Resolute Forest Products Inc (RFP) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products third quarter 2013 earnings call. I would now like to turn the meeting to Mr. Remi Lalonde, Vice President for Investor Relations. Please go ahead, Mr. Lalonde.

Thank you, Valerie. Good morning, everyone, and welcome to our 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 on to our webcast using the link in the Presentation and Webcasts page under the Investor Relations section of our website. 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. Statements are not guarantees of future performance.

You will find additional financial and statistical information, including a reconciliation of non-GAAP financial measures, in the press release and the slides.

We'll 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, everyone, and thank you for joining us today.

During last quarter's earnings call I talked about how pleased with softer pricing conditions overall we preserved margins with improving efficiencies and manufacturing cost reductions. Again this quarter, our asset optimization initiatives taken over the last few years have helped to maximize earnings power in the face of challenging market conditions.

This quarter, we generated adjusted EBITDA of $31 million in Newsprint, up $3 million from the second quarter; $27 million in our Specialty Paper segment, up $17 million; $34 million in Pulp, up $11 million; $9 million in Wood Products, down $16 million from the previous quarter; and $6 million in Coated, down $5 million.

In total, adjusted EBITDA was $104 million, $14 million better than the second quarter, and $8 million better than this time last year.

Lower costs, better market conditions, and the acquisition of Fibrek led us to the best quarter our Pulp segment has seen in two years, which helped to offset the effect of weaker selling price for lumber, and steeper demand declines for newsprint and mechanical papers.

Shipments compared to last quarter rose in all segment, except for Coated, but pricing for all paper grades continued to reflect lower industry operating rates.

Our unit delivered costs this quarter compared favorably in Newsprint, Specialty Papers, and Pulp, against not just the last quarter, but also the last eight quarters, contributing to steady or better margins. The takeaway here is that we are focused on preserving our lower-cost advantage.

We are facing more of a challenge in the Coated Paper segment, as North American producers struggle to adjust to the effect of lower operating rates due to lower demand, grade-switching to [IMSC], and also higher imports from Europe. It's more difficult to optimize a mill with declining shipments, so it's taking longer to reach our efficiency goals at Catawba, our only coated paper mill, but we will continue to push until we get there.

Now let's review the market conditions. Total North American newsprint demand declined 10% through September, reflecting an 11% drop from newspaper publishers, and a 7% decline from other users.

Global demand for newsprint was down 5% through August, which includes a 4% increase in India, and a 14% increase in Turkey, but a 7% decline in Western Europe, and 12% in Latin America.

North American exports have maintained pace at about 500,000 metric tons per quarter this year. (Inaudible) better than 2012, most of which can be attributed to the 38% increase in shipments to non-Japan Asia, which includes India.

The North American industry shipment to capacity ratio remained at 92% through all three quarters, consistent with last year. Resolute shipments were up 20,000 metric tons this quarter, or 3% compared to the second quarter, with the increase split evenly between domestic and international deliveries, maintaining the 55/45 percent ratio from the first half of the year.

The price of newsprint in North America has been stable for two quarters now, down over $40 per metric ton from the level it was (inaudible) in the last year. And while conditions could change quickly, we expect to see sequential volume growth before the seasonally slower period.

Overall demand for uncoated mechanical papers improved again in the quarter. For the year-to-date demand growth of 2.5%, most of which comes from a 14% increase in demand for high-gloss grades, as customers switch from coated paper.

Standard grades, which include our Super and High-Bright papers, also did relatively well in the quarter. They are down only 4% so far this year.

Overall, the industry shipment to capacity ratio remained at 91%, down about 2 points from the same period of last year.

Although the seasonal surge failed to materialize as expected, our shipments rose 5,000 short tons in the quarter.

We recently announced that we would close a small machine in Iroquois Falls, Ontario, which produced only about 30,000 tonnes per year of construction paper. The machine has been operating at less than 60% of its annual production capacity, and the market for its product is very limited.

Overall demand growth for market pulp was 3.4% through September. Regionally, we saw a 6% increase in demand in North America, 8% in China, and no change in Western Europe.

Global demand for softwood pulp, which represents about 60% of our total shipments, was up about 2%, and hardwood demand was up 6%, mostly because of growth in (inaudible). Presently, softwood mills are running at 94% shipment to capacity ratio, and hardwood mills are at 92%.

Our shipments rose by 2% in the quarter, about 6,000 metric tons, and positive pricing momentum carried over from the previous quarter. We see this continuing into the last quarter, but the timing of the significant South American hardwood capacity additions makes 2014 more uncertain.

US housing starts hit 891,000 in August, 19% better than the same period last year. We shipped 21% more product this quarter than we did in the last, reducing the inventory by 20%, as we (inaudible) addressed the build-up caused by the lower-than-expected demand in May and June. We expect more normal shipments in the fourth quarter.

Our average transaction price dropped $62 per thousand board feet compared to last quarter, but as we indicated during our last call, the benchmark random lengths composite index opened the third quarter about $130 per thousand board feet below where it began the second. From this low, the overall price moved during the third quarter, and we expect some of that momentum to carry into the fourth quarter.

Costs remain under pressure, however, given lower overall wood allocation, and the additional burdens imposed on producers under the Province of Quebec's newly implemented Forest Tenure system. So far this year, our costs -- our wood costs are up by about $30 per thousand board feet compared to 2012, and we estimate that two-thirds of the increase is attributable to higher wood costs in the Province of Quebec.

This reflects the April 1, 2013, implementation of the new tenure system, and we are concerned that we haven't seen the full impact, which could push our costs even higher next year.

North American producer shipments were down 9%, as demand for coated mechanical paper was down 4.5% from September, which was further affected by an 8% increase in imports, most of which come from Western Europe.

Partly due to the June 2012 closure of our PM1 at Catawba, production in North America is down by 4% this year. Accordingly, the industry shipment to capacity ratio remains low for the year at 89% compared to an average of 94% for all of 2012. We see a continued pressure for coated paper, as producers adjust to lower operating rates on lower consumption, grade-switching to IMSC, and higher imports.

We've gone to great lengths to optimize our operation. Our realigned asset base allows us to benefit from revenue diversification, and also gives us the ability to optimize costs. This lean and efficient operating platform is our key competitive advantage.

We will continue to play to our advantages, managing production and inventory levels, selling only profitable tons, and maintaining world-class operational standards.

I want to take the opportunity to thank my friend Alain Boivin, our Senior Vice President for Pulp and Paper Operations, who recently announced that he would retire at the end of the year after almost 40 years in the pulp and paper industry. Alain played a critical role in our cultural transformation, and I thank him for his contributions and his service.

I will now invite Jo-Ann to review our financial performance.

Thank you, Richard, and good morning, everyone. We reported today a net loss of $588 million in the third quarter, or $6.22 per share, on sales of $1.1 billion.

This loss includes a non-recurring, non-cash income tax charge of $619 million related to the reduction of the US portion of our net deferred income tax assets. Based solely on historical three-year cumulative results, accounting standards impose a very strong presumption that we cannot recover the deferred income tax assets associated with these US operations.

This reduction in no way affects our underlying tax attributes, including $1.6 billion of US net operating loss carryforwards, and it does not hinder our ability to use these NOLs to shield future earnings. We continue to believe that we will not have to pay cash income taxes over at least the medium, neither in the US, nor in Canada.

Excluding the tax charge and $2 million of other special items incurred during the quarter, we generated net income of $29 million or $0.31 per share. In the same quarter last year, we generated net income of $13 million, excluding special items. The special items are described in this morning's press release.

Total sales were up $23 million or 2% from the second quarter. Shipments rose 21% in Wood Products, 3% in Newsprint, 2% in Market Pulp, and 1% in Specialty Papers. They were down 6% in Coated Papers. The higher shipments were offset, in part, by the significantly lower pricing in Wood Products.

Cost of sales was essentially unchanged from the last quarter, despite the higher volumes, reflecting the net favorable effects of seasonally lower feed costs, lower US other post-retirement benefits or OPEB expenses, the recovery of a business interruption insurance claim, the weaker Canadian dollar, and better efficiencies, largely in Pulp and Specialty Papers, offset by the reduction of certain rebates for electricity, higher fiber costs from an increase in O&P prices and craft usage, higher wood costs at our US Southeast mill because of wet weather, and higher maintenance costs.

Distributions costs increased $4 million, or 3%, mainly because of the higher shipments. Selling, general, and administrative expenses were $6 million lower than the second quarter, mostly due to the timing of employment benefits.

Newsprint delivered cost per unit was $589 per metric ton in the third quarter, down 1% from the previous quarter. This reflects the offsetting effects of the weaker Canadian dollar and seasonally lower steam costs against higher O&P costs and the reduction in electricity rebates.

Our Specialty Paper segment unit delivered cost fell to $675 per short ton, down by $48 or 7% from the second quarter, when we saw higher costs and lower efficiencies associated with the annual maintenance at Calhoun.

Delivered cost per unit in our Market Pulp segment fell $24 to their lowest level in two years at $620 per metric ton, thanks to better efficiencies at our US Southeast mill.

In Wood Products, delivered costs fell $15 from the second quarter to $350 per thousand board feet, mostly because of the additional 72 million board feet of lumber shipments.

With the 6% drop in Coated Paper shipments, the absorption of fixed costs over fewer tons is, in large part, for the 7% increase in unit delivered costs, or $51 per short ton, but we also experienced seasonally higher power costs and higher wood costs in the US South.

Not including improved operating efficiencies such as labor, we generated $12 million of EBITDA with our cogeneration assets in the third quarter, $2 million lower than in the previous quarter. Although our Gatineau facility contributed a full quarter of power generation, we were not able to run to full capacity because of equipment failures.

We also experienced lower generation rates at Thunder Bay because of the annual pulp mill maintenance, and at Dolbeau, as a result of higher moisture (inaudible) wood waste.

Closure costs and related charges were $4 million in the quarter, related to manning reductions at our Baie-Comeau, Quebec, mill. This compares to $12 million in the second quarter for charges associated with the idling of our Calhoun newsprint machine.

Interest expense was down $1 million this quarter to $12 million as a result of the second quarter senior note refinancing.

Turning to the balance sheet and cash flow items, cash and cash equivalents increased by $23 million in the quarter, closing at $271 million. Net cash provided by operating activities was $62 million, $6 million lower than the last quarter. Balance sheet working capital decreased by $9 million, mainly from an increase in accrued interest payable due to the timing of interest payments, and a reduction of the current portion of the US deferred income tax assets.

Capital expenditures were $38 million, a bit lower than average spending in the first two quarters. We expect a pickup in capital expenditures in the fourth quarter, given the timing of projects, including our two new sawmill projects in Ontario, but we nevertheless expect to be at or near the low end of the range of our earlier guidance, which was between $175 million and $250 million, for the year.

ABL availability at quarter end was $566 million, which gives us total liquidity of $837 million.

Pension contributions were $40 million in the quarter against a $10 million expense. The increase compared to last quarter reflects the timing of US plan contributions. The total funding year to date was $98 million, which does not include any funding in respect of the agreement in principle that was unanimously accepted in Quebec by retiree associations, unions, the provincial government, and its pension regulator.

You'll recall that in this scenario we would replace the significant uncertainty associated with potentially material corrective measures in favor of more stable, predictable, and balanced pension funding requirements. We will not make additional contributions to the material Canadian plan until the Province of Ontario agrees to join the agreement in principle, and there is reason for optimism that it will. When Ontario joins, we expect our total contributions to be about $160 million per year against an expense of about $40 million.

Balance sheet pension and OPEB obligations dropped another $71 million this quarter, $57 million of which relates to an amendment to our US OPEB plan for salaried retirees. The obligation is down about $200 million this year because of contributions, foreign exchange, and the US OPEB amendment I just discussed.

When the underlying assumptions, including applicable discount rates, are reevaluated at year end, we expect that this year's higher interest rate environment will significantly reduce our net balance sheet pension and OPEB obligations even further. To illustrate, if we assign a discount rate that reflects the prevailing interest rates as of September 30th, we would expect balance sheet net pension and OPEB obligations to fall by another $400 million compared to the amount reported as of September 30th, 2013.

Thank you. We'll turn over the call for questions, please.

Thank you. (Operator Instructions). Our first question is from Sean Steuart from TD Securities. Please go ahead.

Thanks. Good morning, everyone. A few questions.

I guess let's start with the energy projects first. Can you just -- Jo-Ann you went through, I guess, quarter-to-quarter what you've realized, but, overall, how much left is there to realize in terms of incremental, I guess, cost savings from this point?

Well, what we said is that once the -- all four cogens are up and running at their capacity, we would generate an additional $60 million to $65 million of EBITDA.

Okay, and from this point, though, how much more do we have? Is it all up and running at this point?

They're all up and running, but, as I said, Thunder Bay was down for a period because of the annual pulp mill outage, and Gatineau experienced some machine problems, as did Dolbeau, to a degree. So, they weren't running at full speed, shall we say.

Just a comment on Gatineau, so we still have, and we knew it when we started the mill, (inaudible) to fix on the [grate], so (inaudible) technical here, and it's likely to be resolved in the fourth quarter, and I don't know, because of the reduction in the wood allocation, so we have less fresh wood waste, and we have, basically, to use more wood waste from the landfill site, and the moisture content is significantly higher, as you can imagine.

And what we have -- we have devised a plan to basically build a pile, and it's going -- the heat that is generated when you have a larger pile is going to remove some of the moisture, and we expect that the operation, and the production of power is going to improve in the fourth quarter, and going forward.

So, as Jo-Ann mentioned, I think that the estimate or the guidance that we gave on power generation is going to -- we're going to deliver on it.

Okay. Richard, wondering if you can give us a little bit of context on what you're seeing for pricing in offshore newsprint markets. You gave us some good context on volumes, but can you talk about price patterns in your export markets?

Yes, Sean, I think you also have, when you look at the export market, you have to look at the currency, and externally, one aspect on that is going to affect pricing. So, if you look at the rupee in India, for example, not long ago, the rupee to the US dollar was 47, and it's about 60, 61, now, so, a significant increase. So, I think that what I would expect is that the price is likely to, in US dollars, to remain stable.

We have the same situation, also, in Brazil. So, if you look at the real, it used to, not long ago, to be at 1.7. Now it's 2.2, so when you look at the cost for the publisher, that's only in the currency, we're talking here about 30%, so the same that it's in India.

The -- and I think it's the challenges we have on the export market. I think that we have maintained our volume, overall, and -- but I don't expect that we're going to see movement on the selling price in these markets.

And I think that another reason, also, when you look at production in Russia, with the ruble, so, not long ago, again, was 22, 23, now it's close to slightly over 30, so that provides a significant advantage to the Russian users, and I think when you look at the currencies that they are bringing back their own currency.

The only positive, I think, is really the strong euro. That's 1.37. It was 1.30 at some point in time this year. Now it's 1.37. So, I think that that certainly makes the North American producers more -- they are more competitive on the export market, which is certainly going to -- it's not going to help on pricing, but it's going to certainly help on the volume side.

Okay, understood. I'll get back in the queue. Thanks.

Thank you.

Thank you. Our next question is from Bill Hoffman with RBC Capital Markets. Please go ahead.

Yes, thanks, and good morning. Richard, I just wonder if you could talk a little bit about -- just a little bit further about what Sean was talking about in the newsprint side. If you do get into a situation where you've got better exports markets, one, where do you think you can shift the mix between your domestic and export sales, and two, what do you think from here it will take from a consolidation standpoint to get the capability to get prices up?

Well, Bill, it's very difficult question that you're asking, so -- but let's look at newsprint. We knew that in North America the total demand is down 10%, and if you look at our shipments, we maintain the same volume shipped compared to the last quarter. And so, obviously, when you see a reduction of 10%, it's certainly fair to question.

So, what about capacity? And I said that, very clearly, in previous quarters that now we have a network on newsprint that is very competitive, that is well located, so that we can certainly compete on the North American market, and also on the export market.

When you look at that, certainly the market that we have a significant presence in Brazil, so, next year we certainly see an improvement. They're going to have the World Cup. So, I think that even though their currency, the real, is weaker than last year, I think that we expect an improvement in consumption.

So, and, so far, it's down 12% in Latin America, and Brazil is a big part of it. And certainly India is up 4%. I think that we still expect that India is going to continue to grow, and even though it's a smaller market, Turkey is up 14%. So, there is regions in the world where the market is growing, and because of the location of our facilities, that we're going to take advantage of it.

And the other, also, if you look at our mills in Augusta, we've made the investment, and we had some quality issues, and no we can also export from Augusta, because we can meet the more stringent quality requirement that we have to meet on the market. So, you know, there is certainly -- when you look at the operating rate, it's still 92%, but assuming that the declines continue, well, it's going to become more and more challenging.

But, again, with all the restructuring, realignment of our assets that we are certainly strong positioned to compete and certainly serve the domestic and export market well.

Thanks. And then, just a question on the lumber side. I just wonder if you could talk a little bit about the Ontario sawmills, sort of where they are from a potential sort of higher volumes, going into next year, and also, how you're planning for next year's building season from an inventory management standpoint around year end?

Yes, well, the two sawmills in -- that we are going to build next year, for startup in early 2015, one is in -- it's northwestern Ontario, so, it's about -- one is about one hour west of Thunder Bay, and the other one is north of Fort Frances, about an hour.

And so, both of them are well positioned on the rail lines, CAP and CN, so we should start for -- to see some of the volume by the end of next year for the -- one of the sawmills, and the other one, in Atikokan, it's going to be in 2015.

On -- you know what, the view that we have on the lumber market, I think that we continue to see the improvement in demand, and I think that we're optimistic that demand is going to continue to grow with the improvement in housing starts. We expect that next year we should see -- we should surpass the 1 million starts, and I think that with the less volume in Quebec, I think that situation that we saw this year where we had to take downtime for vacation to bring our inventory down, I think that next year we don't foresee the same situation.

Thank you.

Thank you. Our next question is from Paul Quinn from RBC Capital Markets. Please go ahead.

Yes, thanks very much. Good morning. Happy Halloween. Just a couple of questions here.

I guess I'll start on newsprint. You described pricing in domestic markets as stable for the last six months, and we saw the price increase in Western US move up $15 in September. Is that a sign of strength, or do you actually see those markets being stable right now?

Well, I think it's -- it'll reflect the closure of a mill in the US, and somewhere -- in Snowflake, and I think that there is -- it just reflects the closure or idling, and now the price is at the same level than in the East. So, I think that it just reflects the -- it's at the price -- the price gap has disappeared, I would say, but I would not read more than that on this.

Okay, and then in terms of the increased shipments, up sort of 3.3% year over year, you split that 50/50 between domestic and export. On the domestic side, I guess that means that you're gaining market share?

Well, it's exactly what you describe.

Okay. And then on -- just back to Sean's question on energy, just to see if I've got this, it looks like Q3 was $12 million contribution or $48 million run rate. You expect $60 million to $65 million overall, so the delta, what we've got left, is $12 million to $17 million. Have I got that?

Yes, but, as Jo-Ann mentioned, our biggest generation is in Thunder Bay. They have seven, six or seven, days of maintenance downtime, the annual outage, and the effects, also, we had the small vibration issue with the generator, and now this generator that we're expecting about 60 megawatts, and we're able to run it at even higher output than that. I'm not saying it's going to be the new normal, but it has a big impact.

And Gatineau, we're going to, as I mentioned, fix the issue that we have with the bores, and although with the strategy that we have on managing the wood waste pile, we should be able, also, to reduce -- to produce more steam, therefore more power, and we expect that the guidance that we've given is achievable.

Okay, that's helpful. Just on -- switching to pulp here, you described it as positive momentum going into Q4, but it seems like you're worried a little bit on the capacity adds. Maybe you could expand on that?

Well, certainly, I think that the softwood is on solid ground, and we have 60% of our capacity for us, our capacity is on softwood. But on hardwood, I think that there is more 2 million tons of new capacity, new (inaudible) capacity, one in Brazil, the other one somewhere in Latin America that the name escapes me. But I think that, certainly, that's new production that is going to be available is certainly going to have an impact. I just don't know how much impact it's going to have, but it is certainly in the back of our minds.

I think that the other part, also, when you look at our recycle mills, we're still very pleased by performance. They're running well, and I think that the market seems to remain fairly good on the recycled side, and, obviously, there is demand for tissue manufacturers, and we're at least optimistic. If you look at it, 60% is softwood. There is no new capacity on softwood. That 20% is (inaudible), but where, certainly, on hardwood at Calhoun, and part of the production at Thunder Bay, we could see some pressure on that side.

Okay. And then, just lastly, just on the coated side, you shut that PM1 at Catawba in, I guess, the end of Q2 of '12. But we haven't seen any kind of cost break. Is that due to the fact that the mill is running less efficiently, the operating rate is down, or is it anything specific at the mill that you still need to fix?

Well, we haven't seen the improvement in efficiency that we were looking for. So, it is that simple. It's not running on the two machines the way it is, and, obviously, when you look at, as I said, and when you look at demand, demand is down 9%, shipments are down 9%, and it's more difficult when you have to make changes, the trims and grades and the market is also adjusting to a lower basis weight. This mill used to produce, also, not much lightweight, but now we are also going more lightweights, and it's -- when you -- when you go from heavyweight to lightweight, there is a learning curve that you have to go over, and when you add all that, it's market change, a machine that is down, and the market demand that is also down. So, it certainly brings a lot of changes and pressure at the mill level.

We also had this quarter, by the way, as Jo-Ann mentioned, the summer was very wet, and also the peak power and (inaudible) price was quite high. So, two of these items combined to inefficiency and basis weight, I think that the yield that we saw within this quarter.

Great. That's all I had. Thanks very much, guys. Good luck.

Thank you.

Thank you. Our next question is from Stephen Atkinson with BMO Capital Markets. Please go ahead.

Good morning. I wanted to, shall we say, congratulate Alain Boivin, and wish him all the best, because one could see all the good things he did.

And in terms of your cost reduction projects, like you initiatives at Iroquois Falls and Baie-Comeau, can you tell me where you are, and where the benefits are?

Well, at Baie-Comeau, I think that we're going to reduce the manning again by around 90 people. So, 70 to 90. And there is at Baie-Comeau, there is 70 people that are eligible for retirement, so I think that it's certainly -- it's difficult to announce that kind of restructuring, but with -- when you look at the mill, the manning and the age of people, it's going to reduce the impact.

But it's the impact of manning reductions here that is going to reduce our costs, and at Iroquois Falls, it's the small machine that -- it's producing. It's construction paper that is used for art and crafts and boards and drawing, and activity paper. So, the demand is declining every year, and demand increased because of the colors and we have many changes, grade changes, and business weight changes, and the machine is only running 50% to 60%, and the crew, when, basically, we take downtime on the machine move to the other ones, so, it brings a lot of inefficiency in the mills and the large newsprint machine that is -- should run at 90% efficiency is running way below that.

So, we just believe that this -- the closure of this machine, even though it's a sad day for the employees, I think that it's going, basically, to allow this mill to be more cost competitive going forward.

And do you have any other projects that you can talk about, or major cost reductions that are public?

No. Not at this point, but, obviously, I think that in the last three years we always turn and re-turn stones, so -- but, obviously, there is less projects, but we still have things that we're working on. We're going to announce them when we get there.

Okay. No, I know it's part of your culture. In terms of the wood costs in Quebec, are you able to talk about where you are now and how it compares with Ontario or other regions that you operate in, and give us some outlook on the Quebec wood costs.

Yes, Stephen, the -- it's one, certainly, area of concern when we look at the increase that we had this year. It's significant. It's about $30 per thousand board feet, and I think that it's going -- it's likely going to be higher than that next year, because the implementation started in April.

And so, it's -- well, with the full implementation costs in Quebec, and I think it's just -- I'm just going to repeat what RISI have said, because there is a cost study that has been done by RISI that was reported by the Quebec Association, Quebec Forest Industry Association, where Quebec has the highest wood costs in North America.

So, it is a fact. We have to live with it, and try to adjust to this significant increase, and I think that now we have to pay for -- there is a portion of the wood that is guaranteed. Now we have to pay a fee on it to maintain this guarantee. It's linked to the auction price that is going to be paid for the wood in the province, and so it is -- it has a significant impact. We have only part of it so far, and we're going to, basically, to see more of it in 2014 with the full implementation, and the full year of this new system being in place.

Okay. And in terms of the US South, for your wood costs going to the mill, and recognizing record flooding in the region, how do you see things going forward in terms of your wood costs?

I think that it's the most competitive location. It's the lowest wood cost in our network, and based on the forecast and the projection that we have, and the information on growth (inaudible) rate, we believe that the wood in the US South will remain very competitive.

There is a significant volume of wood that is near or close to maturity that is going to become available. So, I think that we're not concerned at all with the wood supply, and also are very confident that it's going to remain very competitive in the US South at our mills that we have in that area.

Thank you. That's great. Thank you.

You're welcome.

Thank you. (Operator Instructions). Our next question is from Tariq Hamid with JPMorgan. Please go ahead.

Good morning.

Good morning.

I wanted to ask, again, just sort of a bigger picture about the Coated business in Catawba. Operating costs (inaudible) up about $65 per ton over the last two years. What can you do, at this point, to sort of improve the competitiveness of that mill, just given what's still a very difficult market environment, overall?

Well, I think that when we look at the cost itself, I think it's the same pressure that we have on the wood costs, and power, so it's probably not unique.

The plant that we have is focused on the efficiency, machine efficiencies, and I said that the difficulties here, the market is moving slowly to a lower weight. This mill has always been a higher weight or heavier weight mill, and have to adapt to this new reality. And with lighter weight coated paper, well, you produce less tons. So -- and I think that you have to factor that into the plan that we were working on.

But I'm still very confident that we're going to address this and that the efficiency is going to improve. It's still a mill -- I believe it's still a mill that is one of -- among the lowest-cost mills, coated mills, in North America, in the US, and the location, when you look at the cost to serve our customer, it's certainly an advantage.

So, I think that -- and this mill is fairly recent, and fairly well maintained, so, we're confident that we're going to find a solution. I know that it's taking more time, and we're very concerned, I'm very concerned, about it, but we're going to fix it.

Okay. And I guess, sort of conversely, you had a massive improvement in the specialty papers business on the cost side in the last quarter. Do you sort of feel comfortable you'll be able to hold on to some of those gains as you roll into Q4 and into 2014? Do you think about the business as a sort of $600 per ton kind of cost structure, not a $700 per ton type cost structure?

Well, there is always qualifications here. It depends on the business weight that you produce and the grades, and there is a lot of variation from quarter to quarter. So, I think -- but you have -- and all the restructuring that we've done to realign and make the network more cost efficient, I think, is going -- certainly going to carry this benefit in the future.

So, but wood cost is one of the items that we don't control. Power costs is another, another cost bucket that is certainly under pressure. We see it on both sides of the border.

So, I think that, yes, we're well positioned, but there is variables here that we certainly do not control. The ones that we control, I think that we're pretty confident that it's going to carry over into next year and into the future.

Great. And just the last one for me, it's been, also, a while now since you closed Fibrek, but just sort of your comfort level with acquisitions at this point in the cycle, and sort of any kind of targeted grades or markets that you think are particularly attractive right now?

Well, you're certainly aware of all of the issues that we had on the environment, and (inaudible) at the pulp mill in northern Quebec. As a result, we're happier with the operations, and it's running, certainly, to expectations. So, I think that it took a bit of time to address all the issues, but now it's under control, and I think that it's reflected in our results.

Great. Thank you very much.

You're welcome.

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

Great. We'll leave it at that. Thank you, everyone, for joining us today.

Thank you and have a happy Halloween, everyone.

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