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Executives

Duane A. Owens - Vice President and Treasurer

John W. Weaver - President and Chief Executive Officer

David J. Paterson - President, Chief Executive Officer, Director

Bill Harvey - Chief Financial Officer

Analysts

Chip Dillon - Citigroup

Peter Ruschmeier - Lehman Brothers

Mark Connelly - Credit Suisse

Joe Stivaletti - Goldman Sachs

Mark Wilde - Deutsche Bank

Don Roberts - CIBC World Market

Mark Weintraub - Buckingham Research Group

William Hoffman - UBS

AbitibiBowater Inc. (ABH) F1Q08 Earnings Call May 8, 2008 10:00 AM ET

Operator

Welcome to the AbitibiBowater first quarter 2008 results conference call. (Operator Instructions) I will now like to turn the meeting over to Duane Owens, Vice President and Treasurer.

Duane Owens

With me on the call today is John Weaver our Executive Chairman, 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 website. 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 along with the reconciliation of non-GAAP financial measures used on the call can be found on our website. The call is available to all shareholders via live webcast and replay on our website at AbitibiBowater.com. Today’s call is scheduled to last about 45 minutes. I’ll turn the call over to Mr. John Weaver now.

John Weaver

In a few minutes Dave will take you through the details of our businesses and the markets and then Bill will go through the numbers. Before they do that I would like to provide you with an overview of the significant progress we have made on a number of fronts. With regards to the first quarter we are pleased report the two significant realizations of synergies and price improvements.

We have improved the EBITDA generated in our business line substantially when compared to the fourth quarter. This improvement was in the phase of significant inflationary headwinds in the quarter principally related to fiber and energy. Challenges remain, but our actions have mitigated the adverse impact of these inflationary issues. We expect continued momentum in our earnings improvement in the coming quarters as we realize both synergies and favorable market pricing trends.

From the synergies perspective by the end of the first quarter we have achieved an annual run rate of $180 million. The amount realized helped to partially offset rise in cost I just mentioned. One of the major components achieved thus for was a work force reduction of nearly 2,500 people or approximately 14% of the workforce. There has also been a shift in production to produce the right grades on the right machines.

In addition we have projects reducing the energy and chemical usage at various sites. We are working aggressively on synergies and we are confident we will achieve the full $375 million annual run rate by the end of 2009. During the quarter we successfully completed the capacity closures relating to our Phase 1 strategic review of operations. As you recall we closed nearly 1 million tons of newsprint and specialty production. All the capacity closed was in a negative cash position.

During the implementation of our Phase 1 Action Plan we also undertook and continued to work on Phase 2, which is about setting priorities and direction for the Company while focusing on cost control. Phase 2 involves the comprehensive review of all aspects of the business in an effort to further reduce cost, improve our manufacturing platform and better position the company in the global marketplace.

In spite of the continued decline in North American newsprint consumption our overall business fundamentals are improving. Thus additional production closures will not be announced at this time. All though progress has been achieved over the past few months, labor restructuring, energy and fiber costs remain key issues to be addressed in Eastern Canada, therefore we continue to evaluate further action as we work through these key issues.

Examples of Phase 2 actions include: the restart of the specialty machine at Dolbeau with a much lower cost structure, an increase in our asset sales target to $375 million and the launch of a sales process for the South Korean mill and other assets, a reduction in fiber cost and improved access to biomass in Eastern Canada, a reduction in staffing, a commitment to explore avenues to grow our value added, coated and specialty business. We introduced two new environmentally friendly hybrid products; a commitment to grow our international sales reducing the exposure to challenges facing North America and the idling of 50% of our lumber production and the consolidation of some of our lumber operations.

Since the end of the first quarter we have successfully refinanced the Abitibi subsidiary in a very difficult capital markets environment. In addition we sold the Snowflake, Arizona mill in April and have received the proceeds. We are achieved sales proceeds of approximately $220 million to date in the asset sales program. We have made and continue to make the decisions that we believe are essential to improving the Company’s financial position. We remain extremely focused on positioning the Company to deliver the synergies and improving our financial results. With that I will turn the call over to Dave.

David Paterson

From an operation standpoint we remain steadfast with the focus upon realizing price improvements and synergy cost savings. As John pointed out we faced a $27 million increase in pulp and paper, fiber cost and a $5 million increase in energy cost during the quarter.

However, we were able to partially offset these items with cost control. The synergies are real and they’re falling to the bottom line. I will now cover our key markets; looking first at newsprint. Through March total US consumption was reported down 8.5% year-over-year, which is an improvement over the trends we saw last year.

Industry production was inline with this decline and was down by 9%. Industry exports have increased by 2% year-over-year. Exports in general have been hindered by global logistical issues affecting all exports as well as the fact that we closed two of our export mills.

We have implemented each of the announced price increases between November of last year and May of this year and we anticipate implementing the announced June increase. Pricing in many of our offshore markets is moving up on a rapid pace. One exception is Europe with the prices set on an annual basis. In local currency the price in Europe declined by 7% to 8% year-over-year. However, Europe remains a very attractive market for dollar based manufacturers.

Markets like India have seen price increase by $50 in the first quarter and by additional $100 per ton in the second quarter. Excluding North America, global newsprint demand is up about 1% through March, with significant increase is primarily in Asia and Latin America. Combined exports from both former companies in 2007 totaled 1.6 million tons from North America, which was up about 6% over 2006. We intend to increase our export shipments in 2008 by over 10% limited only by logistics.

Turning to commercial printing papers; demand for coated mechanical papers in North America is up 4% through March. Helped by a strong demand the shipment to capacity ratio reached 102% during March. Total demand for uncoated mechanical increased 4.7% through March with a gain of just over 5% in super calendar paper and almost 10% in the standard grades.

The negative developments in the US economy have not yet meaningfully affected customer orders for our products. We have experienced double-digit growth in uncoated free sheet substitutes in hi-brites during the first quarter as customers look to find ways to mitigate rise in paper printing and mailing costs. April price increases, averaging $50 to $60 per ton have been announced for all our coated grades and most all of our uncoated grades as have been reported by third parties.

Shifting now to the global pulp market. World shipments continue to be strong. March shipments were at about 3.6 million tons up 4% over March 2007 and 6% year-to-date. Total inventories are in good shape at about 34 days of supply, which is around the 10 year average. We have implemented several price increases recently. Moving to the wood products business; according to the US Census Bureau, housing starts fell under a million units on a seasonally adjusted basis in March which shows their lowest quarter in 17 years.

Lumber prices in recent weeks have improved marginally but remain uneconomic. With a decline in demand and pricing we are minimizing production where possible and are continually analyzing the right strategies to supply fiber to our mills. As John mentioned, we are operating at nearly 50% of capacity. As part of Phase 2, we have consolidated some of our sawmill operations in Eastern Canada reducing operating costs in those areas significantly.

In summary, for the pulp and paper markets we are seeing price improvements in virtually every grade we produce. Our order books are full. We’ve remained committed to matching our customer’s demand for paper and expect continued production cost improvements. I will now turn the call over to Bill Harvey. Bill?

Bill Harvey

Before I begin I like to point out that as you’re probably aware we reissued our press release this morning. There was a minor change in the product line information relating to the wood product segment. There was no change in the financial statements. Third -- Secondly, I would like to remind everyone that any comparisons I do related to the fourth quarter are a little apples-to-oranges, since the fourth quarter included three months of Bowater’s results and two months of Abitibi’s results reflecting the October 29 merger date.

With that being said for the first quarter we reported a net loss of $248 million or $4.32 per share on sales of $1.7 billion. Excluding special items the net loss for the quarter was $250 million or $3.74 per share. Special items, net of tax consisted of the following: a $44 million gain related to foreign currency changes, a $60 million gain related to asset sales, a $70 million loss relating to closure costs and severances and a $76 million charge relating to tax adjustments.

Overall results in the first quarter were negatively impacted by a sharp rise in wood and recycled fiber, energy and chemical costs. Compared to the fourth quarter, fiber costs in chemicals for our pulp and paper business increased by over $40 million. During the quarter, we saw a very positive trend in our cost performance as we begin to realize synergies. The significant cost pressures we experienced had begun at the outset of the quarter. However, by the end of the quarter we offset these cost pressures and gained very significant traction.

The manufacturing cost improvement across the board in all our grades when you compare January to March was over $20 per ton and in some areas over $50 per ton. The $180 million annual run rate for synergies is changeable and in the quarter we realized almost $40 million in the bank. I would also highlight that we measure synergies versus how the two companies performed in 2006, so that actions taken in 2007 are included on our synergy calculation. That being said the quarter-to-quarter improvement is meaningful and we expect more to come.

Interest expense in the first quarter totaled $129 million. As you are aware we successfully completed the refinancing of our Abitibi subsidiary on April 1. As a consequence, our interest expense will increase by approximately $22 million per quarter beginning in the second quarter. In summary, the refinancing included a $430 million private placement due 2011, a $350 million 364 day term loan, $292 million of new notes from an exchange offer now due in 2010 and a $350 million convertible debenture due 2013.

Our capital spending in the first quarter, totaled $35 million. We expect spending in 2008 to be in the $150 million to $200 million range. From a liquidity perspective as of March 31, our Bowater subsidiary had liquidity of $308 million consisting of $130 million of cash and approximately $200 million of unused bank lines. As of April 1, when the refinancing was completed Abitibi had liquidity of $185 million represented by invested cash. As of April 15, after the sales of Snowflake and a repayment of a portion of the term loan our Abitibi subsidy had invested cash of $277 million.

Our outlook for the second quarter is optimistic. We expect to build on the current positive trend with a substantial improvement over the first quarter. We have faced significant cost inflation pressures, but we are mitigating these synergies and realizing substantial price improvements. I expect our business segments to show an EBITDA increase similar to the improvement we saw between the fourth and the first quarters. Carolyn will now open the lines for questions. Carolyn?

Question and Answer

Operator

(Operator Instructions) Your first question comes from Chip Dillion - Citi.

Chip Dillon – Citigroup

just missed the CapEx number for the first quarter, what was that again Bill?

Bill Harvey

$35 million, Chip.

Chip Dillon – Citigroup

Okay and then you mentioned, do you expect EBITDA improvement in the segments, I guess you said to be the same from in the first to second as it was from the fourth to first. If you could talk a little bit about the newsprint number. It seemed like it proved about $25 million. Looking at the pace of pricing and throwing in some synergies it would seem like maybe you would do more than that. Could you address that and also could you talk a little bit about the corporate expense line which was I think when you strip out the onetime items, was about $76 million, is that expected to stay up at that level.

David Paterson

Chip, I think when I talked about the business I was grouping them. I think we had approximately $100 million improvement across all business areas including lumber, pulp, coated, etc., and I did not mean that any specific area would increase by the same amount; I meant in aggregate we could expect the similar $100 million improvement and you are right; on the corporate and other line our target is to lower that. That was a lot of onetime charges that in fact there were some special items not taken, but I would think of them as onetime type of events in the first quarter, so we are targeting to get that number below at the corporate line to be a more stable number at $70 million or below.

Chip Dillon – Citigroup

70 or below in the second quarter?

David Paterson

I think we are targeting that as where need to get it to. I can’t tell you that its $70 million is in the bank in the second quarter, but that’s our target.

Chip Dillon – Citigroup

Okay and then as you look at the newsprint market, we saw some pretty strong numbers in January and February, both domestically, I wouldn’t say strong, but certainly not as bad, but March was certainly a disappointment and what is the marketplace look like today. You mentioned some very strong pricing in Asia, but overall with the difficulty in getting shipping, the logistics; is the market still pretty tight here in North America?

David Paterson

The market remains tight. I would make a couple of points from an abitibibowater perspective that the capacity we closed in the first quarter really didn't come out full effect because March was the first month and all those mills were out of the system. When we look at our inventory normally you would expect an inventory build in the first quarter in almost all sectors, we didn’t have that despite having some vessel problems, particularly in the month of March and as we look into April and now May, shipments are strong, both export and domestic, so I consider the market in good shape.

Chip Dillon – Citigroup

You mentioned a 10% increase in exports. It would seem like with the pricing you are seeing over in Asia and with the dollar continuing to average down, although I know it’s up in the last week, that you could probably do better if you could export more. Is it just a matter of logistics or is there other reason why you would be increasing your exports even more.

David Paterson

Well, I think logistics is a short-term issue which we are addressing, we’ve done some things to get that fixed, also we do have a large and important North American customer base that we want to support and we work very closely with them, so it’s a balancing act to some degree, but of course if we continue to see the sort of 8% to 10% declines on the US side we have to take the tonnage either to alternative products offshore or closed capacity and right now the best alternative is to go offshore.

Chip Dillon – Citigroup

Its sounds from your announcement this morning that you are considering coated paper to be quite core, so its sounds like the last thing you are doing is looking to exit that business and as you think about growing it is the most likely conversion, the resurrection of the one that was being thought about it. I think Thunder Bay or are there other facilities that would be more attractive.

David Paterson

Well, I think we’ve got a number of facilities across our system both in the US and Canada that are conversion eligible. We are evaluating all of those and I think you will be hearing back from us fairly soon in terms of direction, but from our point of view facilities that have the craft pulp TMP and recycle capabilities give us unique ways to covert from newsprint to alternative products and we are examining all of those, but you will hear from us soon.

Chip Dillon – Citigroup

Looking at the cash flows and seeing the net debt continue to increase in the first quarter do you have a goal as to when you think you could be free cash as a Company overall neutral. Do you think you could be there in the third quarter assuming the coated paper, well of course the stock and assuming the June price increase in newsprint, is that possible?

David Paterson

Yes, I think it’s possible, but I think if you look at what we are $100 million improvement in EBITDA in the second quarter and taking to account we are investing in working capital as you see from the AR line, I think the second, the third quarter is possible.

Operator

Your next question comes from Peter Ruschmeier - Lehman Brothers.

Peter Ruschmeier - Lehman Brothers

The D&A for the quarter was a little higher than I expected. I was curious, Bill, if you could help us out with the pro forma, D&A number for the closures as we should think about it for the second quarter and beyond.

David Paterson

Yes in the D&A again remember Pete that the D&A in the Q4 reflected only two months of ACI and your quite right that the work closure is acceptor, so we expect in Q2 that number to drop to about the $180 million range.

Peter Ruschmeier - Lehman Brothers

On the cost side of the equation I believe you said pulp and paper costs overall $40 million sequential increase. I am curious if you can help us to understand where the run rate might be today if costs were to hold flat relative to the first quarter.

David Paterson

Again that $40 million increase really reflected in pulp and paper, the impact solely of fiber, in chemicals and energy. So that’s just the cost inputs that hit us, what we consider on the price side in the quarter and we did also see a sequential improvement month-by-month from January, February to March especially March. I think March really is when the system ran in an optimized fashion and we saw a dramatic improvement in operations in March and that’s what we mentioned the cost that had dropped almost in every area by about $20 from February to March.

Peter Ruschmeier - Lehman Brothers

Okay, in terms of cost per unit?

David Paterson

Cost per unit.

Peter Ruschmeier - Lehman Brothers

If I could just ask for some guidance on clarifying your pro forma net debt position. If you start with the $5.665 billion and if we adjust for the re-financing and for the Snowflake proceeds, where is that number today?

David Paterson

I think it's approximately $6 billion today. I’ll come back and clarify that. Pete I apologize, but on this call we will put up the number.

Operator

Your next question comes from Mark Connelly - Credit Suisse.

Mark Connelly - Credit Suisse

I was just hoping you could give us a little bit more flavor for the situation in the export markets. You have talked in both your comments and in the prepared notes about the logistics issue and I wonder if you could give us a sense of how much of a restriction that is right now for you? Obviously it's not something you can fix overnight, so I am trying to get a sense of how big it is and secondarily I was wondering if you could just give us an update on your competitive position relative to a European producer, a rough estimate of delivered costs to where your customers are?

David Paterson

I guess starting with the logistics question. I think there is really two components that we need to improve on. One is just the ability to secure and book vessels base or containers for vessels. I think the surge and I don’t think it's just the pulp and paper industry that’s exporting more these days.

I think with the exchange rate, the US is generally exporting more and trading patterns have shifted, so it's finding the space and we put a process, internal process in to make it easier to do business with AbitibiBowater on the export side and we have already seen in the month of April significant improvement in booking and scheduling of vessels. The second one and perhaps more important in the long-term sense is we need some investment by governments in infrastructure projects both in Canada and the US to support increased exports. We are working with governments to get that done.

That’s things like warehouses and peers and roads and we have several facilities, particularly in the Eastern Canada that could be taken offshore to a greater degree if the infrastructure was there to support it. It has two benefits for us: one, of course it takes tons out of the North American market, but also loading on a vessel and it shipping to Europe or the Mediterranean is pretty cost effective from Eastern Canada versus trying to truck or rail down to the US and so that’s a good trade-off for us on a mill net basis.

In terms of Europe, the key course for us is exchange rate and with the Euro at 154, I don’t know what’s today, but I think its 154 this week, we are very cost competitive both from Canada and the US. Our delivered cost particularly into Western Europe will be higher on a per ton basis, but I think because of the exchange rate our mill nets are very good and we continue to be focused on growing where it make sense in Western Europe and the Med out of Eastern Canada.

Operator

Your next question comes from Joe Stivaletti - Goldman Sachs.

Joe Stivaletti - Goldman Sachs

On the lumber business with all the mid closures and what not if market conditions stays similar to what they have been, will you be able to shrink that loss more with some of these further closures beyond what is the improvement we saw from Q4 to Q1?

David Paterson

No, I think right now we are running at a rate that makes sense for us. We are encouraged by our ability to significantly lower our cost there and the second part of any lumber operation question in Canada is the support of our paper mills. Wood chip availability is driven by lumber mills in Eastern Canada, wood chips are very, very tight and so it's a question of supporting paper activity at the same time trying to minimize the losses of the lumber business, but I think the current level of activity in our lumber business is appropriate for what we are trying to do in terms of minimizing the lumber loss and support our paper mills.

Joe Stivaletti - Goldman Sachs

So, is the current level of operation a bit lower than your average in the first quarter?

David Paterson

I would say, it’s probably about the same. Most of the steps we took were early in the quarter. I think our costs are continuing to come down through the quarter and we will be better in the second quarter because of some of the issues that we resolved with governments and with our unions at the lumber business. So those benefits will flow through in the second quarter to a greater extent but in terms of the asset volume of production, I think it would be fairly stable, just on a lower cost platform.

Bill Harvey

So in terms of the loss in the lumber business there is a likelihood of some improvement given the consolidation and the curtailments that Dave has indicated. From a volume point of view John, I think volume is pretty stable, at admittedly low levels, but levels we are comfortable at right now given the circumstances.

Joe Stivaletti - Goldman Sachs

Okay and then on the asset sales plan basically you are saying you are targeting another $280 million for the rest of this year to get to the 500 because you have done 220 and then another 250 next year; are you willing to give us anymore sort of detail on what makes up that, what are sort of high things on your list? You mentioned the mill in South Korea, any other big pieces there that you can share with us?

David Paterson

Well as we indicated previously we are looking at the mill in South Korea, there is also ongoing timber land sales both in the US and now pre dominantly in Canada as we look forward and we are looking at other opportunities including some of our smaller hydro assets and other opportunities, but we feel confident that we can realize the additional $250 million. I guess somebody indicated, I mis-said the total asset sales in the script and it should really be $750 million of total asset sales, 500 this year and 250 the following.

Joe Stivaletti - Goldman Sachs

When you talk about the potential conversions of a mill or a mill decoded and I realize very early, but just in to the extent, even if it’s a ballpark term, can you give us a rough idea on what it would cost to convert one of those facilities; I mean what zip codes you’re talking about to convert one of those mills, if you decide to move forward?

David Paterson

Well, historically the old Bowater talked about $180 million to $200 million to convert a large scale machine from newsprint to coated and that was our experience at Catawba, which I think those of you who followed the Company know that Catawba has been a real home run for us and the good point David raised is that we are not -- we are going to convert, we are looking for a low cost asset in the end of the day, so our convergence is likely to be a larger machine.

Operator

Your next question comes from Mark Wilde - Deutsche Bank.

Mark Wilde - Deutsche Bank

Can you just give us a little refresher on how much land is out there in both the US and Canada at this point?

David Paterson

Mark, to cover the US, it’s broken into yield and all sorts of long term leases. We have about 30,000 acres of free hold left and about 70,000 acres of long term leases and in Canada we have 600,000 acres in Nova Scotia in the Mersey partnership and we have 1 million in Quebec.

Mark Wilde - Deutsche Bank

Then also on the asset sales, you didn't mention Lufkin, but is that potentially in that asset sale bucket as well?

David Paterson

Well Lufkin, we have various assets there that can be sold in pieces or in this whole site in fact, but we still are trying to be steadfast that we're not going to create a competitor for a dollar, but all our assets here and there can be sold if you look at it and some are being demolished; we are in the process of demoling some of the mills that we closed in previous years.

Mark Wilde - Deutsche Bank

Turning to the export market is it possible to give us a sense John of where the most attractive mill nets are in the export market right now?

John Weaver

I think as we sit here today Europe is still probably the most attractive mill net market based on exchange rate given what our forward view is I think that the rest of the world will catch up with Europe probably by the end of the second quarter or with the summer and so I would say that as a globally traded commodity newsprint is an arbitrage to the European number pretty quick here.

Mark Wilde - Deutsche Bank

Another market that Abitibi typically sold a lot into was down in the Caribbean and into Latin America and I just wonder what the growth in places like Brazil right now and the fact that Norske just put a fork in that project they had down there, whether that market is growing for you?

David Paterson

I think just in terms of both the Latin America markets, we have both Abitibi and Bowater have probably been number one and number two ongoing and so now we are certainly the largest supplier to many of those markets and in Brazil we have been the largest supplier and I think we have an opportunity to see some growth there. The pricing there generally follows the US pricing and so it’s moving up as we speak and certainly will be a favorable market as time goes on and especially with a somewhat better than logistics than say India or other places like that.

John Weaver

In Brazil the big question Mark is for the Norskey announcement. I think Brazil is going to be a pretty attractive market. We were anticipating a new entry there and it is not going to happen now so.

Mark Wilde - Deutsche Bank

Okay and then on this coated papers issue Dave, just from looking at the numbers that you have reported here in the first quarter and then taking into account that $60 increase it looks to me like you might EBITDA $200 million on Catawba this year just on the coated paper side kind of excluding the pulp mill down there? How much of that is the result of just that one machine conversion you did. How much of that would be allocated to that. I think it was Big Blue or Whole Blue machine that you did?

David Paterson

Yes, Whole Blue. Well, I don’t want to pull the mill apart but yes that is the biggest, fastest machine down there with the lowest cost structure. So, the big chunk of that was that decision that was made I guess back in 2001, 2002 to convert and that continues to be a great investment.

Mark Wilde - Deutsche Bank

Okay and then is it possible to give us some sense in value-added about why we don’t see better performance there. It seems to me with coated paper prices up and SC moving up with the uncoated free sheet market doing pretty well right now that we would see better results in that value-added segment, than we are seeing right now.

David Paterson

Well, I think the challenge for us on the value-added segment Mark is really this Eastern Canadian issue that we’re referring to. We’ve got to get a lower energy fiber, labor cost structure around those assets to run especially in Eastern Canada.

I think from a revenue point of view they are well priced and they are well accepted in the market but we have got too high a cost structure and that’s really a lot of what we are continuing to work on aggressively. We can’t get our cost down significantly then yeah we are going to reevaluate our manufacturing strategy on those value-added rates.

Mark Wilde - Deutsche Bank

Bill Harvey is it possible for you to give us kind of a going forward view of how much maintenance expense is going to kind of ebb and flow over the next few quarters, just taking the first quarter as a base?

Bill Harvey

When you say maintenance we’re talking is it a major maintenance of…

Mark Wilde - Deutsche Bank

Yes, just the annual mill outages. If you go back over the last several years this was always a big flex factor and sometimes it led to surprises us on a quarterly basis.

Bill Harvey

Yes, and it’s primarily on the pulp side; if you have a major outage about $10 million of both spending and loss contribution in the second quarter and about the same amount in the third quarter so it’s about equal in both quarters.

Mark Wilde - Deutsche Bank

Is that incremental to whatever you had in the first quarter?

Bill Harvey

Yes, yes. There was of course in the winter months we had no major maintenance in the pulp mills in the first quarter.

Mark Wilde - Deutsche Bank

But there is no other big maintenance event that is really going to move to quarterly numbers around a lot then?

Bill Harvey

No. Just those $10 million in the second quarter and $10 million in the third quarter.

Operator

Your next question comes from Don Roberts - CIBC World Market.

Don Roberts – CIBC World Market

John I guess to start on the asset sales in the past there is some speculation in the investment community about the hydro assets but it doesn’t seem to be the first time that you’ve actually sort of mentioned it explicitly and I guess I am just wondering sort of the magnitude you have got a lot of different assets out there, probably the biggest value in the Ontario ones and I am just wondering is it just sort of here and there small ones or is there bigger ones because if the bigger ones, could you give us a sense for how much EBITDA we will be giving away if they were so.

John Weaver

This is a challenge of selling the hydro assets of course is the underlying cost today as they are great. One of the reasons for ACH Hydro in Ontario was so that we could unlock some value, but continue to realize the cost advantage and so I think the sale of some of the larger assets is more challenging, however without selling the mills associated with them, but we also continue to look at some of the smaller assets and we think there is real value in those assets both from a hydro advantage and from the sort of green currency advantage that’s in the marketplace today and so some of our smaller and more isolated assets have a real favorable market right now and so we’re going to be looking at those over the coming years.

Don Roberts – CIBC World Market

I guess there’s implications for the asset divestitures is in Québec and we got this green paper that governments put out there, there is consultations going on, what are kind of the key messages or implications you see coming out of this and timelines. Are we looking at really meaningful changes for example in the tenure there which would again affect value on that 1 million acres that maybe the sales of saw mills?

John Weaver

Well, I think the value of those lands, but we don’t expect significant changes in tenure. It’s going to be green paper, outline some various ways of managing the forest and in terms of tenure going forward but the expectation is that the timber will be sold for lumber and forest products and so I think as long as you have that ongoing assumption, it brings some value to the sale of those lands.

Don Roberts – CIBC World Market

Dave, could you just comment Dave on the fiber cost changes on a regional basis.

David Paterson

Well, I think it’s not so much regional per se as it is the type of fiber, because what we are seeing is tree or harvest fiber from the forest is fairly stable. You have this location between Eastern Canada and the US South but that’s been structural and it’s been there a long time, but the real change in our fiber cost has been waste paper.

We saw an exceptional run up in the costs of waste paper through the fourth quarter and into the first quarter and it’s leveling off now, but it’s a very high level, so as we sit here today, our lowest cost furnish would be craft pulp, our next would be TMP and waste paper; in many cases those are our highest cost furnish which is a change from historical perspective.

So where we have the option and flexibilities for being prudent about how we use waste paper because it’s so expensive and increasing our furnish mix of craft and TMP to lowest our cost structure, so that’s part of the reason we saw something like newsprint where we have some of that flexibility, we didn’t see a huge cost increase in newsprint but our mills are heavily recycled in newsprint. We took some pretty significant cost dips. The other big thing regionally I think that we have to point out is that in Eastern Canada we don’t have a pulp wood price, so the ability to chip, makes chips is limited and that’s what really makes Eastern Canada uncompetitive versus the US South.

John Weaver

In the US South we have our pulpwood market and then our saw log market

Operator

Your next question comes from Mark Weintraub - Buckingham Research.

Mark Weintraub - Buckingham Research Group

On the asset sale and EBITDA question, is it possible to give us a sense of how much EBITDA was associated with the $700 or is associated with the $750 million of on assets that you are targeting for sale?

David Paterson

Mark, we haven’t even talked or even explicitly state which assets they are. So we are not been comfortable putting out a EBITDA number at this point.

Mark Weintraub - Buckingham Research Group

Can you give us a sense of how you think about prioritizing the use of cash flow going forward over the next couple of years between further deleveraging versus showing up the asset base versus the conversion projects etc to improve the profitability of the asset. How do you conceptualize that issue?

John Weaver

I think the number one issue, the target for us is the repayment of debt and that remains that we are going to really be focused on debt repayment. We have said that we are going to spend this year approximately a $150 million to $200 million, but a more typically CapEx number is probably 300 to 350 and I think that any cost improvement or even conversion projects we would take out of that $350 million or $300 million and manage our CapEx to those targets ongoing and so that we had a big strategic project, we would reduce capital spending in our other assets maybe.

David Paterson

Yes. I think to build on John’s comment I think spending that 25% of your depreciation is probably not a sustainable long-term. We can do it for periods of time and we are doing it now. As John said, normalized would be to say 50% of depreciation, gets you to 350 and we certainly confirm conversions in operating the company. We are building a boiler at Fort Frances and running the company at 150 to 200, so can certainly do conversion within that 50% or less depreciation target.

Mark Weintraub - Buckingham Research Group

Is there a way to help us model or figure how cash taxes will work kind of over the next year or two?

Bill Harvey

I think that yes, there is. From the point of view of on the cash tax point of view we will pay zero taxes in Canada over the next two years. In the US because of some corporate structural changes we have done, we expect that we will not pay significant cash taxes in the US. We were in a position where we were using NOLs in the US and they were winding down, but through the corporate changes acceptor we made as a result of the refinancing actually we don’t expect to pay any significant cash taxes.

Mark Weintraub - Buckingham Research Group

In terms of getting provisions back, how will that work if at all?

David Paterson

Are you speaking specifically from an accounting side, the evaluation allowances?

Mark Weintraub - Buckingham Research Group

Well, from a cash perspective are you going to be getting money back?

David Paterson

No, no. We just will not be paying money.

David Paterson

I had mentioned it’s about $6 billion of debt and that is correct. There’s $6 billion of debt that does include amounts drawn under the AR Securitization and when we issue the 10-Q you should look at it, because it does include also the fact that some of the debt as a part of the acquisition, it was a revaluation of debt, so from an accounting point of view the number looks smaller but it will be fully described in the 10-Q and with that we have time for one more question.

Operator

Your last question comes from Bill Hoffman - UBS.

William Hoffman - UBS

Bill I wonder if you could just follow-up on your earlier comments about the selling, administrative and as well as your distribution expenses and how much of that might have been onetime in nature and as we look forward, what target levels you might think you could refer?

Bill Harvey

I will speak specifically to the selling and administration. During the first quarter there were continuing activities related to integration etc that were winding down and those expenses as well as some other what I would consider more onetime events were over $10 million in affect and our target has been to get that number per quarter to the 70 or below and 70 is our first step that doesn’t include all the synergies, that just includes our first step and we believe we can get there pretty shortly, just has to manage aggressively and on distribution, I will pass that over to Dave.

David Paterson

Well I think distribution is really a function of what’s happening in the energy markets particularly oil. I mean we are paying substantially more in terms of fuel surcharges, so the ability for us to move, what we call right grade, right machine, a lot of that is freight related.

So as we keep reordering our production planning schedule and I would say again March was the first month again that all the closed assets were out of the system, we were able to reload the system that we think as we go forward, I want to say we will lower our cost of logistics, but I think we are going to use our planning and scheduling system to mitigate logistics expense but a 120 or what it is today, $124 a barrel of oil, we are paying substantial energy surcharges for every truck and every ship and every rail car that goes out of one of our facilities as is the whole economy. So, the only way really to mitigate into the near term is to go a fewer miles with every ton we ship, to have any chance to mitigate it and that’s what we are trying to do; fewer miles.

William Hoffman – UBS

Paying part of it was rationalization about your strategy, that’s obviously rationalization of making paper in different mills for your customers. Is this more of a new run rate here and just kind of fighting.

Bill Harvey

I don’t think you will see our true run rate until we report our second quarter numbers, because again March was the first month that we could really reload our system with the closed assets out and the new business model kicking in, so let’s wait and see where we are in the second quarter. I think you will be pleased with that.

William Hoffman – UBS

Working capital wise you still would have been burring cash in the first quarter and probably through April? Can you just give us some guidance on where your capital is now and the rest of the year; making some improvements in working capital management?

Bill Harvey

While, I think we are making some improvements on the payable side, the receivable side there continues to be an investment, but that relates primarily to additional price of the products, so we are having an investment but then that will continue through the second quarter, because what we did find were some pressures in the end in March on the some of our suppliers, in March, but particular as we were in the middle of the refinancing where we had a lot of pressures to pay early, we of course resisted strongly, but there was some significant pressures there and that has reversed to some degree. It’s not come back to where we would like it and we do have an opportunity there, but it will have to work on through the second quarter.

David Paterson

The other thing is that we have set new inventory marks for just about every grade and we continue to pushdown inventory, so hasn’t been able to offset the increase in price of the products although we’ve made some, inventories are low.

Operator

This concludes the question-and-answer-session.

Duane Owens

Thank you for join us on today’s call. We look forward to updating you again next quarter.

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Source: AbitibiBowater Inc Q1 2008 Earnings Call Transcript
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