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Executives

Duane Owens – VP of Finance and Treasurer

Dave Paterson – President and CEO

Bill Harvey – SVP and CFO

Analysts

Gail Glazerman – UBS

Mark Wilde – Deutsche Bank

Chip Dylan [ph] – Dylan Research Associates [ph]

Peter Ruschmeier – Barclays Capital

Mark Weintraub – Buckingham Research

Joe Stivaletti – Goldman Sachs

Jeff Harlib – Barclays Capital

Tarek Hamid – JP Morgan

George Staphos – Banc of America

AbitibiBowater, Inc. (ABH) Q3 2008 Earnings Call Transcript November 6, 2008 10:00 AM ET

Operator

Please stand by, your conference is about to begin. Good morning, ladies and gentlemen. Welcome to the AbitibiBowater’s third quarter 2008 results conference call. I would now like to turn the meeting over to Mr. Duane Owens, Vice President of Finance. Please go ahead, Mr. Owens.

Duane Owens

Good morning. Thank you, Michelle. And welcome to our third quarter earnings call. With me on the call today are Dave Paterson our CEO and Bill Harvey our CFO.

Before we begin I need to call your attention to the cautionary forward-looking statement language that is contained in our press release and on our Web site. If you haven’t read it please do so. We will be discussing such forward-looking matters on the call today, and you should be aware due to the uncertainties inherent in such statements, actual results may differ. And any such statements are not guarantees of future performance.

Our earnings release as well as additional, financial, and statistical information, including our reconciliation of non-GAAP financial measures used on the call can be found on our Web site. The call is available to all shareholders via live webcast and replay on our Web site at abitibibowater.com. Today’s call is scheduled to last about 45 minutes.

I’ll now turn the call over to Dave Paterson.

Dave Paterson

Good morning, and thank you for joining us. Today, I plan to cover briefly our third quarter results, current market conditions, and the significant financial improvement we expect to see in the fourth quarter with lower energy costs and a weaker Canadian dollar. Following those remarks, Bill will go into further detail on the quarter and our financing strategies.

For the third quarter, despite energy and fiber inflation pressures, we have approved the EBITDA generated in our business lines by $47 million compared with the last quarter. By the end of the third quarter, we had achieved a synergy annual run rate of approximately $320 million. As mentioned last quarter, some of the major synergy components we achieved are improved uptime on our paper machines, reduced water usage, reduced chemical usage, and lower headcount at the mills and corporate. I remain confident that we will achieve the full goal of $375 million in annual run rate by the end of 2009, if not before.

As mentioned in our press release, the third quarter was negatively impacted by significant increases in the cost of energy and recycled fiber. Looking at natural gas as an indicator, our costs went up by 20% from the second to third quarter. In October, we have seen gas prices decline by 20%, returning to the second quarter levels. Recycled fiber costs also increased by about 20% in the third quarter compared to the second quarter. In October, recycled fiber costs have declined by 40% to levels lower than the second quarter.

In addition to decreases in these cost factors, the Canadian dollar has declined significantly since the beginning of October. As you know, every penny equates to $29 million of annualized EBITDA. The declines we have seen in our costs as a result of these factors alone, we begin to be optimistic about the fourth quarter. Bill will discuss our outlook in more detail shortly.

Moving to our key markets and looking first at newsprint, worldwide newsprint demand rose 1.1% in September. For the first nine months of this year, world demand is down 1.6%. This includes the nearly 10% decline reported for North America. Excluding North America, newsprint demand year-to-date is up about 1%. The US dailies have shown weak consumption in 2008, with circulation down almost 5% with the weak economy.

Exports from North America to other parts of the world are up 3% through September. The month of September was up 11%, the highest level seen since 2002. Many of the offshore markets have experienced substantial growth and demand, such as Brazil, which is up 21% for this year. Our shipments outside North America for the quarter were up just over 15,000 tons, compared to the second quarter, and now represent approximately 47% of our total shipments.

We have implemented each of our previously announced North America newsprint price increases through November, and expect to implement the announced $20 per ton December increase.

With the increase in recycled fiber costs and domestic demand declines, we have announced various curtailments for production. During the third quarter, we took 28,000 tons of downtime. In the fourth quarter, we expect to curtail about 100,000 tons. These outages are being taken at sites that use recycled fiber. Based on input from our customers, our view is that we expect North America newsprint to continue to decline in 2009. As a result, we anticipate taking approximately 50,000 tons of monthly downtime. At this point, the curtailments are temporary, and are being taken at a variety of sites.

We will be making more definitive decisions in the future. At this point, the cost of energy, recycled fiber, and the Canadian dollar are too volatile to make those decisions on a more permanent basis. We will, however, continue to monitor our order books, and make the appropriate production decisions as it relates to our inventory levels.

Turning to commercial plain papers, according to PPPC, demand for coated mechanical papers in North America is off 11% through September across all segments. With the uncertain economy in the US, advertisement has declined dramatically, significantly impacting the consumption of coated papers. Magazine ad pages are down 9.5% through September according to the Publishers Information Bureau. September statistics also showed continuation in the decline of imported coated mechanical, particularly from Europe, which is down 17% for the year.

Total demand for uncoated mechanical has grown about 1.5% through September according to PPPC. Standard rates of uncoated mechanical, which includes Super-brite and book rates are up almost 10% through September, excluding the idle capacity, the industry operating rate at 94% of capacity – industry operated 94% of capacity during September. As reported by third party sources, we have announced a $50 per short ton price increase on our Hi-brite and book rates for January 1st.

Shifting now to pulp markets, world shipments, as reported by PPPC for September, were about 3.2 million tons, down 4.5% from September 2007, mainly driven by decline in shipments to China. The year-to-date global shipments are up about 2%.

We had normal annual kraft outages at our Catawba, Fort Frances, and Coosa Pines mills in the third quarter, reducing production by 16,000 tons. During the fourth quarter, we do not have any scheduled maintenance outages. However, we do anticipate removing approximately 35,000 tons of our pulp through market related curtailments.

Moving to wood products business, according to the US Census Bureau, housing starts were at 817,000 units in September, the lowest level in about 17 years. Lumber demand and prices remain poor. During the quarter, we continue to curtail production, operating about 50% of our capacity. We expect to continue to operate at about this level in the fourth quarter.

In summary, while we’re seeing accelerated inflation during the third quarter mainly due to energy and fiber, we expect to see continued significant improvements in our cost position during the fourth quarter as ONP and energy come down. We continue to realize synergies, and are lowering our costs on a sustainable basis. We expect to continue production cost improvements.

I’ll turn the call over to Bill Harvey, who will give you more detail on our results for the quarter and our outlook for the fourth quarter.

Bill Harvey

Thanks, Dave, and good morning, everyone. Our reported loss for the quarter was $302 million. After special items, our net loss was $104 million or $1.81 per share. Special items before tax included a $5 million gain on the sale of 940 acres of timberlands, a $6 million gain due to translating our foreign denominated balance sheet items into US dollars, a $7 million charge related to severances, a $148 charge for impairments and closure costs, and a $65 million tax adjustment related to the valuation allowances recorded during the quarter due to operating losses outside the United States. Net of these special items, our operating loss improved by $41 million from the second to third quarter. This improvement was primarily due to price improvements in our key products.

The non-cash impairment charge related to our Donnacona, Quebec and Mackenzie, British Columbia facilities. These mills were indefinitely idled in the first quarter as part of our phase one review. During the third quarter, we made the decision to permanently close these sites. Under the third quarter, we had a high degree of maintenance. We have scheduled annual kraft pulp outages at Catawba, Coosa Pines, and Fort Frances, and at our newsprint mills.

Our corporate and other overhead costs, excluding severances and accident payments for the quarter, was $66 million. And our selling and admin expenses declined by $7 million compared to the second quarter. We expect these amounts to continue to decline.

Interest expense for the quarter was $187 million. Of this amount, $36 million related to non-cash amortization of deferred financing fees, debt discounts, and debt revaluations. Working capital required investment in the quarter. Accounts receivable increased by $62 million alone. And payables offset this by about $30 million.

Our effective tax rate for normal earnings for the first nine months of the year was 36%, and we expect that rate to be in – our rate to be in the range for the year.

The Canadian dollar averaged 96 cents Canadian dollars for the third quarter, and it averaged 85 cents Canadian dollars for October. As Dave mentioned, every penny movement impacts EBITDA for our company on annual basis by $29 million. It has been highly volatile. But the current 10 cents Canadian dollars decline from quarter three to now, would improve our EBITDA by about $209 million on an annual basis or $72 million per quarter.

Capital spending was $45 million in the third quarter. And we expect a similar amount in the fourth quarter. We announced last week the intention to sell approximately 189,000 acres of timberlands that are Abitibi subsidiaries owners in Quebec.

From a liquidity perspective, at the end of the quarter, we had $295 million in cash. This amount is broken down into $195 million at our Abitibi subsidiary and $100 million at the Bowater subsidiary.

We are currently finalizing an amendment to our Bowater bank facility to raise the third quarter financial covenants and put in place a borrowing based facility. I expect this will be completed early next week. At that time, we will have access to draw about $70 million under this facility.

On the pension plan side, although we have not finalized our assumptions for next year, we do not expect any material increase in contributions. In fact, we could see a modest decline.

Looking ahead to the fourth quarter, we expect seasonally higher selling volumes, price improvements in newsprint, and continued momentum in the realization of synergies, along with lower energy and significantly lower fiber costs, especially for recycled fiber. We expect that there is significant improvement in our financial performance in the fourth quarter, although some of these will be offset by lower pulp prices and market downtime in pulp and newsprint. In total, depending on the Canadian dollar, again, we expect to see a very significant improvement in operating results.

Operator, we’ll now open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from Gail Glazerman from UBS. Please go ahead

Gail Glazerman – UBS

Hi, good morning.

Dave Paterson

Hi.

Bill Harvey

Good morning.

Gail Glazerman – UBS

Just starting on newsprint pricing, there seems to be a bit of a divergence between the East and the West Coast. And I’m just wondering if you could give any insights as to that.

Dave Paterson

Well I think the West Coast and East Coast prices have settled in at different levels for the quarter. And we’re seeing western producers shift tonnage east to fill their order books.

Gail Glazerman – UBS

Okay. So you’re still seeing that and prepping your ability to push through the fourth quarter price in this?

Dave Paterson

I don’t think it’s affecting the fourth quarter. I think people are looking to see what next year’s going to look like, but no, not in the short term.

Gail Glazerman – UBS

Okay. And can you talk a little bit about what you’re seeing in export markets in terms of demand changes over the last couple of months? And if there’s any changes you’re seeing from what I would presume are lower freight – ocean freight rates and the currency move?

Dave Paterson

Well the currency is – around the globe had been highly volatile. And certainly, some of the high growth markets like Brazil and Turkey are seeing significant currency devaluations on their parts. So I would say that the international consumer is watching very closely what pricing levels are going to be realized in Europe. Remember the European prices are going to be negotiated over the next 45 to 60 days. And I would say that they’re only volume requirements at this point. So they’re being cautious, partially because of the currency or partially trying to understand where prices are going to settle out early in the year.

Gail Glazerman – UBS

Okay. And shifting to cost for a minute, I think you mentioned that the mills that you’re taking down currently are waste paper based facilities. And I’m just wondering, given what you’ve seen in the ONP markets in the last month or so, how much – if it would be attractive to tenants shift their fiber back to which they’ve earned? And how much opportunity you would have to do that?

Dave Paterson

Well, the good news is we have a lot of arbitrage opportunities between different sources of fiber, and we have arbitrage opportunities between the border, between US and Canada. I think you’ve said it well. And it’s really this currency and ONP phenomena has been a – really started very light in September, and accelerated into October. So when we made our third quarter decisions, we had record levels of ONP. I guess, I would argue that our decision to take downtime at our waste based mills probably helped changed the view of the ONP market in terms of what reasonable pricing was. So we will have to be flexible based on currency and waste paper prices in terms of which machines or which facilities we take downtime. But the world, from end of September to today, we’ve seen both ONP and currency just change dramatically.

Gail Glazerman – UBS

Okay. And final question, can you talk a little bit about asset sales and, specifically, maybe your Hydro assets in terms of any hurdles that there would be in terms of being able to dispose off some of those.

Bill Harvey

I think on the asset sales front, we have big initiatives both in land and Hydro. There are always hurdles in any asset sale. And we’re well aware of those. I think with the current disruption in capital markets, have slowed up some activity. But we continue to get unsolicited offers. And both those areas, we’re optimistic that we can get mix and (inaudible) progress over the next six months.

Gail Glazerman – UBS

Okay. Thank you.

Dave Paterson

Thanks.

Operator

Thank you. The next question is from Mark Wilde from Deutsche Bank. Please go ahead.

Mark Wilde – Deutsche Bank

Good morning.

Dave Paterson

Good morning, Mark.

Mark Wilde – Deutsche Bank

Dave, just first on the pulp side. It looks like you were generating about $88 a ton of EBITDA in the third quarter. I just wondered, given the reports about where pulp prices are right now, it would seem to me that you might wind up being EBITDA negative in that business by some point here in the fourth quarter. Am I missing something?

Dave Paterson

Well no. Pulp prices are highly volatile, as you point out. And I think it’s really a demand issue. We don’t know what the price is because demand, particularly out of China, is so low right now. So that’s why in my comments I said we’re taking curtailments in our system to balance our inventory. Prices are under tremendous pressure, but I don’t think that’s unusual at the pulp sector.

The offset, I think, Mark, is we got to think through is the currency issue, that 85 cents Canadian dollars versus 96 cents Canadian dollars. Our Canadian assets at Thunder Bay and Fort Frances are much more competitive.

The other thing that we’re looking at is how do you internalize more of that fiber in our system remembering that our pulp assets are in paper mills. So that’s again a little weighed to marry our exposure to pulp in the short term, and just swing more virgin fiber into paper products we sell in the market.

Mark Wilde – Deutsche Bank

So I guess the net of all of that, Dave, is that how comfortable do you feel about that 35,000-ton number you gave us or could that be a little larger?

Dave Paterson

I’m pretty confident. And I think we’ve – I think our guys have been realistic about what volumes they can sell in the fourth quarter without really having to chase the low end of those prices that you’re alluding to.

Mark Wilde – Deutsche Bank

Okay. All right. And then, you raised – kind of the second issue I wanted to talk about, which is the Canadian dollar. And I just – is there a way in which this is kind of a mix blessing to you?

Dave Paterson

Well, first I’d be interested in whether you think it’s actually going to settle out at because we’ve seen in the last four weeks we go from 96 cents Canadian dollar to 77 cents Canadian dollar, back to 87 cents Canadian dollar. I think it’s at 85 cents Canadian dollar today, so. It’s highly volatile. I think the mix blessing you were referring to, of course, is to change the cost structure of the Canadian industry. I just think for reference for the people following the company, at 85 cents Canadian dollars, the pressure point moves out to the border into the US asset bases because from a cost position, Canada gets very competitive at 85 cents Canadian dollars.

So internally, we have to look at the whole system to make sure that where we do take downtime or curtailments that we’re doing at our highest cost facilities, and 85 cents Canadian dollars changes that dynamic. So Canada’s very competitive at 85 cents Canadian dollars, Mark.

Mark Wilde – Deutsche Bank

Yes. Are you seeing any change in behavior particularly among the smaller Canadian newsprint competitors with the current currency having tanked the way it has?

Dave Paterson

Well, I think part of the reason you’re seeing some of these West-East movement is currency.

Mark Wilde – Deutsche Bank

Okay. And then a follow up for Bill, is it possible – just kind of following up on Gail’s question, can you give us a sense of what’s out there in terms of remaining land? And also, what the potential is in terms of various Hydro assets?

Bill Harvey

Well, I think on the land, there’s approximately 50 million acres left.

Mark Wilde – Deutsche Bank

50 million or 50,000?

Bill Harvey

Fifty thousand, excuse me. I (inaudible) taking notes. It makes my life easier, Mark.

Dave Paterson

We have, what, managed about 50 million.

Mark Wilde – Deutsche Bank

Yes.

Bill Harvey

50,000 acres left. And I think on the Hydro side and the land side, we’re optimistic we can make progress. The Hydro side, of course, is big numbers, Mark, as you’re well aware. And the land side of that amount about – free holding candidates about – this is what we talked about earlier, 1.5 million acres. In US, there’s a leased land of about 60,000, 67,000 acres. And still some free land left in the US.

Mark Wilde – Deutsche Bank

Okay.

Dave Paterson

But Mark, I guess I’d add a little color on the Hydro. I don’t think, given all the volatility in the market, there’s any diminished interest in high quality Hydro assets.

Mark Wilde – Deutsche Bank

Okay. All right, sounds good. Thanks, guys.

Dave Paterson

Thank you.

Bill Harvey

Thanks, Mark.

Operator

Thank you. The next question is from Chip Dylan [ph] from Dylan Research Associates [ph]. Please go ahead.

Chip Dylan – Dylan Research Associates

Hi. Good morning, guys.

Dave Paterson

Hey, Chip. Good to hear from you.

Chip Dylan – Dylan Research Associates

Thank you. A couple of questions, first, just on the coated groundwood market. We’ve known that some of the larger competitors are taking substantial amounts of downtime, while we’ve also seen (inaudible) stages, and it’s pretty clear, catalog mailings are going down as well. How is pricing holding up there? And are you seeing any evidence of increased imports either from Europe or Asia?

Dave Paterson

We really haven’t seen the import issue pop up, though it could. Currently, I think the Euro is down around $1.30 I think, or sub $1.30, so. You have to watch the Euro exchange rate, but no evidence as of yet of improved or increased imports from Europe. I think the numbers were a little clotted earlier in the year when the (inaudible) that put on the coated free sheet segment out of China, and they started exporting mechanical coated. They showed up on those statistics, but that seems to be behind us now.

Again, I think in all our paper products, the real pressure point will probably come in the first quarter as people watch to see how inventories settle out, see how prices are set in Europe. And that’s true both in newsprint and coated mechanical. So at this point in time, I would say we’re getting a lot of discussion about price, but it’s geared towards first quarter price.

Chip Dylan – Dylan Research Associates

I would imagine that newsprint in Europe, the discussion is still attempting to be upward. Whereas, is there any evidence that discussion is downward in coated?

Dave Paterson

Well I think in Europe, the gap – two years ago, we were talking about how high Europe was relative to North America. Now we’re talking about how low Europe is relative to North America. So really, it’s how much of an increase will the industry achieve in Europe or sort of set a big tone for the market place in newsprint.

And on coated, I think it’s the other way. It’s what will prices settle out at on – remember in coated, I mean in particular, you have a lot of volume contracts tied to sort of six-month pricing or things like that as they go out and bid business in the advertising world. So those prices will get set December time for the first six months of ’09. And that’ll set the temperature.

But I think the buyers are pushing for decline, like they always do. And it’s going to be a function of the operator rights and the inventory levels in coated, which are too high entering the fourth quarter. Typically, you’d see coated to capital inventories drop in this time of the year. But it is a very weak advertising environment, which is a long winded way of saying, yes, there is price discussion going on in coated papers.

Chip Dylan – Dylan Research Associates

Got you. And then, lastly, for Bill. Looking at the balance sheet, there is about $1 billion throughout the corporation that you cashed to buy a short term. Can you talk a little bit about where that debt is, both for the Bowater Abitibi or Abitibi or even on the parent company side, and sort of what your initial plans are for handling beyond the Bowater issue you just discussed?

Bill Harvey

Sure. There’s a home debt short term debt. There’s the $248 million, the bench would come in due. And the Bowater is started in August 1 of next year. That we were on the route to replace the Bowater bank facility with – as a bank loan, and combine that with the security debt offering in order to address that maturity, where with deferred capital markets over the last month we’ve delayed – we’re ready to go. We’re just delayed. And we will address that as soon as the capital markets recover to some degree.

On the other side in that is there’s a $347 million 364-day line coming due March 31st in the Abitibi subsidiary. That is supported by accounts receivable – accounts receivable, but they’re not in the securitization program inventory as well as some other assets. And we would be getting ready to roll that facility over.

And finally, there’s an AR securitization facility coming due in July of next year. Those are the big ones that we’re moving on right now, Chip.

Chip Dylan – Dylan Research Associates

Got you. Okay. Thanks very much.

Operator

Thank you. The next question is from Peter Ruschmeier from Barclays Capital. Please go ahead.

Peter Ruschmeier – Barclays Capital

Thanks. Good morning.

Bill Harvey

Hi, Pete.

Peter Ruschmeier – Barclays Capital

Dave, I was curious if you could care to comment on how much of the decline in pulp demand you’ve seen recently do you think maybe attributable to counterparty issues, financial issues related to letters of credit, and things like that nature as opposed to real demand declines. And I guess that may affect newsprint as well.

Dave Paterson

Well, talking about the side, I have no evidence that it’s affected newsprint at this point in terms of ability to finance purchases. On the pulp side, I really don’t know the answer to the question, but I think my sense from talking to our sales people is that there are sufficient inventories in the major export markets that they can sit and wait to see what happens to pricing. And that with the currency volatility out there, that people, much like they’re doing here in North America, are hoarding cash and our holding on to their cash.

That would be my sense. I don’t know if any particular customer can’t open LCs or banks aren’t willing to be counterparties on an LC transaction with their customer. I just don’t know the facts.

Peter Ruschmeier – Barclays Capital

Okay. Okay, that’s helpful. And maybe a question for Bill, Bill, would you care to quantify very significant improvements? And even if you want to put brackets around it, I know it’s always difficult to forecast this business.

Bill Harvey

Yes. It’s completed there the currencies right now, Peter. It’s very currency dependent, Pete. But in the end, it’s when you’re talking very significant, we’ve improved in previous quarters by over $100 million EBITDA quarter-to-quarter. And that’s the significant. So I think there’s upside to improvements that we’ve had in the past.

Peter Ruschmeier – Barclays Capital

All right. So $100 million plus is at least possible with the 85 cents Canadian dollars.

Dave Paterson

It’s very possible with the dollar, yes.

Peter Ruschmeier – Barclays Capital

Okay.

Dave Paterson

And ONP prices coming way down.

Peter Ruschmeier – Barclays Capital

Okay. And remind us, if you could, ONP company wide, I guess, both ONP and OMG. We also see OMG come down. And what’s your total purchases?

Dave Paterson

We consumed about 2.5 million tons annually of recycled material. I’m not aware of any grade of recycled material that hasn’t significantly dropped. As you see, OMG, ONPs are all – I mean, you’ve all read the reports. I mean, you can pretty much, if you will, take it, you can serve the menu price right now. Go ahead.

Bill Harvey

We collect about 500,000 of that 2.5 million.

Peter Ruschmeier – Barclays Capital

Okay. But just to clarify, it wasn’t much of a benefit in 3Q, but it should be a benefit in 4Q, correct?

Dave Paterson

Well, I’d describe it this way, the world – something happened the last week of September to recover paper prices and currency. And they’ve just gone straight down. Again, when we made our third quarter decisions to – idles and capacity, our ONP driven mills for a higher cost. If we made that decision today, we would make a different choice.

Bill Harvey

In fact, Peter, in the third quarter, our costs went up by about $10 million because of the escalation of price of ONP.

Dave Paterson

It was a one-month phenomenon today. Hopefully, it continues but it’s really – it’s been an incredible four weeks in ways over prices and currency.

Peter Ruschmeier – Barclays Capital

Understood. Last question if I could, I was curious if – maybe Bill you could comment on the cost of the outages of Fort Frances, Coosa Pines, and Catawba. And are you planning any outages in Catawba for 4Q?

Bill Harvey

On the pulp side, the repair spending was about $6 million in the third quarter. We had a lot of newsprint outages too, and those added up. There were some substantial repairs spending to about $12 million spent in the third quarter. So we’ll see much, much smaller amounts there in that repair spending. We have talked about taking Catawba down for ten days.

Dave Paterson

We’ve talked to our employees, and I think it’s been reported in some of the trade press. We’ve indicated that we may take an outage from Christmas through New Year’s.

Peter Ruschmeier – Barclays Capital

Okay. Thanks very much. Good luck with the quarter.

Dave Paterson

Thank you.

Operator

Thank you. The next question is from Mark Weintraub from Buckingham Research. Please go ahead.

Mark Weintraub – Buckingham Research

Thank you. A few questions, first, as you look at the third quarter performance, it wasn’t something to be quite as strong as what you’ve been hoping for at the end of the second quarter. What was it? Is it the function of the demand falloff that we saw towards the end of the third quarter? Or were there other things that surprised you relative to what your original expectations have been?

David Paterson

Well I think that – I’ll give you my answer from a market point of view. One is, I think ONP prices peaked, and that was peaked above where we thought they would. And the other thing that happened to us, and you’d probably see it when you look at the newsprint line, is 20% of our sales in newsprint are not in US dollars. They’re either in Euros or pounds primarily, and of course, some Canadian dollars. So they’re all unhedged. I think all those currencies moved against us in the third quarter in the sense they got weaker relative to the dollar. So we convert our UK sales and our European sales back to US dollars. That worked against us. Now, that was certainly more than offset here recently by the decline of the Canadian dollars. So 20% of our newsprint sales in non-US currencies hurt us a little bit in terms of the translation effect. Other than that, I think that those are the two things in my mind, Bill, so.

Bill Harvey

Yes. The only thing I would add to that is the general energy inflation. We can’t forget that currently, energy inflation ha occurred in the second quarter and partly through the third quarter. We underestimated the impact on us across the company. In effect, it’s not so much the direct purchases. I mean that’s quite easy for us to forecast. Part of it was due to just things like wood cost because of the increased cost of cotton haul to pay people to bring wood to the sites. So we got it in many different places by inflation. So it’s nice to be in an environment, at least on one side of the equation, where we’re seeing that reverse so quickly.

Mark Weintraub – Buckingham Research

Okay. Great, that’s helpful. And then, as you look to the fourth quarter, and I realized that there are some variables that are significant and very hard to predict, but do you expect to be free cash positive in the fourth quarter?

Bill Harvey

Well I think if you – I think with stable working capital, we were very close to it. And that we couldn’t be very close to it in the third quarter without any of the other benefits. So definitely, we expect that we can be pretty cash flow positive in the fourth quarter. Hopefully, we won’t be talking just free cash, we’d be talking about bottom line net income.

Mark Weintraub – Buckingham Research

Right. Thank you.

Dave Paterson

Thank you.

Operator

Thank you. The next question is from Joe Stivaletti from Goldman Sachs. Please go ahead.

Joe Stivaletti – Goldman Sachs

It’s two things to follow up. One is, have you done a lot of currency hedging with this recent decline in the…?

David Paterson

We’re unhedged.

Joe Stivaletti – Goldman Sachs

Okay. And you’re thinking on that? Are you planning to just stay that way or do you have some sort of credit–?

Bill Harvey

We’re thinking of – I mean in the end, it’s a double-edged sword about when to lock in and to follow the market as – I mean in a currency market, to be able to lock in a substantial amount takes time. We really are looking at it more from the point of view of risk management across the company. Dave just talked earlier about some of our downtime decisions will be driven by currency. So our actual cost, how much we spend in each country, will be dependent on those types of decisions. So we are looking at it but we have no definitive plans at this point to do financial hedges in currency.

Joe Stivaletti – Goldman Sachs

And the other question on the asset sales front, in the past had shared, I guess earlier this year you shared some forecast or some estimates on asset sales target proceeds for ‘08 and ‘09. I wondered if you might, based on what you’re currently doing, maybe update those numbers or give us some feel for when anything might be happening.

Bill Harvey

Sure. Well we had originally talked about $500 million target, and we moved that to $750 million. We still have that as a target. I think the capital market disruptions have slowed up to some degree what can occur, but I still think $750 million by the end of next year remains a very, very viable target.

Joe Stivaletti – Goldman Sachs

What’s your progress so far? Do you have a number in terms of where that stands today?

Bill Harvey

Yes. I just have – I think it’s about $200 million. We just looked that up. We have both the snowflake sale as well as land spills.

David Paterson

And some small saw mills.

Bill Harvey

And some small saw mills. We’ll get that for you probably as this call continues.

Joe Stivaletti – Goldman Sachs

Okay. Thanks.

David Paterson

Thank you.

Operator

Thank you. The next question is from Jeff Harlib from Barclays Capital. Please go ahead.

Jeff Harlib – Barclays Capital

Hi, good morning.

Dave Paterson

Good morning.

Jeff Harlib – Barclays Capital

I’m wondering if you could break down the EBITDA at Abitibi and Bowater. I’m coming up with $165 million excluding the severance. Do you have the breakdown?

Bill Harvey

That’ll be filed with our 10-Q, which we filed separate reports for each company. So over the next week, you’ll be able to get that.

Jeff Harlib – Barclays Capital

Okay. And just a remaining cash restructuring cost for the remaining restructuring actions for the remaining quarters.

David Paterson

There’s $16 million left of the severances today.

Jeff Harlib – Barclays Capital

Six, zero or sixteen?

David Paterson

Sixteen, excuse me, one, six.

Jeff Harlib – Barclays Capital

Okay. Thank you. Any natural gas hedges that you’re likely to–?

Bill Harvey

There’s a very small amount, not a – nothing significant.

Jeff Harlib – Barclays Capital

Okay. And just coated paper, can you just talk about if you’ve seen some recent pricing pressure given the weakness in demand there?

Bill Harvey

Well, this early, yes. There is certainly a lot of price discussion on coated paper. Again, in that sector, there are a lot of six-month pricing driven by ad spend by major advertisers. And those prices will be set in December for the first half of ‘09. So yes, there is a lot of price discussion. And in general, I would say the price is especially down on all of our specialty papers.

Jeff Harlib – Barclays Capital

Okay. And just with the Bowater refinancing you’re looking at, are you still looking at an active based financing that will provide some flexibility with respect to the mills that have are the – that have been moved to the holding company level?

Bill Harvey

Yes. We have two, three – two-prong approach to put that asset back in line. And we were far along. In fact, we’re in a position to implement that. But we would combine that with some type of secured loan or secured ten offering using those $2 mills under the holding company and the markets in mid October that we were unable to implement that way.

Jeff Harlib – Barclays Capital

Okay. And on the Abi term loan, is that something you’re going to start to talk to the holders now on extending that or are you looking into early ‘09?

Bill Harvey

Very soon. Probably as late as early ‘09 is how you should think of it. That would be sort of about as late.

Jeff Harlib – Barclays Capital

Okay. And you’ve looked to roll that facility?

Bill Harvey

Yes.

Jeff Harlib – Barclays Capital

Extend it. Okay. Thank you.

David Paterson

Thanks.

Operator

Thank you. The next question is from Tarek Hamid from JP Morgan. Please go ahead.

Tarek Hamid – JP Morgan

Good morning, guys.

David Paterson

Good morning.

Tarek Hamid – JP Morgan

Bill, in talks of the $320 million annual synergy run rate, can you sort of give us a number on how much of that was actually achieved during the third quarter and what you would expect to achieve on the fourth quarter?

Bill Harvey

On a run rate basis, about a little over – and I’m doing it on an annual basis, a little over $270 million was in place at the – for the entire third quarter. We did have a lot of downtime – making this downtime in the third quarter, which in essence slowed up the realization of it. But we expect to get to the final number, $375 million, by the end of the year or fourth quarter.

Tarek Hamid – JP Morgan

We should think about third quarter’s holding something like $50 million of that asset, roughly?

Bill Harvey

Yes, on an annualized basis, yes.

Tarek Hamid – JP Morgan

Great. And then, on the pension front, saw you – the net pension expense during the quarter was roughly $75 million on a cash basis. Could you talk a little about where was that spent? Was it in Abi and Bo, and what to expect for the fourth quarter in 2009 on the pension line?

Bill Harvey

On the pension line, there won’t be a significant change in the fourth quarter. You can get the break own of that in the separate filings by companies. I mentioned earlier, on the contribution side, we expect a slight, modest decline next year. Pension expense, we have not finalized the accounting of pension expense number for next year. Earlier in June, we shifted our pension plans from about – as a whole, about 40% fixed income to about 70% fixed income. And that puts us in a position to have – to moderate, or in fact, lower contributions for next year.

Tarek Hamid – JP Morgan

And then just one last question, this is a little bit more general. But how should we be thinking about – with the outages during the third quarter, and then the curtailments you’re going to take during the fourth quarter. How should we be thinking about fixed cost absorption, or sort of just unit cost performance in the different businesses?

Bill Harvey

I think there was significant – making this downtime in the third quarter. There will be downtime in the fourth quarter. There will be fixed charge absorption typically that runs from $150 to $200 per ton in most businesses. What we will be avoiding is the significant repairs we have spent in the third quarter, which were very material because those were – the third quarter downtime was truly made in its downtime.

David Paterson

So spending would be lower.

Bill Harvey

Yes. Spending would be lower, expense in cash.

David Paterson

And our headcount and other SG&A continues to come down. Yes. So there’s a composite of SG&A continues to come down in absolute dollars. That’s right

Tarek Hamid – JP Morgan

Well, thank you very much.

David Paterson

Thank you.

Bill Harvey

Operator, we have time for one more question.

Operator

Thank you. The next question is from George Staphos from Banc of America. Please go ahead.

George Staphos – Banc of America

Thanks, everyone. Good morning. Thanks for –

Dave Paterson

Hi, George.

George Staphos – Banc of America

Thanks for letting me in the call. One quick question, and one bigger picture question, Bill, did you say what the pre-tax amount of the FX gain was in the quarter? I was trying to get at the operating tax rate in dollar terms.

Bill Harvey

I think I’ve – why don’t you ask the bigger picture question first?

George Staphos – Banc of America

Okay. All right. We’ll give you some time then. Well, typical, your lumber businesses, your magazine paper business, your pulp business arguably grow over time. And operations like Catawba World Class, no one knows with certainty, but newsprint looks like it’s going to continue to decline over time. And in recent years, it’s been pretty significant. Do you think that as you’re managing this transition, managing the balance sheet, managing the newsprint decline, that maybe your long term impairing will worsen the position of your better growth businesses for the future? Said differently, might you need to do a more radical restructuring and transformation in your product mix and more quickly to manage through this downturn and demand that you’re saying to save the other businesses?

David Paterson

Well I think, I’ll take a crack at it. I think you’re asking the question we ask ourselves, what investment should we be making to change our product mix and when is the appropriate time to make those investments? Clearly, we would like to grow pieces of our pulp business. We’d like to grow pieces of our coated business. We talked a lot about that. I think, until we begin to de-lever our balance sheet and have sustainable free cash flow, it’s going to be difficult to do.

Though we’ve got to deliver all the promises we’ve made to our investors, and that’s our primary objective in the near term. We have an internal road map that’s been well-defined in terms of what our current capabilities are and what we could do in a rapid fashion to address the issue that you’ve raised. So I think step one is to have sustainable free cash flow and operating earnings, prove that we can begin and continue to de-lever the balance sheet. And then begin making those investments to address the very issue you’re talking about.

Because our base assumption is that North American newsprint demand will decline significantly in ‘09. We feel that we are ready for that from a strategy near term or a tactical point of view for ‘09. And that we will continue being that load until the North American newsprint market levels off or flat – goes off at some level. But no one knows where that is so we have to plan accordingly.

George Staphos – Banc of America

Dave, I guess I just worry about the cash strain that you have in newsprint as you try to contain the right size the business–

David Paterson

George, I think if we have to be clear, our goal is to make newsprint not a cash trying – in fact to make newsprint a cash generator with positive earnings. And matter of fact, I think that’s been proven by our actions this year and the way we intend to manage the business.

George Staphos – Banc of America

Okay. And on the shorter term question?

Bill Harvey

Yes, sir. Sir, on the quick tax foreign exchange was a gain of $6 million. And on again, as I mentioned in the – in my earlier discussion, an $80 million gain after tax. Again, that relates to the foreign currency impact on our balance sheet. And the actual tax impact relates to the – some of our taxes are in statutory in Canadian dollars, so.

George Staphos – Banc of America

Okay. I’ll try to try the pre-tax where the operating tax rate off line. Thanks.

David Paterson

Okay. Thanks, George.

Bill Harvey

Operator, could you supply the replay information?

Operator

Certainly. If you would like to listen to the instant replay, you may call 416-695-5800. It will be available until November 15, 2008 and the passcode is 32656.

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Source: AbitibiBowater, Inc. Q3 2008 Earnings Call Transcript
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