Resolute Forest Products' CEO Discusses Q3 2013 Results - Earnings Call Transcript

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 |  About: Resolute Forest Products, Inc. (RFP)
by: SA Transcripts

Resolute Forest Products, Inc. (NYSE:RFP)

Q3 2013 Earnings Call

October 31, 2013 9:00 AM ET

Executives

Rémi Lalonde – VP, IR

Richard Garneau – President and CEO

Jo-Ann Longworth – SVP and CFO

Analysts

Sean Steuart – T.D. Securities

Bill Hoffmann – RBC Capital Markets

Paul Quinn – RBC Capital Markets

Stephen Atkinson – BMO Capital Markets

Tariq Hamid – JPMorgan

Operator

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products’ Third 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, Valri. Good morning and welcome to our third 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 our webcast, using a link in the Presentations and Webcast 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. 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 to please direct their questions to our communications department following today’s call. Richard?

Richard Garneau

Good morning everyone and thank you for joining us today. During last quarter call – during the call I talked about how faced with softwood pricing conditional role we preserve margin with improving efficiencies and thus manufacturing cost reduction. Again, this quarter all rapid optimization initiatives, taken over the last two 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 quarter 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 cost, better market conditions and the acquisition of Fibrek led us to the best quarter. Our full segment I have seen in two years which help to upset the effect of that weaker selling price for lumber and steeper demand decline for newsprint and mechanical papers. Shipments compare to last quarter rose in all segments except for coated but pricing for all paper grades continue to reflect lower industry operating rate.

Our unit deliberate cut this quarter compare favorably in newsprint, specialty papers and pulp again not just the last quarter but also the last eight quarters contributing to steady or better margin. The risk that we hear is that we are focused on preserving all lower cost advantage. We are facing more of a challenge in coated paper segment as North American producers struggle to adjust to the effect of lower borrowing rate due to lower demand, great 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 goal at Calhoun 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 11% drop from newspaper publishers and 7% decline from other users. Global demand for newsprint was down 5% through August which include 4% increase in India and 14% increase Turkey but a 7% decline in Western Europe and 12% in Latin America. North American export have maintained pace at about 500,000 metric tons per quarter this year, 11% better than 2012. Most of which can be attributed to the 38% increase in shipments to non – Japanese Asia which includes India.

The North American industry shipments to capacity their ratio remained at 92% through all three quarters, consistent with last year. Resolute shipments were up 22,000 metric ton this quarter or 3% compared to the second quarter with the increase split evenly between domestic and international deliveries maintaining the 55:45 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 for two 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 on coated mechanical papers improves again in the quarter, for the year-to-date demand growth of 2.5% most of which come from a 14% increase in demand for high-gloss grades, as customers switch from coated paper. Standard grade which include our Super and Hi-Brite papers also did relatively well in the quarter. They are now only 4% so far this year. Overall, the industry shipment to capacity ratio remained at 91%, down about two points from the same period last year. Although the seasonal surge failed to materialize as expected, our shipments rose 5,000 short tons in the quarter. We have recently announced that we would close a small machine in Iroquois Falls, Ontario, which produce only about 30,000 tons per year of construction paper. The machine has been operating at less than 60% of its annual profession capacity and the market for its product is very limited.

Overall demand growth for market pulp was 3.4% through September. Originally 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 shipment was up about 2% and other demand was up 6% mostly because of growth new characters grade, presently softwood mill are running at 94% shipment to capacity ratio and hardwood mill at 92%.

Our shipments rose by 2% in the quarter about 6,000 metric tons and positive pricing momentum carry over from the previous quarter. We see this continuing into the last quarter but the timing of the significant South American hardwood capacity addition makes 2014 more uncertain. U.S. Housing stock started 191,000 in August; it’s 19% better than the same period last year. We shipped 21% more product in this quarter than we did in the last reducing the inventory by 28% as we can swiftly attract the buildup caused by the lower than expected demand in May and June.

We expect more normal shipments in the fourth quarter. Our average transaction price were up $62 per 1000 board feet compared to last quarter but as we indicated during our last call, the benchmark random land composite index open to third quarter at about $130 per 1000 board feet below where it began the segment. From this lot overall price moved higher during the third quarter and we expect some of that momentum to carry into the fourth quarter.

Costs remained under pressure however given lower overall wood location and the additional burden on producers under the province of Quebec newly implemented forest tenure system. So far this year our cost per – our wood was up by about $30 to 1000 board feet compared to 2012 and we estimate that future of the increase is attributable to higher wood cost in the province of Quebec.

This reflects the April 1, 2013 implementation of the new tenure system, and we have concern that we haven’t seen its full impact which could push our cost even higher next year. North American producers shipment were down 9% as the demand for coated mechanical paper was down 4.5% through September which was further affected by a 8% increase in import, most of which come from Western Europe. Partly due to the June, 2012 closure of our PM 1 at Iroquois Falls, production in North America is down by 4% this year.

Accordingly, the industry shipment to capacity ratio remained 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 rate, on lower consumption, grade switching to IMSC and higher imports.

We have gone to great land to optimize our operation. Our real line asset base allowed us to benefit from the [red new] diversification and also gives us the ability to optimize cost. This lean and efficient operating platform is our key competitive advantage. We will continue to play to our advantage as managing production and inventory levels, selling only profitable ton 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 year after almost 40 years in the pulp and paper industry. Alain played a critical role in our total transformation and I thank him for his contribution and his service.

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

Jo-Ann Longworth

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 U.S. portion of our net deferred income tax assets. They solely on historical three year cumulative results accounting standard impose a very strong presumption that we cannot recover the deferred income tax asset associated with this U.S. operations. This reduction in no way affects our underlying tax attributes including $1.6 billion of U.S. net operating loss carry forwards. And it does not hinder our ability to use these and allow to shield future earnings. We continue to believe that we will not have to pay cash income taxes over at least the medium term, neither in the U.S. 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 paper. They were down 6% in coated papers. The higher shipments were offset in part by the significantly lower pricing in wood products. Cost to sales was essentially unchanged from the last quarter despite the higher volume reflecting the net favorable effect of seasonally lower steam cost, lower U.S. 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 paper, offset by the reduction of certain rebate for electricity, higher fiber cost from an increased in OMP prices and kraft usage, higher wood cost at our U.S. Southeast Mill because of wet weather and higher maintenance costs.

Distribution costs increased $4 million or 3% mainly because of the higher shipment. Selling, general and administrative expenses were $6 million lower than the second quarter mostly due to the timing of employment benefit. 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 cost against higher OMP cost and in the reduction in electricity rebates.

Our specialty paper segment, unit delivered cost sale to $675 per short ton, down by $48 or 7% from the second quarter when we saw higher cost 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 year at $620 per metric ton, thanks to better efficiencies at our U.S. Southeast Mill.

In wood products, delivered costs fell $15 from the second quarter to $350 per 1000 board feet mostly because of the additional 72 million board feet of lumber shipment. With the 6% drop in coated paper shipments, the absorption of fixed cost over fewer ton is in large part responsible for the 7% increase in unit delivered cost of $51 per short ton. But we also experience seasonally higher power cost and higher wood cost in the U.S. South.

Not including improved operating efficiencies such as labor, we generated $12 million of EBITDA with our cogeneration asset in the third quarter; $2 million lower than in the previous quarter. Above our Gatineau facility contributed a full quarter a power generation, we are not able to run it to full capacity because of equipment failures. We also experienced lower generation rate at Thunder Bay because of the annual pulp mill outage maintenance and at Baie-Comeau as a result of higher moisture led self-wood waste.

Closure costs and related charges were $4 million in the quarter related to manning reduction at our Baie-Comeau Quebec mill. This compares to $12 billion in the second quarter for charges associated with 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 notes refinancing.

Turning to the balance sheet and cash flow items, cash and cash equivalence increased by $23 million in the quarter, closing at $271 million. Net cash provided by operating activities were $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 U.S. 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 the $10 million expense. The increased compared to last quarter reflects the timing of the U.S. plan contribution. 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 union, the provincial government and the pension regulator. You recall that in this scenario we would replace the significant uncertainty associated with potentially material corrective measure and favor up more stable, predictable and without pension funding requirement.

We will not make additional contribution to the material Canadian plan until the province of Ontario agrees to join the agreement in principle and there is a reason for optimism that it will. When Ontario joins we expect our total contribution 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 a U.S. OPEB plan for salaried retirees. The obligation is down about $200 million this year because of contributions, foreign exchange and the U.S. OPEB amendment I just discussed. When the underlying assumption including applicable discount rate are reevaluated at yearend, we expect that this year higher interest rate environment will significantly reduce our net balance sheet pension and OPEB obligation even further. To illustrate, if we apply a discount rate that reflects the prevailing interest as of September 30, we would expect balance sheet, net pension and OPEB obligation to fall by another $ 400 million compared to the amount reported as of September 30, 2013.

Rémi Lalonde

Thank you. Well, turn over the call for

questions please.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from Sean Steuart from T.D. Securities. Please go ahead.

Sean Steuart – T.D. Securities

Thanks, good morning, everyone. A few questions. I guess let’s start with the energy projects first. Can you just Jo-Ann you answer I guess quarter-to-quarter what you realized but overall how much left is there to realize in terms of incremental I guess cost savings from this point.

Jo-Ann Longworth

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

Sean Steuart – T.D. Securities

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

Jo-Ann Longworth

They are all up and running but as I said Thunder Bay was down for a period because of the annual pulp mill outage and Gatineau experiencing some machine problems as did double to a degree so they won’t running at full speed shall we say.

Richard Garneau

Just on account on Gatineau also we still have and we knew it, one we resolved the [indiscernible] on need effects on the grade so technical here and it’s likely to be resolved in fourth quarter and I don’t know because of the reduction in wood locations so we have less fresh wood waste and we have basically to use more wood waste from the land fill site and the moisture contain is significantly higher as you can imagine and now what we have – we have device a plan to basically drill a pile and it’s going – that is generated when you have a larger pile is going to remove some of the moisture, and we expect that the operation and production of power at least 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 – were going together [indiscernible]

Sean Steuart – T.D. Securities

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

Richard Garneau

Yes, Sean, I think that you also have when you look at the export market you have to look at the maturancy and it’s only one aspect that is going to affect pricing so you look at Rupee in the India for example, no longer ago the Rupee to the U.S. dollar was 47 and it’s about 60-61 now so significant increase so it end up what I would expect is that the price is likely to in U.S. dollar to remain stable. We have the same situation also when in Brazil so if you look at the Real used to not long ago to be at 1.7 now it’s 2.2 so one year could be add the cost for the publisher and only maturancy we are talking here about 30% so the same that’s in India, and I think it’s the challenge that we have on the export market I think that we have maintained our volume overall and but I don’t expect that we are going to see movement on the selling price in this market, and I think that another reason also when you look at production in Russia what the Ruble, so not long ago again was 22-23 now it’s close to slightly over 30 so that provides significant advantage to the Russian users, and I think that when you look at the currency that they are offering back their own currency. They only positive I think that we see really the strong Euro at 1.37 and it was 1.30 at some point in time that’s here now it’s 1.37, so I think that surely make the North American producer be – they are more comparative on the export market, what sure may going to – not going to have on pricing but that’s going to surely on the volume side.

Sean Steuart – T.D. Securities

Okay, understood. I’ll get back in a queue. Thanks.

Operator

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

Bill Hoffmann – RBC Capital Markets

Yes, thanks and good morning. So I like just wondered if you could talk a little bit about just little further about what Sean is talking about in the newsprint side, if we give a situation where you got their export market won, what do you thinking you are going to shift the next between your domestic and export sales. And two, what do you think from here will take from a consolidation standpoint to get really prices up.

Richard Garneau

Well, Bill, it’s very difficult question that you are asking so but let’s talk newsprint. We knew that the North America, it’s all demand is down 10% and if we look at our shipments we maintained the same volume ship that contained to the last quarter and so obviously when you are facing with absolute 10% it’s, so better question what about capacity and I said that very clearly in this quarter that now that we have networked on different is very competitive, that is well located so that we can surely compete on the North American market and also on the export market. When you look at that it’s only the market that we have significant presence in Brazil also next year we surely see an improvement, yes, they are going to have the World Cup so I think they even deal with their idea of currency, the Real is weaker than last year I think that’s we expect an improvement in consumption. And so far it’s down to 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 do it smaller market, Turkey is up 14%. So there is region in the world way outside where the market is growing and because of the location of all facilities that we are going to take advantage of it, and the other also if you look at all mills in Augusta, we have made the investment, we have some quality issues and now we can also export from Augusta because we can need the most stringent quality requirement that we have to meet on the market. So but there are certainly when you look at the operating rate that’s still 92% but assuming that the decline continue while it’s going to become more and more challenging but again with all the restructuring, realignment of asset that will surely, strongly positioned to compete and surely sure be domestic and export market well.

Bill Hoffmann – RBC Capital Markets

Thanks. And then just a question on the lumber side. I just wondered if you could talk a little bit about the Ontario sawmill where they are from a potential sort of higher volumes going into the next year. And also how are you planning for –into next year’s building season from an inventory management standpoint around yearend.

Richard Garneau

Well, the two sawmill in that we are going to build next year by forced start up in 2015, one it’s not Western Ontario so it’s about one is about one hour West off Thunder Bay and the other one is north on for [situated] about an hour. So both of them are well positioned on the rail lines, CP and CN so we should start to see some of the volumes by the end of next year, one of the sawmills and the other one is at the Atikokan, it’s going to be in 2015. That the view that we have on the number of market I think that we continue to see the improvement in demand and I think that the – we estimate that the demand is going to continue to grow with improvement in housing start, we expect that next year we should see – we should surpass the one million starts and I think that with the less volume in Quebec I think that the situation that we saw this year we had a – I had to take down time for vacation to bring inventory down in next year we don’t foresee a same situation.

Bill Hoffmann – RBC Capital Markets

Thank you.

Operator

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

Paul Quinn – RBC Capital Markets

Yes, thanks very much, good morning, happy Halloween. Just a couple of questions here. I guess first on newsprint, you described pricing in domestic market is stable for the last six months and we saw the price increase in Western U.S. move up $15 in September. I just find this stranger; do you actually see those markets being stable rate now?

Richard Garneau

Well, I think it’s reflect that the closure of mill and the U.S. somewhere again in the slow pace so and I think that’s – there is – it just reflect the disclosure I believe and now the prices are different level than in the East so I think that, it just reflect the – that’s price gap as this appear I would say but I would not read more on that on this.

Paul Quinn – RBC Capital Markets

Okay, and 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 are gaining market share.

Richard Garneau

Well, it’s exactly what I described.

Paul Quinn – RBC Capital Markets

Okay and then on just back to Sean’s question on energy just to see if I got this, it looks like Q3 was $12 million contribution or $48 million run rate, you expect 60 to 65 overall so the delta what we got less 12 to 17, if I get that.

Richard Garneau

Yes, as Jo-Ann mentioned the biggest generation is in Thunder Bay and six or seven days of maintenance something the annual outage and that the effects also, we have the small vibration issue with the generator, and now this generator that we are expecting about 16 megawatt and we are able to run it at even higher output on that. So I am not saying that it’s going to be the new norm. But it has a big impact and getting knowing to as I mentioned effects the issue that we have with boards and although what the strategy that we have on the hedging the wood where is piled , we should be able also to reduce – to produce more steam therefore more power and expect that the guidance would give is achievable.

Paul Quinn – RBC Capital Markets

That’s helpful. Just on the switching to pulp here, you described it as positive momentum going into Q4 but seems like you are worried a little bit on the capacity as may be can you explain on it.

Richard Garneau

Well, certainly I think that the softwood is on solid ground and we have 60% of all capacity, production capacity on softwood but on hardwood I think that there is more than 2 million ton so new capacity, new chemistry capacity one in Brazil and the other one somewhere in America that the name is Kepney [ph] but I think that surely this new production that is going to be available is surely going to have an impact, I just don’t know how much impact it’s going to have but there is also in the back of our mind. I think that the other part also when you look at recycle mills, we are still very pleased by performance, so they are running well and I think that the market seems to remain fairly good on the recycle side, and obviously there is demand for tissue manufacturer and at least up domestic quality look at 60% is softwood, there is new capacity on softwood, that 20% is all ability, but that certainly on the hardwood at Calhoun and part of – about the production at Thunder Bay, we could see some pressure on the their side.

Paul Quinn – RBC Capital Markets

Okay and then just lastly just on the coated side. You said that PM 1 in I guess the end of Q2, 2012 but we haven’t seen any kind of cost break, is that due to the fact that the mills running less efficiently, the operating rate is down or is it anything specific at the mill that you still need to fix?

Richard Garneau

Well we haven’t seen the improvement and efficiency that we were looking for. So it is that simple, it’s not running, and the machine the way it is and obviously when you look at that as I said when you look at that demand, demand is down 9%, shipments are down 9% and it’s more difficult to when you have the – to make changes that the trends and grades and the market is also adjusting to a lower basis way, the mill used to produce also not much light weight but now we are also going and more light weight stand it’s – when you go from heavy weight to light weight there is growing curve that you have to go over, when you had all that it’s market change machine is down, and the market the demand that is also down so it, so it certainly bring a lot of changes and quite sure at the mill level. We also had this core by the wood as Jo-Ann mentioned the summer was very wet and also the peak power and it kind of add the electricity price was quite high, so two of the high and combined to efficiency and this is way I think that feel to resolve that we have seen this quarter.

Paul Quinn – RBC Capital Markets

Great, that’s all I had. Thank very much guys, good luck.

Operator

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

Stephen Atkinson – BMO Capital Markets

Good morning. I just wanted to, obviously we say congratulate Alain Boivin, wish him all the best because one could you see all the good things he did. And in terms of your cost reduction projects like your initiatives a Kraft and Baie-Comeau, can you tell me where you are and where the benefits are?

Richard Garneau

Well at Baie-Comeau, I think just I would going to review the manning again by around 90 people, so 70 to 90 and there were so many people that are eligible for retirements so I think certainly it’s difficult to announce so that tenure is structuring but when you look at the mill, that the manning and the age of people so it’s going to review the impact but it’s the impact of many reduction here that it’s going to reduce our confident, and we look forward the small machine sub machine that is producing this construction paper that is used for that arts and craft and boards and drawing and activity paper and so on. The demand is declining every year and the demand increase because of the colors and we have many changes, great changes and business way changes and machines is only running 50% to 60% of the time and the crew one basically we take down payment the machine move to other one or bring a lot of inefficiency in the mills and the large inducement machine that should run at 90% efficiency is running a way below that so we just believe that the closure of that machine even though it’s sad for day employees I think that is going to basically allow this mill to be more cost competitive going forward.

Stephen Atkinson – BMO Capital Markets

And do you have any other projects that you can talk about or made your cost reductions that public.

Richard Garneau

No, not at this point but obviously I think doesn’t want three years so we are always a turn and returns don’t so obviously there is less worth project but we still have things that we are working on. We are going to announce them when we get there.

Stephen Atkinson – BMO Capital Markets

Okay, now it’s probably a culture, in terms of the wood cost in Quebec, are you able to talk about where are you now and how it compares with Ontario or other regions that you operate in and give us some outlook on the Quebec wood cost, yes.

Richard Garneau

Yes, Stephen, one, it’s certainly a way of concern when we look at the increase that we have this year, it is significant, it is about $30 per 1000 board feet and I think that is going – it’s likely going to be higher than that next year because the implementation starts in April, and so it’s – well with the full implementation, costing correct and I think that it shuts – I am just going to repeat what the Resia [ph] had said because there is a costing that has been done by Resia that was re-quarter by the Quebec association, Quebec cotton industry association where Quebec as the highest wood cost in North America so it is a fact we have to live with it. And try to adjust this significant increase and I think that now we have to pay for – there is a portion of the wood is guaranteed now we have to pay a fee on it to maintain this guarantee and is linked to the auction price that is going to be paid for the wood in the province, so it is – it has a significant impact we have only thought so far and we are going to basically to see more of it in 2014 with the full implementation and full year of this new system being in place.

Stephen Atkinson – BMO Capital Markets

Okay and in terms of the U.S. south for your wood cost going into the mill and recognizing record flood again in the region, perhaps you see things going forward in terms of your wood cost.

Richard Garneau

I think that is the most competitive locations, it’s the lowest wood cost in our network and based on the forecast and that the projection that we have and the information on growth, rate we believe that the wood in the U.S. south will remain very competitive, there is significant volume of wood that is near or close to maturity that is going to become available. So I think that we are not concerned at all with what the wood supply and also a very confident that it’s going to remain very competitive in the U.S. South, our mills that we have in that area.

Stephen Atkinson – BMO Capital Markets

Thank you, that’s great, thank you.

Operator

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

Tariq Hamid – JPMorgan

Good morning. I wanted to ask again just sort of a bigger picture question about the coated business in Catawba, operating cost heated up about $65 per ton over the last two years. What can you do at this point to sort of improve the comparison that mill just given would still a very difficult market environment overall.

Richard Garneau

Well, I think when we look at the Catawba itself I think it is the same pressure of that we have is on the wood cost and our so it’s probably not unique. The plan that we have is that focus on the efficiency machine – machine efficiency and I said that the difficulty is here that the market is moving slowly to rely the weight this mill as always been a higher weight or may be weight mill then have to adapt to this new reality and lighter weight coated paper but while we produce less ton so and I think just you have to factor at into the plan that we are working on. But I am still very confident that we are going to address this and that the efficiency is going to improve still the mill I believe the sawmill that is one of among the lowest cost mill, coated mills in the North America and the U.S. and the location when you look at the cost to wood to sort of all customer and such a main advantage I think that end discount is fairly recent and fairly well maintained, so we are confident that we are going to plan solution and I know it is taking more time and we are fully concerned and very concerned about it. But we are going to fix it.

Tariq Hamid – JPMorgan

Okay and I guess sort of conversely you have a massive improvement in the specialty papers business on the cost side last quarter. Do you sort of feel cost will be able to hold on to some of the gains here on the Q4 and into 2014. The business is sort of 600 per ton kind of cost structure, now that a 700 per ton type of cost structure.

Richard Garneau

Yes, well, there is always qualification, it depends on the business way that we produce and the grade and there is variation from quarter-to-quarter, so I think but you have and all the restructuring that we have done and to realigning and make the network more cost efficient, I think it’s going – certainly going to carry this benefit in the future but wood cost is one of the item that we can full power cost is a matter of another cost bucket that is certainly under pressure. We see it on both side of the course, so I think that yes we are well positioned but there is variable appear that we certainly do not control. The one that we control I think that we are pretty confident that it’s going to carry over within the next year and into in the future.

Tariq Hamid – JPMorgan

Great and just the last one for me. It has been also a while that since you host Fibrek but just sort of your comfort level with acquisition at this point of cycle and sort of any kind of targeted grades or markets that you think are particularly attractive right now.

Richard Garneau

Well, certainly all the issues that we had on the environment, deal operation at the both mill and Northern Quebec has been the result where that be with the operations so and it’s running certainly to expectations now so I think that give a time to address all the issues but now it’s under control, and I think it is reflected in our result.

Tariq Hamid – JPMorgan

That’s great. Thank you very much.

Richard Garneau

You’re welcome.

Operator

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

Rémi Lalonde

Great, we will leave at that. Thank you everyone for joining us today.

Jo-Ann Longworth

Thank you. And have the happy Halloween everyone.

Operator

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

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