Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

 

Duane Owens – VP & Treasurer

Dave Paterson – President & CEO

Bill Harvey – SVP & CFO

Analysts

Gail Glazerman – UBS

James Armstrong – Citi

Mark Connelly – Credit Suisse

Peter Ruschmeier – Lehman Brothers

Don Roberts – CIBC World Markets

Mark Weintraub – Buckingham Research

Christopher Chun – Deutsche Bank

Bill Hoffman – UBS

 

AbitibiBowater Inc. (ABH) Q2 2008 Earnings Call Transcript August 7, 2008 10:00 AM ET

 

Operator

Good morning, ladies and gentlemen. Welcome to the AbitibiBowater second quarter 2008 results conference call. I will now like to turn the meeting over to Mr. Duane Owens, Vice President and Treasurer. Please go ahead, Mr. Owens.

 

Duane Owens

 

Good morning, and thank you, Catherine. Welcome to our second quarter earnings call. With me on the call today are Dave Paterson, our CEO and Bill Harvey, our CFO. Before we begin, I need to call your attention to the cautionary forward-looking statement language that is contained in our press release and on our Web site. If you haven’t read it please do so.

We will be discussing such forward-looking matters on the call today and you should be aware due to the uncertainties inherent in such statements actual results may differ and any such statements are not guarantees of future performance. Our earnings call as well as additional financial and statistical information, including a reconciliation of non-GAAP financial measures used on the call can be found on our Web site. The call is available to all shareholders via live webcast and replay on our Web site at AbitibiBowater.com. Today’s call is scheduled to last about 45 minutes.

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

Dave Paterson

 

Good morning everyone, and thank you for joining us. On the call today, I plan to cover briefly our second quarter results, current market conditions, and a few key initiatives we have underway to improve our performance. Following my remarks Bill will go into further detail on the quarter.

For the second quarter, we are pleased to report that through significant realization of synergies and continued price improvements, we have improved the EBITDA generated in our business lines substantially compared to the first quarter, which was accomplished in spite of significant inflationary pressures related to energy and fiber. We anticipate continued momentum in our earnings improvement in the coming quarters as we continue to see the results of additional synergies and favorable market pricing trends.

Looking further at the synergies, by the end of the second quarter we achieved an annual run rate for approximately $270 million. Some of the major components achieved thus far are improved uptime on our machines, reduced water usage, reduced chemical usage, and lower headcount at the mills and corporate. We continue to work aggressively on synergies and remain confident that we will achieve the full goal of $375 million annual run rate by the end of 2009. We have made and will continue to make tough decisions that we believe are essential to improving our financial position.

From an operational standpoint, although the second quarter is normally a seasonally lighter usage quarter for energy, we faced higher prices for energy and higher fiber cost during the quarter. Offsetting these rising costs is the major focus in the operational level. For example, in newsprint even factoring in inflation, our cost went down by $5 per ton in the quarter. The synergies are real and we believe are providing a competitive advantage.

Moving to our key markets and looking first at newsprint. Through the first half of the year, total US consumption was reported down 10.4% year over year. Industry production was in line with this decline and was down about 9%. Industry exports are about flat year over year. We have implemented each of the previously announced North American newsprint price increases through August and expect to implement the announced $20 per ton September increase.

Excluding North America, global newsprint demand is essentially flat through May, with significant increases primarily in Asia and Latin America. Pricing in most offshore markets has moved up significantly as well. We continue to see growth in these markets. Vessel capacity and cost of ocean freight have been problematic, but we are addressing these by shipping from multiple locations and utilizing various ports in North America. We are tracking slightly ahead of last year shipping rate per month and are trending upward each month. Bear in mind, this is without two of our primary export mills Dalhousie and Mackenzie, which were closed or idle earlier this year. We shifted production and logistics from these sites to others that were primarily North American delivery mills. Shifts can be attained, but the costs (inaudible) due to freight rates and fuel surcharges. We are working to expand our long-term relationships with carriers servicing key markets.

Along with energy prices, recycled fiber has also experienced significant inflationary pressures. Old newsprint or ONP delivered cost had risen by nearly 30% from the first to the second quarter. Prices continue to rise through August. As this cost has risen, we have been reducing our consumption where possible.

Our customers continue to experience softness in advertising, which is a reflection of the uncertain economy. We also know that they are taking numerous actions to reduce their consumption of newsprint. While we believe there is currently a balance in our supply and demand from our customers in North America, we will continue to monitor our order books and we’ll take actions necessary to eliminate any working capital investments and inventory on our part.

Turning to commercial papers. According to PPPC demand for coated mechanical papers in North America is off nearly 4% through June. Print advertising has declined and magazine and catalog publishers have pulled back as a result of paper and postage increases. Magazine ad pages are down 7.4% through June according to the Publishers Information Bureau. As a result, our inventories have increased, but a correction is expected as we move into the fall spawning season. Building on the success at our Catawba site, we continue to review opportunity for similar conversions of newsprint capacity to coated mechanical papers. At this point, we have several options regarding the possible conversion.

Total demand for uncoated mechanical posted strong growth of 6.2% in June with gains of over 5% in supercalendered paper and almost 5% in the standard grades. Year to date, these uncoated grades are up about 4%. Some of the strength particularly in the supercalendered grades is due to grade shifting. Excluding idle capacity, the industry operated at about 95% of capacity during the first half of the year. As reported by third party sources, we’ve announced a $60 per short ton increase on our superbright grade from September 01. Among our priorities for the third quarter are eliminating low margin or unprofitable orders that do not meet a minimum threshold, as well as taking the opportunity to reduce inventory levels for all our grade families.

Shifting now to global pulp. World shipments continue to be strong, as reported by PPPC June shipments were at about 3.4 million tons, up 1.4% over June 2007 and nearly 5% year to date. Total industry inventories are in good shape at about 32 days of supply, which is around the 10-year average. We have entered the typical seasonal summer sluggishness in pulp shipments. However, pricing continues to improve with the recent announcements in North America and elsewhere. We had a normal annual kraft outage at Calhoun and Thunder Bay in the second quarter reducing production by 12,000 tons, and we will be taking the annual outage at Catawba in the third quarter reducing tonnage by 6,500 tons.

Moving to the wood products business. According to the US Census Bureau, housing starts were at 1.1 million in June, about 27% lower than June of last year. Lumber prices in recent weeks have improved marginally, but remain poor. The slight improvement is due to a seasonal uptick in demand and a constrained output across the industry. We continue to operate at about 50% of our capacity. During the quarter, we made significant strides to reduce working capital in the wood products business by lowering our raw material inventories.

As we mentioned last quarter, we are conducting an ongoing evaluation of our business. We are focused on cost reduction and rightsizing our business. During Phase I of our review, we attempted to renegotiate one of our major labor agreements in Canada early, but attained little success on the national level. These contracts will be coming up for renewal next year and will be a significant part of our go-forward strategy. Newsprint consumption is down in 2008 more than we anticipated and costs are higher than we anticipated. Recognizing those challenges we are ready to take the action necessary, including elimination of unprofitable production.

In summary, (inaudible) continue to see accelerated inflation mainly tied to energy, we continue to see pricing improvements in virtually every grade that pulp and paper reproduce. At the same time, we continue to realize synergies and lower our costs on a sustained basis. We expect continue production costs improvement.

I will now turn the call over to Bill Harvey who will take you through our results for the quarter.

Bill Harvey

 

Thanks, Dave. Our reported loss for the quarter was $251 million. After special items, our net loss was $150 million or $2.60 per share. Special items, before tax included a $17 million gain namely related to the sale of 28,000 acres of timberlands, a $16 million loss due to translating our foreign denominated balance sheet items into US dollars, a $70 million charge related to severances, a $30 million charge for closures, and a $72 million tax adjustment related to the valuation allowance recorded during the quarter due to operating losses in our Canadian subsidiaries. Net of these special items, our operating income improved by $104 million from the first to the second quarter. This improvement, as Dave mentioned, is due both to price improvements as well as significant synergy realizations.

Working capital in the quarter was a cash usage of approximately $59 million. Account receivables increased due to higher selling prices for our paper products. Inventories for coated and specialties increased during the quarter. And accounts payable was also a cash usage as we had higher cash interest payments during the second quarter and approximately $60 million of cash severance payments.

In the second quarter, as previously disclosed, we had scheduled annual pulp mill maintenance outages at both Calhoun and Thunder Bay, which resulted in increased costs of about $8 million and removed about 12,000 tons of market pulp production. In addition, as result of the pulp board [ph] outages, we had about $8 million higher repair spending and this was allocated to the specialty product line, mainly at the Calhoun mill.

In the third quarter, we have a scheduled kraft mill outage at the Catawba facility, which will reduce pulp production by about 6,000 metric tons and we expect to incur repair costs of approximately $5 million.

In the second quarter, our results in wood products benefited from continued cost reduction efforts, the idling of higher cost facilities, and a $15 million benefit related to the sale of log inventory previously subjected to lower of cost or market adjustments.

Our corporate and other overhead costs after severances and impairment charges were $62 million, down from $76 million in the first quarter. We expect this amount to continue to decline as we realize additional G&A synergies.

Our effective tax rate for normal earnings in the quarter was about 35%. Note 5 of our earnings release shows a reconciliation of the effective tax rate, excluding special items to the tax rate on reported earnings. We expect the rate to be in this range next quarter.

Capital spending was $47 million in the second quarter and we continue to expect to be in a range of $150 million to $200 million for the year. From a liquidity perspective at the end of the quarter, we had $340 million in cash. This amount is broken down into $250 million at our Abitibi subsidiary, and $91 million at our Bowater subsidiary. In addition to cash Bowater had undrawn bank lines of $136 million. Looking ahead to the third quarter, we expect to see higher selling volumes, pricing improvements in our paper grades, and continued momentum in the realization of synergies. While we are still experiencing higher recycled fiber costs and energy costs, we expect an operating income improvement in the third quarter approaching the same improvement we saw between the first and second quarters.

Finally, I’d like to point out that the recent financing in asset reconfigurations at Abitibi and Bowater will be reflected in the quarterly statements that each the entities will file with the SEC.

And with that, we will open the line up for questions.

Question-and-Answer Session

Operator

 

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

Gail Glazerman – UBS

 

Hi, good morning.

Dave Paterson

 

Hi Gail.

Gail Glazerman – UBS

 

I guess, just as a start if you can give a little more color on the export markets and particularly, I guess if you look at the industry data volume, Western Europe are down, you would still think that currently that’s attractive? I mean I guess you can just talk about where the upside has been, (inaudible) profitability between the different regions?

Dave Paterson

 

This is Dave. All the export markets are attractive to us at this point. I think in the case of Western Europe where it’s a large but mature market and I think as we mentioned before on the call we have selling in either Sterling or Euros in Europe on a fixed annual price basis. So, in relative terms, the rest of the world is catching up and I think will surpass Europe by second half of this year in terms of attractiveness. But from a growth perspective, the growth is definitely for us at least will be Middle East, South America, and Asia. And the limiting factor right now is just vessel availability.

Gail Glazerman – UBS

 

Okay. And just turning to inflation for a minute, I am feeling your guidance (inaudible) talk that much about it, but can you talk about I guess what type of cost inflationary pressures it would be if cost felt where they are today and moving into the third quarter?

Bill Harvey

 

We’ve had inflationary pressures as you would know in energy and energy related areas on price and freight. Those are the two biggest components. Right now we have had some good news on the Canadian dollar. It’s stabilized at about $0.95, which is good news. I think what you will see on the cost side is continued synergies. I think on a month to month basis, we expect cost to be flat across the company. That being said, on a quarter to quarter basis, there’s still an impact of energy on freight, especially for the third quarter.

Dave Paterson

 

Gail, our big opportunities reduce consumption and that’s really the synergies activity and our consumption of energies and input in terms of actual units is down. It should fall continue to be down through the more months in the summer and the key is to get total consumption down as the weather turns in the fall. And the other piece for us is how do we use our operating flexibility in our mills to reduce where possible the consumption of recycled fiber and increase TMP and kraft, which are better from a cost perspective, the better fibers for us right now.

Gail Glazerman – UBS

 

Okay. Can you quantify that or give any sense of the opportunity there to change your fiber mix?

Dave Paterson

 

It’s significant. We’ve got two large mills that are 100% recycled (inaudible) and the rest of our system recycle has historically been swing fiber. So, if you look at a mill like Calhoun or Alabama mills or even mills like Ponderay, we have a chance to really minimize the use of recycle and substitute.

Gail Glazerman – UBS

 

Okay. And just last question. Can you give any update on the status of assets sales or potential deployment?

Bill Harvey

 

Sure, we are moving ahead on a few different fronts. On the land sale front, that’s well under, both in the Canadian lands and in the US. Our Korean mill, as you are well aware, there was another transaction in Korea and we are waiting for that transaction to settle. But we could clearly have done a lot of work and we are prepared. And then as we mentioned on the last call, we are looking at select targeted [ph] assets at this point.

Gail Glazerman – UBS

 

Okay. Thank you very much.

Bill Harvey

 

Thanks.

Dave Paterson

 

Thank you.

Operator

 

Thank you. Our next question is from Chip Dillon from Citi. Please go ahead.

James Armstrong – Citi

 

Good morning guys. It’s James Armstrong calling for Chip. Congratulations on a much improved quarter. First question is, I saw there is a large amortization in your interest expense. Will that continue going forward and can you help us on modeling that amortization?

Bill Harvey

 

Sure. There is a few things that went on in interest expense. One of them in the quarter was the unwind of a treasury lock associated with the refinancing of our Abitibi subsidiary and that was an $11 million, that was a cash charge. So, that was a one-time cash charge in the second quarter. Secondly, as a result of the refinancing we have a large ongoing amortization, non-cash amortization in the interest expense line. And that totals approximately $32 million per quarter. And that’s related to both the exchange notes that you might remember, and it’s part of the refinancing, and an amortization of deferred financing fees. So, net-net if you take the amortization out and the $11 million treasury lock out, our interest expense from a cash point of view hover at this point around $160 million.

James Armstrong – Citi

 

Perfect. I appreciate that. And second, on the newsprint price front, I mean are you seeing any excessive push back do you think that these prices will continue to hold? In addition do you see any further pricing going forward?

Bill Harvey

 

Well I think our customers face a challenging market and we certainly have active dialog with our customers about their challenges. But given our continued need for financial performance improvement and dealing with all the cost pressures we’ve talked about I think we will take appropriate action.

James Armstrong – Citi

 

Perfect. I appreciate that. Thanks a lot.

Bill Harvey

 

Thank you.

Operator

 

Thank you. Our next question is from Mark Connelly from Credit Suisse. Please go ahead.

Mark Connelly – Credit Suisse

 

Two things. To follow-up on that previous question, consumption was dropping pretty meaningfully even when prices were falling. So, it’s hard to make a clear argument that rising prices are a big factor in demand destruction. How do you think about that Dave? I mean, again coming back to the earlier question, are your customers – is the rising cost of paper really a big fundamental issue for them, I mean obviously it’s not helping right now, but didn’t seemed to make a lot of difference over the last couple of years?

Dave Paterson

 

They can obviously answer that question better than I can. But I think as a percentage it’s not as significant it had been in previous cycles. But I believe an absolute spend, it’s probably right up there with labor costs or overhead costs. It’s significant to them. They are looking for ways to obviously reduce the cost of operating their business. I think this cycle we are seeing them be very aggressive in terms of ways to reduce consumption as their spend primarily from ad volumes or ad spend from the customers is declining significantly. So, I guess, at the end of the day, Mark, I would say that they are getting really aggressive about their future business model and are actively figuring it out. And part of that is size of the paper, number of pages, what the audience are trying to hit in the paper and it’s we’re both working on it together in a very difficult situation. But the price of paper is a significant expense to them, but I think it’s really working to figure out the new business model that’s driving their actions in the short term.

Mark Connelly – Credit Suisse

 

The one thing we haven’t seen now is a meaningful change in the amount of inventory they keep on hand. It looks to me like the buyers of newsprint tie up a lot of working capital there and that really hasn’t changed all that much. I mean, certainly their overall inventory levels have come down, but there – you think with 10 years of supply chain management, the amount of inventory they carry might go down. And it really doesn’t really appear to be from a day supply perspective.

Dave Paterson

 

Well, I’ll answer from a perspective of – in rising price market, inventory generally is a good investment. So, I think inventory movements historically indicate a shift from buyer to seller in the marketplace and right now I believe – I assume that they believe inventory investments are good investment on their part.

Mark Connelly – Credit Suisse

 

Just staying on the inventory theme for a second, it strikes me that newsprint producers have done a pretty darn good job of managing their own inventories. But coated producers over the last couple of months seemed to have done just an abysmal job. Can you give us a sense of why with the big declines we saw in mill inventory headed a price hike. It only took two months for coated inventories to go from trough to peak?

Dave Paterson

 

Well, our sense here is that the shift in demand in coated was quite rapid and happened late in sort of back half of the quarter. And our customers made a decision to stop buying and start consuming inventory. So we’ve seen that happen before in coated. The other thing, coated of course is a tremendous amount of grade substitution up and down the spectrum within the coated supercalendered, freesheet coated mechanical, supercalendered and some people even go down to the uncoated grades depending on the application. So, I think it’s a combination of – the price of coated is gone up quite a bit. They have a certain amount of dollars or willing to commit to ad spending and they are doing a combination of – look into the second half of the year, “Well, we’ve got some of these dollars left for ad spending and I can either substitute or cut back,” and both of those things. I mean my sense is those decisions were reached in the second quarter and we’ve dealt it quite rapidly as an industry segment in the coated papers group. And I think you are seeing some public announcements on uncoated that became quite quickly.

Mark Connelly – Credit Suisse

 

Okay. Thank you.

Dave Paterson

 

Thanks.

 

Operator

 

Thank you. Our next question is from Peter Ruschmeier from Lehman Brothers. Please go ahead.

Peter Ruschmeier – Lehman Brothers

 

Thanks. Good morning.

Dave Paterson

 

Hi, Pete.

Peter Ruschmeier – Lehman Brothers

 

Couple of questions. I was curious maybe for Bill, if you could elaborate a little bit on the land sale program. Any figures you can share from the quarter in terms of acres sold, price realizations? And then just at a higher level, kind of what’s the strategy, I mean do we have a view that this is – land sales will happen over years or is this over couple quarters, we should expect meaningful sales?

Bill Harvey

 

Yes, I think the land sales program is going well. It’s really two programs, one in the US and Canada. In the quarter, (inaudible) I think the number is 27,000 acres in the quarter – 28,000 acres and the price was about $814 per acre in the quarter. So, that’s mainly on the US side and that continues. We have, as you might know, over 1.5 million acres in Canada and that’s – certainly a sale of a portion of that is underway right now. You should expect it over the next three to four quarters to try [ph] it. Our goal is to have it done in the next year, I mean and that’s primarily because of (inaudible) done in pieces.

Peter Ruschmeier – Lehman Brothers

 

And do we have any examples of transactions near your Canadian wins that might give us some clues as to valuations?

Bill Harvey

 

The only one I can think of offhand is we did sell a significant piece of Canadian land, approximately a year-and-a-half ago approximately $200 per acre US.

Peter Ruschmeier – Lehman Brothers

 

Okay. That’s helpful. And how many acres after the 28,000 acres in the US sold in the quarter, how many do you have remaining the US?

Bill Harvey

 

In US, we will have left about 20,000 acres of pre-hold and 52,000 acres of long-term leased land.

Peter Ruschmeier – Lehman Brothers

 

Okay. That’s helpful. I am curious maybe a question for Dave, in the direct mail channel, I presume you compete very effectively versus other paper grades. I am curious on what you are seeing in that channel both in terms of demand trends but also in terms of your share of that channel?

Dave Paterson

 

Our share as a substrate?

Peter Ruschmeier – Lehman Brothers

 

Well, I guess qualitatively if you can comment on how some of the supercalendered groundwood grades are doing in that channel in terms of a paper substrate of choice.

 

Dave Paterson

 

Well, I think the choice is really about were ad spend and how many dollars they have. So, if you have price movements, they will substitute and it takes a quarter or two for that to happen from a printing point of view. I guess in general, the bigger hit I think for our customers is really the postage rate increase and there was a two-step postage rate increase that occurred. That was a significant one and it was late in the fourth quarter than an inflation adjusted one this year. So, I think – somebody help me a bit – the impact of the postal rate increase is like 4:1 the paper price increase. So, it’s really the postal rate that’s hurting us and that is a historical fact, every time the US Postal Service raises the bulk rate you see a drop off in directly our catalog. And I do believe there is a dialog between our customers and the government about the bulk rates and how they are going to manage bulk rate pricing going forward.

Peter Ruschmeier – Lehman Brothers

 

Okay. But in general – so it sounds like the ad dollars are coming down, any quantification for how you see that?

Dave Paterson

 

I wouldn’t say that. My view is that they had a budget for dollars and as their cost go up, they don’t raise their spend they just say I’ve got this many dollars left and they are reallocating those dollars for the second half of the year between all the various advertising channels they have and clearly in let’s call it May and June, the coated paper segment took a pretty good hit.

Peter Ruschmeier – Lehman Brothers

 

Okay. And just lastly, if I could, maybe for Bill, you mentioned Bill, the working capital drag in the quarter including some severance payments. I am curious if you have any near-term guidance you can offer on working capital including potentially severance payments.

Bill Harvey

 

I think it’s on the AR, accounts receivable side there’d like – there will be an investment likely in the third quarter related to increased pricing of our products. Severance payments, at the end of the quarter we had about $50 million still accrued to be paid. That will be done over the next three or four quarters. So, it will come in quarter by quarter. Those are the two biggest components I can think of offhand Pete.

Peter Ruschmeier – Lehman Brothers

 

Very good. Thanks guys.

Dave Paterson

 

Thank you.

 

Operator

 

Thank you. Our next question is from Don Roberts from CIBC World Markets. Please go ahead.

Don Roberts – CIBC World Markets

 

Thank you. Yes, couple of questions. First, I guess when we think of a big drawdown on the consumption in North America, the importance of this offshore market being that much more important. Dave, I think you mentioned the problems available, that availability be an issue, but could you quantify for us just the outlay cost increase that we are seeing with this ocean freight as well? But that seems to me this option of going offshore is diminishing as we progress.

Dave Paterson

 

I think the issue there is twofold. You got availability which drives the base rate, then you got fuel surcharges, which is driven by the price of bunker fuel oil. And that is being adjusted down as oil prices come down. I think the key is that you pick your markets and you get into on the logistic side you lock in long-term relationships with your key vendors out of mills, and we are in the process of doing that. I think it was – we mentioned that in my comments, but we moved through our system about a million tons of orders shipped around and that in combination with the logistics moves took a while to straighten up. We are still working on it. It’s getting better, has a way to go. The other part, the answer is clearly logistics offshore are higher than logistics in North America and we will price our products to compensate the loss on logistic cost.

Don Roberts – CIBC World Markets

 

Just sticking on this cost theme, you had mentioned about conservation being one of your biggest sort of leveraged on the energy side. Could you give us a little bit of an update on – I assume conservation a lot of it is going to be through off of cogen projects and substitution. Give us a bit of an update on where those are and the kind of magnitude of things you might expect?

Dave Paterson

 

Well, we have two significant energy related projects this year. One is at our Fort Frances mill where a big biomass boiler is coming online in September. And that project is on budget and on schedule. That will get us off cost of fuels and start burning residuals from the forest land. And we are doing a significant turbine project at our Coosa Pines mill also in that late third quarter, early fourth quarter time frame, which will make us less depended on purchase electricity and we continue to look for those type of opportunities across our system. And we have those but we have to do it within the context of our capital spending budget, given our needs there. So, most of what we spend next year will be energy or consumption related CapEx to drive down those costs.

Don Roberts – CIBC World Markets

 

You had alluded to the notion that on the potential drawing board in the future again is conversions over to the coated groundwood. I assume that one of the sites would be the Thunder Bay. It’s fair to say that you would have to do a fairly big cogen project there to make that viable if you would do a conversion as well?

Dave Paterson

 

Well, I think you're asking – question is, the conversion from newsprint to other grades and these we base the fact that you are going to be a low cost producer of whatever grade you choose to make. I think at Thunder Bay we have a number of challenges. One of them is the cogen or the percentage of energy we buy in the outside market, that is a challenge whether we make coated paper there or newsprint. But the conversions don’t work unless we end up with a first quartile asset like we didn’t in the case of Catawba. So, we can’t get there or we can’t get there with a reasonable capital cost, they won’t happen.

Don Roberts – CIBC World Markets

 

Okay. Thank you.

Dave Paterson

 

Thank you.

Operator

 

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

Mark Weintraub – Buckingham Research

 

Thank you. First I just wanted to verify when you talk about the third quarter operating cost improvement being similar to the second versus the first. Is that just as was reported without adjustments kind of an $85 million dovetail or did you have some adjustments in the number you were thinking off?

Bill Harvey

 

Mark, that was basically related to after special items. And I think towards, we are approaching the improvement from second from first. Clearly, I think a $100 million improvement that we obtained second to first was a big step forward. We expect another big step. It’s hard to see how exactly what the number will be right now. But we think it could approach the same type of number, a $100 million.

Mark Weintraub – Buckingham Research

 

Okay. Thank you. Is it possible for us to give – to us some color as to what the operating profit performance for the Abitibi part of the company was versus the Bowater?

Bill Harvey

 

I think both the subsidiaries will be filing the documents over the next week that will provide that break down. I think at a high level there was a good improvement in both subsidiaries. And you’ll have to look at those documents when they file.

Mark Weintraub – Buckingham Research

 

Okay. And then lastly, the $28 million in other income, does that go away in the third quarter, what was that related to exactly and did that go away?

Bill Harvey

 

That was related to gain on extinguishment of debt, $31 million of that. So, that does go away in the third quarter.

Mark Weintraub – Buckingham Research

 

Okay. Thanks very much.

Bill Harvey

 

You are welcome.

Operator

 

Thank you. Our next question is from Christopher Chun from Deutsche Bank. Please go ahead.

Christopher Chun – Deutsche Bank

 

Okay, thanks. Good morning.

Bill Harvey

 

Good morning.

Dave Paterson

 

Good morning.

Christopher Chun – Deutsche Bank

 

Just a follow-up on the last question about the others. Are we to think then that the operating income improvements is above that other line and that other line does not affect your comments about the operating income?

Bill Harvey

 

Yes, I think on that line, the line when we are talking about operating income improvement, is really the line that we referenced in the press release, which is operating income above interest expense and above other net. And we exclude from that items related to the special items which are consistent quarter to quarter, severances, gain on sales of assets we take out and those are the two big ones.

Christopher Chun – Deutsche Bank

 

But just clarifying, the other line is not considered as special items, but it’s still not an operating item either?

Bill Harvey

 

Yes, it’s not an operating item. It’s actually – on our income statement you will see a line ‘other loss income’ and that’s the line where we are referring to. Below that line is interest expense, foreign exchange gain, and other net. But the other net is below the line.

Christopher Chun – Deutsche Bank

 

All right. Okay. And then I had a question about CapEx. You mentioned that the ’08 netted in the range of 150 to 200, I am wondering in the out years though whether that amount is sustainable or whether it’s really need to go up a bit to maintain your asset in competitive position?

Dave Paterson

 

Well, I think it’s going to be driven by the condition of the company and the number of mills we are operating.

Christopher Chun – Deutsche Bank

 

Great. But if those things don’t change, do you think that 150, 200 is a sustainable number?

Dave Paterson

 

I guess I would say those things need to change. So, as the health of the company improves and that we have a – as we go through our continued evaluation of assets, we will evaluate the number. In the near term, I don’t think we need to raise CapEx to run the company. I think it’s going to be driven by deleveraging the balance sheet and then having alternative investments that make good economic sense. And right now, the two that would fall on that category would be anything that reduces our consumption of fossil fuel energy or conversions, and those things are both actively reviewed on a regular basis.

Bill Harvey

 

I think, as Dave discussed earlier, the 150 to 200 does include some projects that you would call non-made in this level projects even this year. So, it’s a broad range and I understand your question where you are coming from, but we’ve – historically we’ve allocated a capital towards those mills – towards the right mills and try to focus it.

Christopher Chun – Deutsche Bank

 

Okay. That’s helpful. And then in terms of your coated paper pricing, the quarter over quarter jump wasn’t quite as much as we would have expected based on industry public prices. Is there a certain segment that’s on contract or something like that?

Dave Paterson

 

No. I mean that’s being changed in terms of our customer relationships in coated. So, no, there is nothing special there.

Christopher Chun – Deutsche Bank

 

Okay. And then on the operating cost side and in specialty paper is that – the quarter over quarter trend was higher than we expected other than the maintenance cost, was there anything going on there?

Dave Paterson

 

And that made it set as a pretty big number and I think what – that was the biggest single impact.

Christopher Chun – Deutsche Bank

 

Okay. Thanks for your help.

Dave Paterson

 

Thank you.

Bill Harvey

 

Operator, I think we time for one more question.

Operator

 

Our next question is from Bill Hoffman from UBS. Please go ahead.

Bill Hoffman – UBS

 

Hi guys, good morning. Bill, I just wondered if you could talk a little bit about the just refinancing strategy going forward, combination of assets sales, etcetera, with some of these, the 364-day facility and the like.

Bill Harvey

 

Sure. What we are focusing on now is the refinancing of the Bowater subsidiary with an ABL [ph] line that we talked about before and we are moving ahead on that as well as you saw in the filings in the second quarter. We are in a position where Coosa Pines and Grenada are subsidiaries of the holding company. And that puts us in a position to do a complementary refinancing. So, our plan is to address the 2009 maturity upfront on the Bowater subsidiary. And we are moving forward on that. On the 364 renewal, that would be done later this year. We believe there is good collateral support in that loan. And we’d be moving ahead toward in the fourth quarter to renew that.

Bill Hoffman – UBS

 

Okay. Thank you. And then, Dave, just a question on the asset rationalization. Could you just give us an update – I think one of you guys earlier talked about was shifting production capacity from site to site. And I know you’ve really only have added a quarter or two, but do you see a lot more opportunity to pull cost out of system by moving grades to different mill locations?

Dave Paterson

 

There is certainly an opportunity there. I think as we look at some of those opportunities they are a little more complicated than the first round. But there’s certainly opportunities for mixed improvement across our system and that’s both from a productivity point of view on the paper machine as well as logistics improvements as we move ton closer to customers. But that’s a big part of what we look at every month as the order book comes in.

Bill Hoffman – UBS

 

Does it look like, at this point in time that might lead to further opportunities to shift machines?

Dave Paterson

 

We are evaluating that.

Bill Hoffman – UBS

 

Anything imminent you want to talk about?

Dave Paterson

 

Not yet.

 

Bill Hoffman – UBS

 

Okay. Thanks very much.

Dave Paterson

 

Thank you.

Bill Harvey

 

Thanks Bill.

Operator

 

Thank you. This concludes the question-and-answer session. If participants wish to dial-in to the instant replay please do so by dialing 514-861-2272; please proceed by entering the passcode which is 3265672 followed by the pound sign. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: AbitibiBowater Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts