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Executives

Rémi Lalonde – Vice President, Investor Relations

Richard Garneau - President & Chief Executive Officer

Jo-Ann Longworth - Senior Vice President & Chief Financial Officer

Analysts

Sean Steuart - T.D. Securities

Bill Hoffmann - RBC Capital Markets

Stephen Atkinson - BMO Capital Markets

Tarek Hamid - JPMorgan

Paul Quinn - RBC Capital Markets

Resolute Forest Products Inc., (RFP) Q2 2013 Earnings Conference Call August 1, 2013 9:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Product Second Quarter 2013 Earnings Call. I would now like to turn the meeting over to Mr. Rémi Lalonde, Vice President for Investor Relations. Please go ahead, Mr. Lalonde.

Rémi Lalonde

Thank you. Good morning and welcome to Resolute’s second quarter earnings call. I am 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 a 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 the uncertainties inherent in these statements, actual results may differ. Our 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 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?

Richard Garneau

Good morning and thank you for joining us today.

Faced with volatile pricing associated with our cyclical paper, pulp and lumber products, this quarter, we preserved margin as a result of our continued efforts to reduce manufacturing costs. We lowered labor costs; we realized operating efficiencies, we generated EBITDA with external power sales from new cogeneration facilities and we also had the benefit of external and seasonal factors such as lowest team usage and a weaker Canadian dollar.

The bottom line impact of this improvement was enough to overcome the overall drop in product pricing which has fluctuated across product grades in the first half of the year. Paper grades were flat to down particularly in newsprint. Pulp improved marginally and lumber fell as quickly as it rose. I’d like to emphasize the continued progress we made on manufacturing cost using newsprint as an example.

External factors like seasonality and commodity costs are such that we can guarantee this every quarter but our delivered costs per unit this quarter was $594 per ton. This number includes depreciation, SG&A and distribution cost. The weaker Canadian dollar had only the $6 per ton impact on manufacturing cost compared to last quarter and $5 a ton against the year-ago period. The rest of the improvement reflects the cumulative effect of our asset optimization initiatives. These are the principles we are applying across all mills and all grades.

Volume improved sequentially beyond just seasonal factors, but it was down year-over-year due mainly to our 2012 efforts to address changing market dynamics by focusing production in the most cost-effective manner. Not including the 3 pulp mills, we acquired with Fibrek, which allowed us to realize greater benefits from the gradually improving scrap pulp market, we now operate 4 fewer machines overall compared to the year ago period. This is the result of six machine idlings and two restarts at more cost efficient mills.

As to discipline capital management, we were very timely in accessing the capital market to refinance $500 million of secured debt with $600 million of unsecured notes that reduced our cash interest burden by $16 million annually and extents the maturity by five years. We generated adjusted EBITDA in the second quarter of about $28 million in newsprint, up $12 million from the first quarter.

Referring to the point I made earlier, this is despite a $21 per metric ton drop in average transaction price. Adjusted EBITDA were $11 million in coated, up $2 million also despite a $36 per short-ton price reduction. $10 million in specialty, down $8 million, $23 million in pulp, up $15 million and $25 million in wood products unchanged from the previous quarter. In total, adjusted EBITDA was $90 million, $17 million better than the first quarter.

As I mentioned, the improvement results from better cost in higher volume of certain products by lower overall pricing.

Let’s review market conditions. Total North American newsprint demand declined 9.5% in the first half of the year, reflecting a 10% drop from newspaper publishers and the 6% decline from other users. Global demand for newsprint was down 4% through May in that same period, Latin America was down 8%, Western Europe down 5%, China was down 1% but India was up 2% and Turkey was up 16%.

While precarious because of currency fluctuations, export from North America users were up 9% compared to the first half of 2012 reflecting mainly gains in shipments to non-Japanese up 36% although shipments to Western Europe were down 33%. Certain U.S. dollar markets like India are reopening to North American producer due to the combined effect of the strengthening euro and significant European capacity reduction over up 1 million ton since the end of 2012.

The North American industry shipment to capacity ratio remains at 92% for the first half of the year consistent with last year. Resolute shipments were up 6% compared to the first quarter with the increase split evenly between domestic and international deliveries maintaining the 55%, 45% ratio from the first quarter and showing our ability to quickly capitalize on changing market dynamic with our strategically located mills network.

After two-and-a-half year of stability, the price of newsprint in North America started to come under a significant pressure late last year mainly as a result of capacity restarts in Quebec in May and weaker export volume.

Domestic newsprint prices had stabilized but the market remains fragile as North American export gradually improve. It is important to highlight that this can change quickly with currency fluctuations against the U.S. dollar.

The trend for coated mechanical paper continued on pace with the first quarter. North American toll demand was down 5% in the first half of the year, while shipments from North American producer down 11%, about 200,000 short tons and the import up 22% or about 43,000 tons mostly from Western Europe. Accordingly, the industry shipments to capacity ratio continue to widen coming in at 87% in the first half of the year compared to an average of about 94% for all of 2012.

The late 2012 North American price increase was not implemented because of demand softness, higher imports and great switching to high-end SC or (sub-calendering) following the government’s reported restart of a large mill in Nova Scotia. Nonetheless, we expect to see modest seasonal improvement in coated grades during the third quarter.

I mentioned last quarter that after the difficult adjustment period that followed the idling Catawba 1, CM1, the mills were starting to perform to expectations. This is now shows that as our delivered costs dropped significantly in the second quarter. Overall demand for uncoated mechanical paper continued to do well in the year of down and modest 2.4% compared to a 16% drop into North American demand for 2012.

But this includes a 9% increase in demand for high-gloss grades. Demand for these grades were driven by the significant additional production from the large mill that I mentioned earlier and from the grade shifting down from lighter weight coated paper. Demand for light weight uncoated mechanical paper was on 16% but our production is very small. Demand for the standard commercial grades fell by 9% in the first half of the year.

Overall, the industry shipments to capacity ratio stood at 91%. The additional capacity for high-gloss and weaker demand in other mechanical grades put pressure on pricing in the second quarter but we expect a modest seasonal improvement in the third quarter. Overall, demand for market pulp was up 2.5% in the first half of the year were gains in the second quarter reversing the 1.4% slip in the first. North America improved by 8%, China by 2% and Western Europe by 1%. Global shipments of softwood pulp which represent about 60% of our total shipments were up about 2%, again reversing the 1% decline through the first quarter.

Commodity pricing for market pulp continued to improve in the second quarter, building gradually on the momentum that started late in 2012 and we expect relatively stable conditions for the balance of the year. The impact of significant South American hardwood capacity additions announced for late this year and early next year is unclear.

After breaking to the 1 million barrier in March, seasonally adjusted housing starts retreated to 836,000 through June. This is still 20% better than the 757,000 starts reported in June of 2012 when the U.S. housing recovery began to gain momentum. The benchmark random land composite struck high 451 to 1000 board feet in the first week of the second quarter, then fell in the straight line to a low of 322 as the quarter was coming to a close.

Market price has gradually improved since then closing last week at 353 to 1000 broad feet but demand continued to rely on the U.S. housing starts. We remained optimistic about our strengthening position in this segment and especially our furniture growth project the restart of Ignace saw mill and the construction of the new Atikokan saw mills both in Ontario. But wood availability a major issue in the province of Quebec and the lack of certainty makes the long-term investment decision challenging.

This quarter was a great example of our strategy in action. We faced stock pricing concessions and tighter demand in the number of our product but we preserve margin by lowering manufacturing cost significantly. We made the right adjustment for a cost leader, we lowered labor costs, we improved efficiency and we generated EBITDA with power sales from our cogeneration assets.

Our asset optimization efforts since 2011, help form the lean and efficient operating platform that is our key advantage to compete for the highest margin tons. Even in a non-stable pricing environment, giving up the ability to generate cash at all point in the cycle. With this platform, except for scheduling -- for schedule maintenance, we plan to run our pulp and paper asset to capacity for the balance of the year to meet customer needs. And we continue with our strategy across the board to treat from certain paper grades. Our philosophy remains the same, run for profit, not for tons. We do that by managing production in inventory levels and in only profitable tons and maintaining world class operating standards.

Let me finish with an update on our pension situation. Last quarter, we mentioned that we had reached an agreement in principle with company stakeholders in Quebec to significant on certainty associated with potentially material corrective measures in favor of the more stable, predictable and balanced pension funding requirements. We are presently waiting for the provincial government of Ontario to respond to the agreement in principle that was unanimously accepted in Quebec by Retiree Association, union, the provincial government and expansion regulator.

I’ll now advice Jo-Ann to review our financial performance.

Jo-Ann Longworth

Thank you, Richard and good morning everyone. Today, we reported a net loss of $43 million or $0.45 per share in the second quarter on sales of $1.1 billion. Excluding $61 million of special item, we generated net income of $18 million or $0.19 per share. The special items are described in this morning’s release but the most significant ones are a $38 million net charge related to the refinancing of our 10 in a quarter senior secured notes, $9 million of start-up costs at our Gatineau newsprint mill; a $7 million charge related to asset impairments and closure costs mainly from the first quarter idling of our Calhoun Newsprint machine and a $7 million charge on translation of Canadian dollar net monetary assets.

Total sales were up 3% from the first quarter, shipments rose 6% and Newsprint 5% and market pulp 4% especially paper and 2% in wood products. Coated paper shipments were down 2%. Compared to the first quarter, average transaction price dropped $21 per metric ton in newsprint, this steepest drop in the last three quarters of print decline. Coated prices fell $36 per short ton and specialty prices were down $15 per short ton.

Market pulp saw an increase at an average transaction price of $27 per metric ton. The average transaction price for wood products rose slightly, up $4 per 1000 board feet despite a sharp second quarter drop in market prices for lumber. Because of the typical like between pricing and invoicing for lumber products, we expect the second quarter market price drop to negatively affect our third quarter average transaction price. Despite the overall increase in volume cost of sales was essentially unchanged from the prior quarter. This is because of a lower labor cost, seasonally lower steam usage, more efficient kraft usage and lower wood cost in the U.S. A slightly weaker Canadian dollar as well as a full quarter contribution of power sales from Thunder Bay’s cogeneration facility.

On the flip side, we experienced higher maintenance costs primarily because of a cold outage at our Calhoun mill. We changed our accounting policy from a direct expensing of cost associated with plant major maintenance to the deferral method. These costs are now amortized on a straight line basis over the estimated period until the next plant major maintenance activity. We’ve applied the change retroactively. This will eliminate the skewing effect of sizable maintenance cost in specific quarter to spread them out over the effective period generally one year which will make it easier for you to track our ongoing performance.

Distribution costs were up $7 million or 6% with higher volumes. While selling, general and administrative expenses were unchanged. Newsprint delivered cost per unit was down $42 per metric ton to $594, touching record company low. This largely reflected a cumulative effect of our intensive asset optimization initiatives such as closing a high cost machine in Calhoun and restarting a refurbished cogeneration assisted machine in Gatineau, leaner manning structures at our Amos, Baie-Comeau, Claremont and Thorold mills closing high cost production in (Mersey) and strategic capital investments including the cogeneration facility at Thunder Bay.

Delivered costs per unit in coated papers dropped by $44 per short ton, falling below its 12-month trialing average for the first time in the last eight quarters. We’re encouraged to see Catawba working hard to regain its competitive position.

Unit delivered cost was up $14 per short ton especially papers mainly because of a cold outage at Calhoun and lower power generation from Hydro-Saguenay following a breakage affecting 6 of the total 170 megawatts of production capacity. We expect to complete the repair by the end of the quarter. Because of maintenance costs were spent as incurred even with the accounting policy change. These items somewhat mapped the positive impact of asset optimization including idling of two machines and restart of the world class machine in Dolbeau, which also benefit from cogeneration and the implementation of a leaner manning structure at Alma.

Unit delivered costs in the pulp market segment was down $13 per metric ton compared to the previous quarter, its lowest level since 2011. In addition to improved operating efficiencies, we benefited from better labor costs, lower maintenance and the Thunder Bay cogen.

In wood products, delivered costs per unit was up slightly $4 per 1000 board feet most of which was due to higher stumpage fees which are linked to selling prices. Not including improved operating efficiencies such as lower steam cost, we generated 14 million of EBITDA with our new cogeneration asset from Q2 compared to $8 million in Q1 and $4 million in Q4 of last year. With the Gatineau cogeneration facility online since mid-June, we now have our full complement of cogeneration assets selling green power to the grid.

Closure costs and related charges were $12 million in the quarter, down from $40 million in the previous quarter. In both cases, representing mostly accelerated depreciation on the newsprint machine we closed at Calhoun. Only $3 million of the second quarter closure costs were cash items.

Our interest expense was down $1 million in the quarter. Next quarter, we will start to see the benefit of the refinancing we completed mid-quarter where we took at 99% of our 10 in a quarter secured notes due 2018 with unsecured paper at 5% and (7% to 8%) due 2023. This will reduce our cash interest expense by 16% or $60 million annually.

In connections with the refinancing, we incurred $59 million of other expenses representing the $84 million tender offer premium paid to the 2018 noteholders, net of the unamortized premium from the initial issuance of the notes up $25 million.

Turning to the balance sheet and cash flow items, cash and cash equivalence increased by $33 million in the quarter, closing at $248 million. Net cash provided by operating activities were $68 million in the second quarter and $88 million improvement from the prior quarter. We reduced balance sheet working capital by $31 million as a result of a $59 million decrease in inventories mostly, seasonally lower raw materials at some mills as well as the reduction in specialty and pulp finished goods partially offset by the semi-annual interest payment.

Capital expenditures were $46 million in line with spending in the first quarter, for 2013, we continued to expect capital expenditures for compliance and maintenance of business activities at 55% to 65% of depreciation and amortization. We also expect to spend between $50 million and a $100 million for value creating projects.

Availability under our recently increased $665 million ABL is $540 million for total liquidity of $788 million as of June 30, 2013. Pension contributions were $31 million in the quarter against the $12 million expense. We expect to make $150 million of contributions in 2013, while expensing $40 million of that. Assuming Ontario agrees to join the agreement in principles that was unanimously accepted in Quebec by retiree associations, unions, provincial government and its pension regulator.

I will add that retirees of Ontario pension plans represent less than 15% of the total pension plan membership in Canada.

I’ll take this opportunity to provide context around the impact of the recent rise in interest rates and pension liability. Balance sheet pension and other post-employment benefit obligations which are calculated using U.S. GAAP are reevaluated only annually in the fourth quarter. But to illustrate using the prevailing interest rate on June 30, our balance sheet net pension and one-time obligation would fall from $1.8 million to $1.4 million, $1.8 billion to $1.4 billion. Similarly, the solvency deficit under our Canadian funding relief regulation is computed only in year end. But, again, to illustrate assuming the year ended on June 30, the applicable discount rate would have improved by over 50 basis points and when taken together with the return on assets so far this year, the solvency deficit would be cut by about $425 million. Indeed, under the same assumption, our solvency ratio would have improved to over 72%.

Assuming the Government of Ontario joined all the other stakeholders to move forward with the agreement in principles that Richard talked about.

The impact of higher interest rate will mostly be limited to the balance sheet because the agreement in principle would replace the concept of corrective measures based on solvency levels and say we are up reasonable, incremental but stable contribution.

Rémi Lalonde

Thank you, Jo-Ann. Mary, let’s open the call for questions please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We have the first question from Sean Steuart from T.D. Securities. Please go ahead.

Sean Steuart - T.D. Securities

Thanks good morning everyone. A couple of questions. Richard, I'm wondering if you can speak to uncoated ground wood markets. It looks like the supercalendared price increases are in for July. I guess I'm just trying to gauge across your grade mix how much positive price momentum you would expect to realize in the third quarter and how much of that might lag into the fourth quarter this year?

Richard Graneau

Well, I think that when you look at the third and the fourth quarter of the seasonally the demand is going to improve. I think that its what we normally see on the price increase, I think that when you look at the shipment to capacity ratio for the first half its 91%. So, I don’t think that we are going to see other pricing announcements here, I think that’s the anomaly, you need to have higher percentage to get an improvement in pricing but demand, we saw the improvement in the second quarter, I believe that that demand is going to improve in the third and fourth quarter.

Sean Steuart - T.D. Securities

What portion of your overall product mix in that segment would be seen the $40 per ton increase so?

Richard Graneau – President, Chief Executive Office, Director

It’s -- we had 1 mill, it’s Kenogami we have about 140,000 tons, that is SGE. So, that’s the volume that is going to benefit from the price increase.

Sean Steuart - T.D. Securities

Okay. And with your strong balance sheet, Richard, I'm wondering if you can give us any insight on what you're looking at, I guess, in terms of M&A opportunities to secure fiber in Eastern Canada. That seems to be an ongoing priority. Are you actively looking at opportunities at this stage? Any sort of context you can give there??

Richard Graneau

Well, certainly on the saw mill side, we are looking at opportunities. We know that there is consolidation the place in Quebec and but I think it’s a very long process to get approval from the government, and the government should get the consolidation. But the process that we follow -- we have basically to get the communities on board and have the stockholders basically to support and consolidation very often means that the saw mills is going to be closed and more volumes is going to be put into the saw mills. So we are working on it externally and in Quebec.

In Ontario, we are now just about to start the Atikokan saw mills and also will do the modification to Ignace at the drier and a borer basically to be able to dry the wood. So, I can get it – additional capacity that we are going to have in 2014, sometime in 2014. But beside that obviously looking at opportunities you have to have the right one and we are going to continue to lookout for the opportunities that can provide synergies and opportunities that can be used, our capability, our skills as management team to be able to extract as much value as possible for the shareholders.

Shawn Stewart- T.D. Securities

Okay, thanks. I will get back in the queue.

Operator

Thank you. The next question is from Bill Hoffmann for RBC Capital Market. Please go ahead.

Bill Hoffmann - RBC Capital Markets

Yes. Richard, could you talk a little bit more about the newsprint markets and just your thoughts on it. I mean, obviously, we're a little bit out of balance here at this point in time and you're very dependent on the export markets. I just wanted to know what your thoughts are with your -- in regards to your asset base, whether you expect or would close another facility to tighten those markets up and how you want to proceed from here?

Richard Graneau

Well, on the newsprint market, I think that we have no plan to close more capacity. I think that we have realigned our network. We closed the machines that were of high cost, replaced them. And the best example is Gatineau that was just restarted with the cogeneration. And obviously at this mill and when you at the mills in our network that can export and be a competitor. We have Gatineau. We have Claremont. And we have Baie-Comeau. And in south we have (inaudible) and we have Grenada.

And so, I think – it is one we look – we look at the market when you look at the operating rate and that goes to 92%. So, we knew that we certainly with the export market it’s key for us and we know that currency is a factor of that it’s very important. But you have seen the progress we have made on costs in the second quarter and I think that we expect that -- we expect to continue to benefit from this. Realign benefits -- realignment, so I think that, I think that when we look at our network, I don’t want to talk about somebody else network. But we’re certainly very well positioned to continue to run it and hopefully the export market is going to continue to perform well, we have just know that the Euro to the U.S. dollar that the Euro is to going to maintain its value to where we are presently. And but no plan to reduce capacity. We are just going to do everything that we can on the cost side to improve our competitive position.

Bill Hoffman - RBC Capital Market

Thanks. And then, do you expect that with a little bit of economic growth here that -- and a little bit of firming in the export markets, that the newsprint market would be prepared for a price increase, which you've been sort of hesitant to go jump in on at this point?

Richard Graneau

Again 92%, and if you look at the history, and if you look at the last 10 years for example, that’s 92% it’s a very difficult rate to justify a price increase and I think that the other factor also currency and the stat of the export market. I think that what we are going to monitor the situation and certainly look at the market. But, I have repeated that many times, we work on our costs and sometime our cost reduction is as good as the price increase.

Bill Hoffman - RBC Capital Market

Okay, thank you. And then just one final question. Moving to the coated side of the business, just your thoughts about the market tightness here in the back half of the year, obviously in the seasonally stronger demand period. Where do you think operating rates will get to?

Richard Graneau

When we look at the coated mechanical set again for the first half, when shipment to capacity shows only 87%, eight seven, 87% that’s a -- we need to have a better consumption numbers. And I think in the fourth quarter we normally see better demand, better of advertising more ad features. I think that segment is certainly under pressure in terms of demand. And I think that it shows the importance and now we are pleased with the performance, now its get better. We have improved our efficiency, our cost are down.

On to machines to the level that when we land the three machines and I think that we are just going to (inaudible) among the lowest costs of coated mechanical in North America, we are going to continue to watch for opportunities. But, there we need to see operating rate or shipment to capacity in north of 92%, 93% and 94% to be able to really implement price increases.

Bill Hoffman - RBC Capital Market

Yes, okay. Thank you.

Operator

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

Stephen Atkinson - BMO Capital Markets

Thank you. Good morning, everyone. Congratulations on all the cost reductions. And I was looking at going forward. Could you update me where you are on the lumber mills, like where you've started up some and still have more to come?

Richard Graneau

Well, we have the two mills that we’re going to build and modifying in Ontario and Quebec. I think within the new built sector southern, we are now getting all our team to bid on the 25% of the wood that is made available by the government. But, as an industry not only Resolute, in 2013 there was another 10% permanent reduction in the wood supply. And so obviously to be able to optimize all of saw mills in Quebec and I think we still have a very good result. That will have – we don’t have the wood to run the network that we presently have.

So obviously, there is a need for consolidation, but I need to see a consolidation demand our network to have more wood into the saw mills. And that’s one of the benefit of this auction program the 25% because we can put this wood in any one of the saw mills, so if we want to optimize one saw mill, so we are going to be able to use this volumes to do parts of the rationalization.

But I think that longer term when you look at the wood supply, I think that mould is going to be needed, we probably have one -- certainly one saw mill is -- we need to be close permanently to be able to move the guaranteed volume which we will have by saw mills to a one or two other saw mills.

Stephen Atkinson - BMO Capital Markets

Okay. So that in terms of Ignace, can you tell me where you are on that project?

Richard Graneau

Well, we just started to work on it. So it needs that, so it needs the construction of the boilers and the klins. And we’re just about also to start at Atikokan to work on the land itself. We have some work to do before starting the foundation of the second work at Atikokan. So, we are basically on schedule it’s the right time of the year to do it. So, and again, unless we have issues with the distributor work and the ability of contractors and workers in the north – in northwest in Ontario, we should have production of these two facilities on board in some time – again in the second quarter of 2014.

Stephen Atkinson - BMO Capital Markets

Okay. And when you talk about the run rate of $16 million on energy and I guess there's a little bit still to come from Gatineau. Then I was looking about the Saguenay power outage. That would not be included in all of that?

Jo-Ann Longworth

That’s correct, Stephen. It’s Jo-Ann. It’s actually $14 million with the quarterly amount of EBITDA from the cogens without Gatineau. Gatineau just started up at the end of the month, and it does not include the Hydro- Saguenay assets which are included in the cost of specialty paper group.

Stephen Atkinson - BMO Capital Markets

Okay. And how is Gatineau running now? Or like, are you able to tell me where you are in the operating rate or the startup curve?

Richard Graneau

I think we struggled in the first few weeks. But, now the mill is producing to expectation. And it’s not expected happen, three years that the mill is down. There is – we have to replace by a lot of bearings that basically, when the equipment is not running that is basically we have breaks or downtime that we have to take to replace them.

But now it’s running, it is in slightly above our budget, so we are very happy with it. The turbine that started a bit later newsprint production started a bit before the turbo generator and now the turbo generator is also is running well and producing electricity. So we are going to have wonderful impact of power generation and power sales in the third quarter. And having to this mill, we used to have that. We are happy to see this mill up. And the like quality that is made at this mill and that’s again that’s a mill that is well located to export and we place high cost Calhoun machine that we close in this process to optimize our asset base.

Stephen Atkinson - BMO Capital Market

Okay. And finally on Dolbeau is that running at full capacity now?

Richard Graneau

Its running at full capacity but the sale, there is a some issues and then the mail that has been closed also for the real appliance. So there is -- straight that, we know that we would have again the same type of event that we had in papers that of events that we had in Gatineau. But, in the last few weeks we have seen a better of, it’s more reliable, so and I think that third quarter we are certainly, even though the cost is lower than not a similar mill with a similar product, we can do better than that, that’s also what more reliable equipment. And also, after about three years the employees, they need to get back. There was some training that now it’s completed. So we are pretty satisfied with the results so far of these two.

Stephen Atkinson - BMO Capital Markets

Okay, great. Thanks so much.

Operator

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

Tarek Hamid - JPMorgan

Good morning. I just want to drill down again on the coated business, just on the $44 a ton cost decrease. Could you maybe sort of help us think about the breakout of that decrease quarter over quarter? And sort of how much of that was kind of just input costs, fiber, chemicals and energy? And how much of that should we think about as sort of just a kind of semi-permanent fixed cost reduction?

Richard Garneau

Well, obviously Jo-Ann is going to look at the details. But we have a better efficiency on the two machines, so it certainly has helped to reduce the overall cost. So, when you have less – you loss time on the machines, there is a benefit on – you have better fiber consumption, better chemical consumption and also labor. So, I think, Jo-Ann has said the most of the items that I just covered, then Jo-Ann is going to give you a specific on each item.

Jo-Ann Longworth

About most of it is coming actually from the lower uses of kraft which is a higher cost input material as well as lower steam usage following the annual outage. So coming off of that, we would back to more regular levels. And then, you do have some market price decreases on coating.

Tarek Hamid - JPMorgan

And then, when you look at the price decline there, as you sort of switched from three machines down to two, was part of that price decline just a mix shift as the product slate changed? Just how should we think about that?

Richard Garneau

Well, the two machine is mainly related and I mentioned that when you look at – for the mechanical with the shipments capacity of 87%. So, I think that the discussion to idle the machine was well directly lined with the decline in demand. So, I think that, what I would – it would have – maybe higher impact from the market.

So I think that we are just allowing what our capacity with market demand, customer demand and focus on the two larger machine that are more efficient. And also the fact that, there is P&P that is less efficient so we can also improve the yield on the external mechanical pulp that is used in the coated mechanical production.

Tarek Hamid - JPMorgan

Okay. So no real change in the product mix in the quarter that impacts the pricing?

Jo-Ann Longworth

No.

Tarek Hamid - JPMorgan

Okay. And then, just finally, you talked a little bit about this on the M&A front, but as you look through your grade mix, the Fibrek acquisition I think is sort of proving to be pretty accretive, but any other sort of grades in particular that you're targeting as you think about M&A?

Richard Garneau

Well, no, I think that -- it depends on the opportunities obviously. So we are looking at what is, may become available and I think that our main focus is, what can we -- you have to look at synergies. And it’s always on synergies that we focus on and how we can use our skills as a management team to make the changes that are required to adapt to market, the changing market and when you look at the decline in demands. So we have to take that into account. I think that the opportunities, if any, it’s going really to be the focus of the company.

Tarek Hamid - JPMorgan

Great. Thank you very much.

Richard Garneau

You are welcome.

Operator

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

Paul Quinn - RBC Capital Markets

Yes, thanks very much and good morning. Just a couple of questions. One on -- I'm pretty impressed with the newsprint price -- not price, but cost decrease. But, just curious as to why we're not seeing costs fall quicker at Catawba and if -- in the past you described that as the lowest-cost coated machine out there and it looks like you guys aren't making any money at it. Do you expect further machine closures in that area going forward here?

Richard Garneau

Well, I would like to have the answer for that, I just don’t know. So but what I – I think the number – when you look at Catawba and look at all of the margin, even with the selling price reduction, on the percentage basis, it is encouraging to see that it is resolved. But I think the – Paul, your comment is right on the mark, so when you look at 87% shipments to capacity ratio, you have to ask yourself the question, what’s going to happen. But we have – this minute it is very cost competitive. We have done what was needed to be, so it takes a bit of courage to do it, but it’s done, and now it’s running better and we expect that we are going to continue to run only with these two machines for the time being.

Paul Quinn - RBC Capital Markets

Okay. And then just over on the lumber side, your charts are showing both random and stud prices down strongly in Q2. I know, Jo-Ann, you mentioned sort of the lag in invoicing. Was there a change in mix that resulted in an increase in realizations?

Richard Garneau

No, there was no change in mix, we run the saw mills, random and stud saw mills in the same fashion.

Paul Quinn - RBC Capital Markets

So, how big is that lag in invoicing then? Is that -- is it a lot longer for you guys than anybody else? And I just note this because everybody else that's reported to data has seen drops in realizations?

Jo-Ann Longworth

Well, the lag is anywhere depending on the type of business anywhere from a week or two to a month. So we saw the steepest decline were in May and June. So if you look at the wrap up at the beginning of the quarter -- very high price at the beginning of the quarter then the drop, they kind of evened out about the same prices Q1, but the prices for example have not recovered so far as high as they started the second quarter high. So, it becomes a question of averaging.

Paul Quinn - RBC Capital Markets

Okay. And then just lastly, lots of speculation out there on potential paper machine conversions to container board. Just wondering if you guys -- I know this has been done in the past at one of your facilities, but if you're looking at that area as a potential growth area?

Richard Garneau

No. That’s a simple answer.

Paul Quinn - RBC Capital Markets

Well, thanks very much. Best of luck.

Jo-Ann Longworth

Thank you.

Operator

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

Rémi Lalonde

Great. Well, I think we will just leave it there. Thank you everybody for joining us today.

Jo-Ann Longworth

Thank you.

Operator

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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