- we saw a slowdown in September, but in October so far demand is certainly stronger following the hurricane Sandy. I think that we are certainly going to -- it's a disastrous event for the people around New York City and New Jersey, but I think that it's going to take time before we see the impact on demand.

But overall, there is good demand in October. And I think that there is -- and you know that the fourth quarter is always exposed to weather conditions. If you have a snow storm and weather conditions like that could affect. But, we see -- we're certainly optimistic on the demand side for the first -- for the fourth quarter considering that now we are close to 900,000 starts in the US. So, I think that we are certainly going to continue to see an improvement on the lumber side.

Obviously, on the cost side we have an increase, but the stumpage are all market based. So, when we have an increase in pricing, we have a direct impact on stumpage. We also have to make some adjustment in our rates to contractors in the third quarter, our harvesting contractors. And also, transportation costs because of distance and fuel costs we had. We spent more on transportation. That explained the spike in -- all the increase in our costs. And our winter quarter was not as good as the one that we normally have.

Understood. And with respect to Saint-Felicien, you talked about another, I guess, couple of quarters for needed repairs there. I'm just wondering how that might affect, I guess, your downtime schedule at that mill. And Jo-Ann detailed, I guess, $10 million in incremental costs in Q3 related to the downtime in Saint-Felicien. Can you give us any guidance over the next couple of quarters as these repairs continue?

Well, I think on the repair side it's really we need to complete the (inaudible). There was (inaudible) to stop (inaudible) 15 because we cannot spread on the land, so -- and it would take too much room to landfill. We're going to continue in the -- probably in the second quarter of next year. And on -- we also have repairs to do on the Black Liquor, the clients. We have corrosion that we have discovered in the last three weeks that would need to be repaired. So, I don't know what kind of impact that it's going to have on downtime at this point because we have to determine how we're going to approach it. But, I think as Jo-Ann mentioned and I also mentioned, that the cost, that we have identified about $50 million that we'll have to spend. And the other repairs on the electrostatic precipitator has been completed. And now we're at least on the emission, air emission, we're back to -- we are where we need to be in terms of air quality.

Okay. And then last question for Jo-Ann. I guess as we're working through the reconfiguration of the asset base, I'm trying to gauge how you expect corporate costs to trend, not just over the next couple of quarters but longer term. It's come up the last couple. Can we expect that to gravitate to, I don't know if it's $2 million a quarter eventually or zero, but any guidance you could give on that front?

The corporate costs on EBITDA?

Yes.

We basically -- corporate costs are those costs that we don't put in other mills. So, we have some costs there for closed mills, which will continue for -- especially those, for example, like [Gatino], which we're still looking at.

Right.

And then other kind of unusual things that come up. So, normally, that corporate amount should be as close to zero as we could get it unless we have unusual items.

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

Thank you. (Operator Instructions). Our next question is from Steve Atkinson of BMO Capital Markets. Please go ahead.

Thank you. Good morning, everyone. As you know, you have a lot of energy projects going on. I didn't want to read them all out to you, but -- you know them better than I do. But, I was wondering if you could give me an update on where you are, like, which has been done and which has -- which are coming, like Saint-Felicien and Dolbeau?

Okay. At Saint-Felicien, yesterday we started the new turbine, the 9.5 megawatt. Well, I think that by mid-November we have (inaudible) hours where we have to do all the testing before we can push the power on the grid. So, I think that -- I expect when -- we're expecting to have the full benefit certainly starting in December.

Dolbeau, we have some repairs to do, also on the co-gen. They're going to be completed by mid-November and we're expecting to basically have the full benefit of the cogeneration by the end of the year. So, we're going basically to start benefiting fully from it in the first quarter of next year.

Thunder Bay we are in the process now to finalize construction, the building. It's on schedule. I think that the start-up is scheduled for the first quarter. So, we have a date at the end of January where we expect to start this project and with that probably the -- really, a ramp-up is going to take a month, a month and half or two. It's a big project. It's going to be $50 million that we spent for 50 megawatt of power. So, there's always some items that need to be refined after startup. So, I think that the full impact should be in the second quarter of next year.

Okay. Thank you. In terms of the Catawba restructuring, can you -- like, with the closure of the machine, etc., etc., are you where you want to be or is there more to come?

No, I think that the -- with a reduction, a restructuring, of labor, 154 on the manning side, I think that it's now where we want to be. Obviously, when you do a restructuring that significant it takes time to put all the pieces together. But, I think that the locals, the union locals supported the restructuring. They know that it's going to really position this mill very well on the cost side. And -- well, you mentioned the closure of a machine. We said that it's an indefinite -- it's not a permanent closure, it's indefinite because we haven't finalized our plan on this machine because, still, it's the -- this machine produce a good lightweight coated and also are very good SCE quality. And we're going to decide probably early next year what we're going to do with the machine.

But, I -- in terms of repositioning this mill, if you look at our costs, our costs basically went up quarter over quarter and we had one machine left by (inaudible). So, the cost impact because of volume was about $45 and will reduce our cost overall by $35. So, I think that -- and the -- we don't have the full impact of the restructuring at the end of the third quarter. So, you can certainly appreciate what has been done to reposition this mill. Even though it's a low cost, it's going to be lower cost when it's -- the restructuring is completed.

So, where the costs did go up over the past couple of years, then I'm assuming they're coming back down towards where they once were after adjusting for inflation and things like that.

Yes. Well, listen, there was also chemical costs that went up that, obviously, with lower RE costs it's having an impact. But, I think that all the items that we control, that we have an impact on that we're making progress to reduce the costs. Again, coating, it's -- and all the chemical cooking and bleaching chemical, we don't really have a control on that other than trying to optimize and get the best prices that we can, but we are exposed to the market on this item.

Yes. Yes. In terms of (inaudible) where I read that you took some downtime, is there any plans for the fourth quarter?

No. We're running now at capacity and we expect to be running this mill at capacity in the fourth quarter.

Okay. And finally, with the harvest reductions in Quebec, are you able to manage around it? Do you have sufficient fiber to run your mills or will you have to take downtime?

Well, I think that I already mentioned the 11% reduction and it's about -- it's slightly over 900,000 cubic meters. It's more than one sawmill. So obviously, there was a need of consolidation. There was -- we have in the -- we have too many sawmills and we're going to continue our dialogue with the government to be able to mitigate the impact of this reduction, of this permanent reduction in harvest levels. But, it is in Quebec. I can ensure you there is no impact on the wood supply. The project that we have (inaudible) to restart the sawmill. The kilns and the planer mill are going to be built. It's going to take place in the second and third quarters of next year. So, we're going to be able to take advantage of this additional production next year.

But obviously, in Quebec all of the changes are also on the newer changes. We know that the government is going to take responsibility for planning. The government is going to take responsibility for roads. The government is going to take responsibility for certification and the government is going to take responsibility for (inaudible). So, when you look at all of that, obviously we don't know yet what kind of impact that it's going to have, but we're certainly expecting that it's going to have an impact on costs.

And there's a 25% of the volume that is going to be put to option. But, to come up with this 25%, our sawmills -- our (inaudible) volume is coming down by 30%. So, all these changes are going to have an impact. We don't know exactly how much it's going to affect the cost side but, obviously, it's going to have an impact and we're certainly going to be in a better position to determine how much it's going to be when we see what effect the government is going to be in dealing with these four major items that I mentioned.

Okay. So, in the meantime, you'll run Ontario flat out and try and balance in Quebec,

Yes. Well, the -- our sawmills (inaudible) now. We have 300 million of capacity and (inaudible) is going to be about 140 million. So, yes, we're going to certainly optimize these two sawmills.

Thanks so much.

You're welcome.

Thank you. (Operator Instructions). Our next question is from a participant. Please state your name and your company and proceed with your question. Please go ahead.

Hello?

Please go ahead. Your line is now open.

Hello, Richard?

Yes.

This is Joe Von Meister from Bennett. How are you?

I'm doing fine.

Do you have a -- I mean, I'm looking at the history of your coated operating costs and I know what a good mill that is. In general, where should we expect to see costs trend at that operation now that some of the changes that you've made are in place?

Well, it's certainly going to trend down and I think that -- I mentioned the 154 reduction in staff and our labor. So, I'm not going to mention to you numbers because I don't know exactly where it's going to be, but it's going to continue to trend down with this optimization of the mill. And I think that I said that it takes a bit of planning, but when you look at it, the costs went down -- went up only by $10 million and the volume itself, it's at $45 per ton.

And the other significant improvement that we see, and I mentioned it, that we're focused -- very focused on absolute efficiency on the machines. And we're still pretty far from the objective that we have. So, it's more production that we're going to have, obviously. And this production, assuming that we can sell it, is going to bring the costs down. So, it's going to be more volume that we're going to get from the mill in Catawba.

You mentioned on the pulp side of the business, do you -- does your crystal ball show any -- I mean, can you give us any guidance on where you see these markets, particularly pulp and specialty in 2013?

Well, on the pulp you have to look at Europe. Europe is the -- it's before -- they use more pulp than China. And we all know that the European situation with the euro and the economy is very difficult. So, there is a big slowdown and it's a recession. It's probably -- it's probably a strong -- wood is stronger than the recession and it's going to have an impact on pulp consumption. They are short, significantly short on pulp. But, any improvement -- and there are some economies that are forecasting an improvement for the second half of next year in Europe. So, I think that it's probably fair to expect that at the second half of the year we're going to see an improvement.

But, if you look at pulp consumption in China, it's still -- it's up 17% this year and they are -- we saw a slowdown in China. So, they don't have the trees so they are going to rely on pulp. And I think that there is certainly an opportunity. We can have better news that we -- that we are forecasting now on (inaudible). And you remember how much impact they had in the last year or so in increased demand on the pulp side.

So, I think that we could have a positive surprise on this side, but I'm not going to signal on that because I just don't know.

What about on specialty?

Well, specialty, it's -- it is when you look at the stats and you see printing and writing down 7.6% and uncoated and mechanical down 17%, and you consider all the switch that has been made from high gloss to newsprint, is it going to continue? I don't know.

And you also have to take into account the US economy is not as strong as it used to be. And I think that there are still -- when you talk to our retailers, to our customers, they're still -- they're still very cautious on print. And I think that it's certainly a reflection of what we see into the numbers. So, when you look at standard, it's down 8%. And I think that it's -- most of our production is in the high grade and super high grade. This one is less effective.

What we're concerned, obviously, it's the large capacity addition that could have an impact. But, I think that I mentioned Dolbeau, how well positioned we are and I think that we have exactly the same approach than the one in Catawba. At Dolbeau we have a very small crew running this mill with 135 people. So, I think that this new (inaudible) model is going to certainly provide an advantage on the cost side that I believe is very difficult. I will not say impossible, but very difficult to replicate. So, we have this kind of advantage that I believe that is going to allow company and our mills to compete efficiently.

What have you seen in terms of market activity related to Port Hawkesbury's restart?

Well, the only thing that I can say, that it's a large capacity and you see the stats. And it is a concern, but they'll have to compete. We have to compete and we'll see what the end result is going to be. I think that Dolbeau has an advantage, a smaller machine in the market that is consuming less, provides a lot of flexibility and I think that this flexibility is going to be an advantage. I don't want to compare with anybody else, but I think that it's certainly a benefit that we have on top of having this co-gen and the power agreement, that we can sell power and have the adjacent sawmills. It's all a condition, the whole element of -- almost impossible to replicate.

What is the incremental EBITDA contribution from the new co-gen facilities that are coming online this year that would be comparing 2013 EBITDA from co-gen up and running to 2012?

On an annualized basis, all of the new projects we've talked about, the new Saint-Felicien turbine, Dolbeau and Thunder Bay annualized at full capacity is about $65 million to $70 million.

Great. Thanks, Jo-Ann. Great job, guys, in a tough environment.

Thank you.

Thank you.

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Lalonde.

Great. Well, thank you, everyone, for joining us today.

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

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