Mercer International Inc (MERC) 2005 Q3 法說會逐字稿

Good morning. My name is Crystal, and I will be your conference facilitator. At this time I would like to welcome everyone to the Mercer International third-quarter conference call. (OPERATOR INSTRUCTIONS). Ms. Tramont, you may begin your conference.

Thank you. Good morning and welcome to the Mercer International 2005 third-quarter earnings conference call. Management will begin with formal remarks, after which we will take your questions.

Please note that in this morning's conference call management will make forward-looking statements there were made in the press release. According to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, we would like to call your attention to the risks related to these statements which are more fully described in the press release and in the Company's filings with the Securities and Exchange Commission.

Joining us from management on today's call are Jimmy Lee, President and Chairman, and David Gandossi, Executive Vice President, Chief Financial Officer and Secretary.

With these formalities out of the way, I would like now to turn the call over to Jimmy Lee. Jimmy, please go ahead.

Thank you. First, I would like to welcome everyone to Mercer International's third-quarter and nine months year 2005 earnings conference call. I would like to touch on some of the highlights that influenced our business in the quarter, as well as the nine months of this year, the results to date and recent developments which may have an impact on our business for the rest of the year.

In the quarter, we experienced weak (inaudible) market conditions, together with continued strengthening of the Canadian dollar, which was partly offset by slightly weaker Euro exchange rates. The quarter begin with very weak market demand from China, as well as volume for softwood pulp, and volume only returned when prices reached levels which were close to the cash break in prices for many of the producers. The situation for hardwood eucalyptus was more favorable, and we had conditions where hardwood pulp prices were on par if not in some cases better than NBSK.

The resolution of the labor situation in Finland in the pulp and paper sector did not have a significant impact as to the market conditions, quite contrary to the expectations. The Company has been focused on improving the cost position at all of its mills, and in this regard, we have made very good progress together with the foundation for future plans to improve the costs of production at all sites. As a result of the startup of the Stendal facility and the purchase of the Celgar operations, revenue for the third quarter increased to EUR148.9 million versus EUR47.4 million in the comparable quarter of last year. Those prices both in U.S. dollars and Euro terms were much less than the prior year and resulted in pulp sales realizations per ton to drop to EUR398 on average versus EUR472 per ton in the prior year.

Even under these very difficult operating conditions, pulp operations generated operating income of EUR9.2 million versus EUR2.9 million in the prior comparable period. We continue to make incremental progress in our paper operations, and in this, this was reflected in the fact that revenue from paper operations increased to EUR15.5 million from EUR12.7 million in the prior year's quarter. Paper operations generated an operating loss of EUR1.1 million compared to an operating loss of EUR7.6 million.

Overall we had improved income from operations of EUR7.9 million as compared to a loss of EUR4.8 million for the same quarter of last year. For the quarter, we reported a net loss of EUR5.6 million or EUR0.17 which included much higher interest, as well as depreciation as compared to the prior year, as well as realized and unrealized gains of 3.1 million on our interest rate and currency swaps and unrealized non-cash foreign exchange gains and our long-term debt of EUR5.9 million.

In the prior year for the quarter, we reported a net loss of EUR9.9 million or EUR0.57 per share. Our operating EBITDA increased to EUR21.9 million from EUR5.3 million for the comparable quarter.

From a balance sheet perspective, our networking capital increased significantly due to the receipt of the government grants related to the financing of the Stendal pulp facility, which resulted in our networking capital increasing to EUR131.6 million as at the end of September 30, 2005.

For the nine months ended September 30, 2005, revenue increased to EUR376.4 million from EUR148 million. Income from operations were EUR16.2 million versus a loss from operations of EUR7.6 million. Operating EBITDA increased to EUR55.1 million from EUR15.6 million. On a reported earnings basis, we had much higher net loss of EUR87.4 or EUR2.86 per share versus EUR12.6 million or EUR0.73 per share, which was primarily the result of the valuation losses of approximately 70.1 million on our interest rate and currency swaps related to the long-term debt for the Stendal facility. The bulk of such losses are all non-cash and increase or decrease as a result of the long-term interest rate changes, as well as the exchange rate between the U.S. dollar and Euro.

Overall in light of the very weak market conditions, we are generally satisfied with the Company's performance. The ramp-up of the Stendal facility is progressing very much according to plan. The tie-in of the two additional digesters is scheduled for December of this year, and this should result in the mill being in a position to take the next step of production improvements as well as costs. The quality of the pulp is well-regarded, as well as accepted in the market, and progress in production costs is very much in line with our original expectations and the existing loan facilities anticipated the cost development, as well as the ramp-up costs.

Celgar progress and cost reduction is also going very well, and approved capital expenditures for next year and early 2007 in the washing and drying sections of the mill results in significant improvement. In the meantime, we have undertaken various studies, as well as plans to improve the costs, as well as the net mill realizations from sales, and thus, further incremental progress is expected in the very near future.

In the current quarter, we are scheduled to have regular maintenance, as well as downtime at Stendal for tests, as well as tieing of the new digesters, and this will result in overall production being reduced by approximately 30 to 35,000 tons in total.

The start of the fourth quarter saw some improvement in the list price for pulp; however, conditions continued to be reasonably soft, particularly in China. At the same time, the Canadian currency has maintained strength, while the Euro has been weaker. Conditions are very difficult for many of the producers of NBSK, and without some significant progress in price, there will likely be some casualties in this industry. The Company continues to maintain its focus on cost control, as well as production efficiencies.

In addition, with the addition of our new sales and marketing executives and the buildup of our overall sales team, we will see also progress in regards to our net mill realizations and the shift to sales volume through the most logical sales areas based on trade and other factors.

On that, I would like to open the call to questions.

(OPERATOR INSTRUCTIONS). Ted Wolff, U.S. Financial.

I wonder if you would expand a little bit on your thoughts about the pulp markets?

Yes, I think the existing situation in the pulp market has been pretty flat for an extended period of time because, of course, the current -- (multiple speakers)

That is the outlook?

I would say the outlook is pretty flat. I mean I think we're trying to push through slight incremental increases. We are seeing that certainly there is a lot of resistance in that regard, but we are seeing some progress. We think that the conditions are such that if this type of flat pricing scenario continues for much longer, as I kind of indicated, there is a strong likelihood that there will be casualties. Because if you look at this quarter's numbers, many of the producers certainly were under stress. We feel that this cannot really go on too long, and therefore, the likely scenario is that prices should start to move upward.

When that happens, of course, it is difficult to tell. But the market conditions certainly have been fairly weak for an extended period of time, and therefore, there is more likelihood than not that the situation will change.

Jimmy, there is still I believe a substantial amount of semi-obsolete sulfate capacity. Have you had any thoughts about that?

Well, you know, there's a lot of high-cost producers, both in the Eastern part of Canada, as well as some of the coastal mills in British Columbia. As well, of course, even in Europe, there is a few smaller inefficient facilities. You know, if you look at the landscape, clearly there is going to be change.

In terms of when that occurs, of course, no one can time it. But we know that there is a lot of mills which presently are either losing money from a cash perspective without even finance costs or others and are hanging in there for reasons which I don't quite understand. But it represents certainly in terms of tonnages several million tons. So there's a lot of capacity, which clearly is very high cost, and there is going to be some restructuring, which probably will happen in this industry.

What do you think the timing of that might be?

Well, I mean, you know, we have been in this type of channel pricing in terms of Canadian and Europe dollar price for you know the last three to four years. So I think it has gone quite long, and I think certainly next year will be one where I think their maybe final decisions are going to come from at least some of these facilities.

Thank you. That is very helpful. Could you tell me please have you received all of your government grants?

We pretty much got most of them. I mean there is very little money left over. A few million, but that is really more related to timing and other issues. So we would say that almost all of it has been received today.

Are you now in charge of Stendal? Have you taken it over from the construction company?

Yes, we have taken over the actual management and the day to day running of the facility. But, of course, there is a lot of loose ends in terms of the punchlist items which needs to be corrected, etc. So they are still involved in the mill, but not in the operations of the mill.

But your statements in the future essentially are going to reflect operations as they are, as opposed to these various non-recurring things?

No, there are still tests that need to be completed and even into next year because the two digesters, of course, will be installed. There will be certain other tests which are going to mean that we will not have complete regular type of running, but certainly in terms of overall efficiencies, we can take the next step in terms of our cost reduction because we will have now the too digesters installed, which means that we can now really tune the rest of the facility based on that total tonnage.

Of course, the next level is, of course, other areas of the plant, but I think if you look at the cost development they are going extremely well. It is very rapid, and therefore, in the next few quarters, you will see that Stendal on a cash cost (inaudible) will be very competitive, even against Rosenthal, which has been operating since 2000.

Jimmy, I wonder if you could tell me when you think the mill -- or when you anticipate that the Stendal mill will reach optimum operation?

Well, I mean every mill goes through continued incremental progress.

Yes, of course.

At Rosenthal you see that even there we have continued to make cost reductions. So, of course, the first couple of years will lead to very rapid reduction in cost, but we continue to focus on getting further and further savings, and therefore, we will continue to see that.

But in terms of strictly operating issues, I think after next year we will certainly have all of the tests and everything else over with, and therefore, we will be in a position to really say, okay, we are probably running it on a more steady-state type of basis.

And that would be 2007?

Yes.

Jimmy, thank you very much. This is very helpful.

Patrick Young (ph), Raymond James.

I have just got a few questions here. Starting with Celgar, can you provide some -- give me some color on the change in the chip pricing formula in DC and its impact on the Celgar mill?

Well, I think that everyone realizes that the traditional way of pricing in terms of pulp chip or pulp logs, as well as some residuals, is kind of delinked from this type of indexing that has been the norm in the industry. And this, of course, has been the result of the fact that there has been significant amounts of fiber as we go through the pine beetle problem in the interior, and this will continue to be the case moving forward, certainly in terms of the interior.

Fiber availability, which ultimately means that in our area also we're getting very good pricing development for our saw mill residuals, we have a lot of inventory, and certainly we are not in any way under pressure in terms of fiber supply. And, therefore, we feel that this is an area that we will have better pricing as we move forward. And, in fact, some of the wood is even finding its way even into Alberta and the coastal producers. So I think that fiber will become more and more abundant as a result of the beetle issue, and therefore, we will have continued -- well, continued situation, which is delinked from the traditional formula that has been the norm.

Do you have an approximate order of magnitude in terms of savings going forth?

No, I think this is something that we will be focusing, and you know what is really important is to make sure that we know what the real cost situation should be based on (inaudible) alternative suppliers, etc. And, therefore, we will be making incremental progress, and I think it is headed in the right direction. Where that finally ends up in terms of actual price, we will have to see. But certainly the direction is for better wood prices.

Great. Thanks for that. And just taking with Celgar for a second, how long do you think it will take before the marketing initiatives at Celgar will start showing up in terms of better mill --?

Well, of course, we are all here in London and in terms of the market for next year, and clearly a lot of that decision starts to occur from this moment on. There is another conference, as you know, in the early part of next year for the Asian side, and therefore, we see that the shifting and more long-term contracts is something that we will see into next year, and this will continue to build.

Thanks for that. I guess one last question. Pulp production looks like it is on a quarterly basis higher than rated capacity at probably Celgar and Rosenthal. Do you think this is sustainable?

Yes. In fact, certainly on the Rosenthal side, we feel that we can still make some small production gains. Not a lot clearly, not just the top end. Celgar, there is still good room for further capacity in terms of production. But we won't really get there on a reliable basis until we finish up this capital investment that we have planned for next year and 2007.

Right. That is all I had. Thanks for that.

Jimmy, I just might add -- this is David here -- just a bit of an emphasis on that last point. That if you're looking to year-to-date production, the thing to remember is that all three mills have maintenance downtime in the fourth quarter. That is planned downtime. So you cannot just normalize the production from the first nine months. You need to recognize about 10,000 tons out of Rosenthal and five out of Celgar as well for planned maintenance in the fourth quarter of this year.

Claire Huxtable, RBC Capital Markets.

I have a couple of questions about downtime, but it sounds like that has just been answered.

The other question I had was with regards to pricing discounts at Stendal, and how long do you expect them to be placed at their current level?

Well, I think the first year said they will have, of course, the introductory discounts which are normal to emphasize the paper producers to try a new quality. As you know, that type of testing period is pretty much now over, and therefore, that introductory part of it is going to no longer be there. And with the quality now pretty much established, we will have essentially a one pricing strategy. And that means that the mill net strategy for all mills will be the same.

So the difference in real pricing at the end of the day will be the result really of freight and other issues, but really with one pricing. There won't be any discount in excess of what is normal.

Okay. That is good. Thank you.

Joe Pratt (ph), A.G. Edwards.

The first question on the hardwood/softwood relationship, in recent months hardwood has been at or above the NBSK price, and some where I saw that there was talk of 50% substitution. Can you just give me a feel for whether or not there may be any technological techniques that enable more hardwood to be used in paper than formally?

Well, I mean substitution is something which is ongoing. I don't think that is the primary fact behind the recent strength in eucalyptus price or the fact that we have had parity, in fact in some answers to be slightly better prices for eucalyptus. I think it reflects more the fact that we have had a huge premium difference between NBSK and hardwood for a long period of time, which meant that certain swing capacity moved from hardwood production to softwood, and the wind damage in Sweden certainly also created a bigger amount of production of softwood versus hardwood. And it is really those factors together with the startup of Stendal and the discipline that the hardwood producers seem to have brought to the market on their own product, that we see that the pricing all of a sudden has changed.

Now, of course, a lot of the swing capacity which was hardwood, which shifted to soft, will, depending on the wood availability, more likely than not ship back to the hardwood, and therefore, we see clearly that this is not going to be a situation that is going to be a long-term one, where you have this parity, as well as sometimes a better price for hardwood. So the indications are either softwood prices are going to move up further or certainly hardwood prices will have to accommodate for the normal difference in price between NBSK and hardwood pulp.

But I guess it just seems to me that in terms of -- let's compare it to 10 years ago -- does hardwood have a greater world market share of papermaking raw materials supply than it did 10 years ago today?

Yes, I think ultimately that is true, and I think that will continue to be the case in the sense that the eucalyptus grade will become probably the primary grade rather than NBSK, which has historically been the primary grade. Because the volume of softwood production, certainly NBSK is going to be limited, while eucalyptus will continue to grow.

The furnish depends on the paper making, but certainly NBSK and softwood is very important for tissue production. Less so for, you know, uncoated free sheet. So it is really the paper which determines the fiber requirements, but at the end of the day, NBSK will continue to play a role, and we have seen that because, of course, demand throughout this period is continuing to grow. But right now eucalyptus demand, of course, is growing faster.

Okay. My second question might be for David, and that is just in the September quarter, what was the quantity of grant funds that came in?

About EUR77 million.

Okay. And year-to-date what was that number?

Well, we started the year with --

185 in (inaudible). So we have got up to 275, so we are -- I guess about 90.

90 year-to-date and 77 in the September quarter?

Yes.

And not much more to come?

No, we've got about 10 million that is not reflected as a receivable. It will come in between now and the end of the year.

Rick Sherman (ph), Oppenheimer.

A couple of years ago, I asked you -- I know your cash cost was around $300 for most of your mills, but I had asked to kind of simplify and say if you kind of threw the kitchen sink in, I believe the number was around EUR400. Depreciation and interest cost was a number that most people could use as a breakeven. Is that still valid?

Well, I think if you go through our schedule in regards to the actual mills for the quarter, I think you can pretty much get a very good feel in terms of what the breakdown in terms of cost both financial and others in terms of (inaudible) because, you know, that Celgar and Rosenthal are part of the (technical difficulty)-- group, and therefore, you know that the debt which encompasses the senior notes and the 10 million and you know you can choose to put whatever in terms of the convertible sub-debt portion in there, and then you can pretty much allocate what the finance part of the costs are, and that is the depreciation there, and you have our EBITDA from each mill. So I think pretty much get a reasonable guesstimate of what both from a cash as well as a non-cash earnings perspective is.

My focus, of course, is to stem the cash cost of production. My goal is to have all of the mills have less than EUR300. In fact, Celgar, if you look at the cash, cost and production, is quite low, but the problem is its trade costs are much higher. So it's a combination of freight and production costs, which, of course, creates a disadvantage. But from a strictly production base, it is fairly competitive.

Okay. It is just that you know normally in the past, whatever the list price was, you could basically assume that you would be netting out somewhere between 10 and 15% below that number.

Yes, I mean our margin is highly dependent on really the price. And, you know, that our net mill average realization price was probably under EUR400 for the third quarter.

Why was that? Was it depressed due to the China situation?

Well, I mean it's a combination of slightly higher discounts at Stendal than what would normally be the case, as well as a slightly lower pricing that we get for Celgar because of the freight and other types of issues. And, of course, it also reflects the actual weakening of the list price in the quarter. So those would be the combinations of why we had a lower average mill net realization in the third quarter versus the second quarter.

There is something that Ted touched on, I mean do you believe there is going to have to be some pricing discipline relative to the overcapacity that is in the market it seems for --?

Well, I think that pricing discipline is one, but at the end of the day, everybody has different core type of parameters. And, therefore, what is important really is (technical difficulty)--. There is certain periods where you have overcapacity, and it's not a lot because you're talking about several hundred thousand tons really making a big difference in the paper market, which is more than 100 million tons of production. So this small incremental amount of NBSK has a big impact on the rest of the industry, and this is where we need to have a better discipline in the sense that you need these higher cost producers who really are desperate to sell and do sell. They tend to be the ones which, of course, weaken the market, and everybody has to follow. And this has been the tradition in the China market, and as long as that continues, we will have a kind of very volatile pricing type of development.

Thank you.

Bruce Klein, CSFB.

I was wondering, I think I missed the beginning of the call, but I think China I think you said demand -- I think you said it was soft. I'm wondering how long that has been going on, and what sort of your view is there?

And then just the emission credits, I did not know if those are done, or is there anymore in the future, and then if you had CapEx for the restricted group for Q3, that would be helpful?

Well, in terms of the carbon emission area, I think we, of course, have been allotted (technical difficulty)-- three years based on our expected production rate and other type of parameters by the German government. The German -- Germany as a whole because of the unification is in a different position than some of the other members to the agreement because, of course, from 1990 on a significant amount of capacity in terms of industry and high-end emitters, of course, disappeared in eastern Germany. And, therefore, as a country, Germany is a little bit in a better position than some of the other members who signed the (inaudible) treaty.

And that is why I think we in a way have been a bit of a benefactor in the sense that we do on average have slightly excess amounts, and therefore, we have been able to realize on that, and we continue to believe we have more than sufficient quantities based on our expected production rate, and we will see in terms of pricing and other developments what type of sales strategy we may have in the future. But so far we have been selling, and we have adequate certificates for the future. So there's no concern there.

In terms of the China market, you know because of the port situation in British Columbia, as you know, there is a lot of supply which should have gone to China which did not go to China. And after that was the result of a big chunk of volume which ended up in China, which meant that instead of a more normal type of delivery situation, what you probably had was China, which was very low in inventory all of a sudden getting a big chunk of inventory, and now going into the third quarter they are seeing that the producers are trying to push through price increases. And, therefore, they are going to hold back. And because they got this big shipment all being delivered, of course, they are positioned a little bit different than if it was normal type of volume growth throughout the summer.

So I don't see that the demand side is in anyway reflective of basic paper consumption in China or their ability to export it. It is just that I think it is really an inventory situation, as well as their attempt to resist any price increases.

And the third in terms of the restricted group investments, I mean other than the investment that we have announced for next year as well as 2007, all investments are really related to just strictly normal day to day maintenance items.

What was the third-quarter CapEx for the restricted group?

At Rosenthal, it was EUR2.5 million. For Celgar, it was 1.6 million Canadian.

And, Jimmy, I was not clear, I heard you talk about the carbon commissions. I did not know if you expect fourth quarter next year to have further credits?

Well, within allotted credits, which cover all three years. And each year, of course, we have to make sure that we have sufficient numbers for that year, but we have already slated allotment for all three years. And this is based on our production of volume that we expect to have for this year, next year and the year after, and as well as the type of fuel that we will consume. And fortunately we have been able to balance both production and carbon type of fuel consumption so that we actually have excess that we have been able to sell. We think we are adequately allotted certainly this year and the two subsequent years in terms of carbon emission. We will have to review in each quarter whether we are in excess to a point that we would like to sell it based on price or whether we would like to keep it in that quarter. But certainly we're comfortable that we have sufficient carbon emission credit to cover our needs.

And the downtime -- was it 30, 35,000 tons in Q4? How much is restricted group of that?

That is 13 is Rosenthal -- I'm sorry, 10 is Rosenthal and 5 is Celgar.

Okay. And was there any in the third quarter at those two mills?

Not of normal plant downtime, no. All of our regular maintenance is in the fourth quarter for the restricted group.

No, I'm talking about total downtime whether it is maintenance or market?

No, no, it has got nothing to do with market. We have no market-related downtime at all.

Okay. And then Celgar in terms of where they are on their cost performance versus where you had hoped and why?

Well, I think they made very good progress. In fact, based on our original expectations, they are probably ahead of the cost curve, but negative in terms of that, of course, is the fact that the Canadian currency is stronger than what we originally envisioned. So what you've got is better-than-expected cost development offset by stronger currency movement.

Okay. And lastly, just a follow-up on an earlier question about the hardwood and papermakers maybe desire or substitution for more hardwood versus softwood. I did not know if you thought -- I know there are some gains going -- well, not gains, but I know there some price differentials that may normalize out. But separate from where the actual price is, our papermakers hitting up against the wall of how much more hardwood they can use in your estimation? And secondly, have there been any technology changes that would allow them to use a lot more than we might have envisioned a year ago?

I'm not aware of any real technology change which shifted the actual recipe mix. I think what is more important is that, of course, every papermaker will try to use the cheapest furnish, whether that is hardwood pulps or mechanical pulp or whatever it may be and their continued focus in terms of reducing the overall fiber cost.

In terms of NBSK, you know, in certain areas, it is clear that whatever amount of substitution, whether it is mechanical or hardwood or whatever, has pretty much reached its limit. Other areas, you know, it continues. We know that in the free shoot wood free graphics area, softwood is not really critical at all. In fact, some producers may not even put hardly any softwood in.

But in terms of tissue, we know that softwood is still a very relevant fiber, both NBSK as well as other softwood. So it is really a question of the papers that each of our customers produce. But clearly every one will focus in terms of reducing their overall fiber cost, and that is to be expected. And what we can focus on is, of course, the same thing, which is to reduce our fiber cost, which is our wood chips.

David Frey, Stanfield Capital Partners.

I had a couple on the restricted group. The first one is, the first two quarters of the year, it looked like there was some corporate overhead. If you added the EBITDA of the two mills, the restricted group EBITDA was less by about 2 million a quarter. This quarter it was kind of even. Is there something going on there that -- or what is a good run-rate for I guess the corporate overhead that is in our restricted group?

Well, I don't think that we changed in terms of corporate overhead allotment or allocation in terms of what we charge as a proportion. I think clearly there is going to be different type of costs in the different seasons, but I think on an annual basis they should be pretty consistent. David, do you want to --

No, I would agree with that Jimmy. I think you should -- what you're seeing now you should be starting to think as somewhat reflective of our run-rate.

Together restricted group EBITDA I guess now you can just add the two mills together, and there is no other corporate overhead number or difference between that?

Well, I mean some of the things that you saw in the early part of this year, of course, was the cost which were related to -- even the acquisition of Celgar, there was a lot more activity at the corporate level that was aside from strictly items which could be capitalized for that acquisition. And, therefore, you're going to have slightly different type of overhead in those areas. But I've think right now, of course, there is not any real extraordinary type of events occurring, so they probably indicate close to what would be the norm.

So what is kind of a good run-rate I guess to use going forward for that?

Well, I guess what is the corporate overhead portion for the same amount?

Roughly 3, Jimmy?

3 million that is not allocated to the two mills?

No, I mean the corporate -- you asked for corporate overhead.

Okay. And then the next question, just looking sequentially from the second quarter, it looked like at both mills your average price realization was up. And I know there is some currency that muddies the water, but even adjusting for that, it was a little surprising giving the list price has come down. It looks like most of the other pulp companies have reported -- have seen sequentially lower price realizations. I was wondering if there was anything going on there?

Well, I think if you looked at the prior quarter versus our -- this quarter, the net mill realizations were slightly lower like all the other producers. But I think in terms of our margins they were certainly an improvement in terms of our production cost, and therefore, offsetting the net mill reduction in price, what we got was an improvement in terms of overall cost benefit, some of which was currency-related, but really more in terms of production cost.

I will have to check my math. I just took the revenues per mill divided by the shipments, and it seemed like it was spinning out a higher average realization? (multiple speakers)

Well, we have the net mill realization here at just under EUR400 for the three months in the third quarter. I think if you go back to last quarter's earnings release, I think we were slightly over 400 something net mill. I don't have that number with me, but I'm pretty certain it was slightly lower 400. It was more like 5 or something like that.

Okay. And can you give us any sense for what -- I'm just trying to think of like how to get to the LTM indenture EBITDA. Is there any information you have on like Celgar's shipments, revenue and EBITDA for the fourth quarter last year?

Yes, David, these are all a little too detailed for Jimmy, and I am here in London. Maybe we could have (multiple speakers)

I will circle back. And then just one thing on the maintenance for the fourth quarter, is there any unallocated expenses that you had incurred in the quarter in addition to just lower shipments?

No, I mean you are going to just have lower production numbers, that is all. I mean the rest of the cost is pretty much amortized for the period.

Okay. Great. And then last question, sorry, just on the working capital swings, any sense of how much working capital swings going into the winter months?

Well, I think inventory levels probably are pretty close to what it is going to be in the fourth quarter. The working capital, I mean we still have grants, as David indicated, which are not reflected which will be received -- the EUR10 million, that is not significant. But I think our working capital position will be within this type of number. There should not be any real pulldown in terms of that number or any real big increase in terms of any working capital.

Okay. I will turn it over. Thanks a lot.

Craig Kellier (ph), Regiment Capital.

Some of my questions have been answered already. Can you talk about October price increases, and what you're seeing in terms of traction there?

Well, I mean we're trying to push through a total of about $40 U.S. in Europe. I think we're not going to probably get all of that. I think we are going to get some traction. It will be somewhere probably closer to the middle than full amount certainly in one step. But I would say that all of the industry is trying to push through the price increases, but we will have to see after London and the next couple of weeks as to whether all of that is going to be settled out.

And as Stendal ramps, can you talk about the type of discounting that is going on and kind of when you think that rolls off? Just kind of the general --

Well, the discounting is really related to the introductory nature of it. You know, you have to motivate the potential customers to try the quality. It means that they have to make certain adjustments to their paper machine, and therefore, there is cost of them. And also you have to motivate them to try something, which clearly they may not wish to because, you know, they may have a pulp supplier already that they are quite happy with.

So typically there is an introductory discount of somewhere around 2% depending on the volume, etc. And, therefore, those introductory discount will disappear because, of course, once they have had the opportunity to test it out, then they are going to become regular buyers or they are not going to buy.

Is there any discounting going on at Celgar?

No, there is no real discounting in the sense that Celgar is not a contract producer. I mean pretty much all of it is volume because of the receivership nature was sold on spot kind of conditions. So although there was arrangements were there was a lot of buyers who bought regularly, but clearly it was a spot seller even to those customers. That is all being shifted to contract type arrangements for next year. So a larger percentage of Celgar sales will be more contract normal type of conditions, like Rosenthal and Stendal and clearly less spot activity. And this will mean we should get better pricing because typically spot is at a discount to contract type arrangements.

And when we look at the restricted group, I think some of us just have a little trouble piecing together the historical there. Can you maybe just talk about what you're targeting for leverage there and what kind of capital structure would be ideal for you going forward I guess on the whole company?

In the restricted group?

The restricted group and just the overall Company as well.

Well, I mean if you look at our balance sheet, it unfortunately does not include a lot of things that we have received in terms of grants and other, so I think the -- as well as the long-term valuation issue related to the interest rate swap that we entered into at the start of the Stendal facility. So clearly our balance sheet is not indicative of the amount of money that has from a financial perspective put into the company as really quasi equity and cash.

So the debt-to-equity structure unfortunately is higher than what would normally be the case. But if you add those components back, we are pretty similar to many within the industry in terms of our cost of production. Certainly we have at Rosenthal it is a very low-cost producer.

Celgar, once we complete out the investments that we have budgeted for next year and the year after, as well as the net mill realization increases, the freight issues and other things, I think Celgar's cash flow will also improve marketably as we move forward. But right now it is not a a position that I can say, okay, Celgar's numbers is this, and this was, you know (technical difficulty)--. I think what we have to do is once the washers investment is finished, the dryer expansion is done, we're producing 480, 490,000 tons of volume at Celgar, and we had some time to kind of see what the cash cost of production is, then I think we'll have a good idea as to Rosenthal and Celgar.

But Rosenthal clearly has historic data. It is not going to be able to really improve its cost picture that much. So unfortunately you are kind of having one set of item numbers which are very much more predictable than our Celgar, which unfortunately I really cannot comment until I finish the necessary investments and other things that are on the table right now.

Okay. Maybe I missed it earlier as well, just obviously a lot of paper products' names have been hurt, significantly by energy costs. Can you give us kind of a breakdown of what percentage of your cost is energy and what types of energy are you hedged?

Well, in terms of our normal operations, if we run fairly steady, we don't have any energy cost as a whole because we produce electricity that we sell with -- that is offset by natural gas that we have to buy to fuel our home. And, therefore, on a net net basis, we actually have a slightly positive energy contribution rather than a negative. So we are not impacted by the high energy cost.

Celgar unfortunately is at a level where it is on a fine balance between positive and negative. So sometimes if there's some disturbances, we end up with some cost, which, of course, results from that, and we have to buy from the grid. And there is a slight cost in terms of our energy cost of production. But if it is all running well, we should actually have a positive contribution overall from our energy side. But we're not impacted at all by recent development.

Okay. Thank you, guys.

John Helms, Orix Capital Management (ph).

You touched on this a little bit, but I noticed the restricted group, the SG&A percentage dropped over 200 basis points Q2 to Q3. And could you touch on that again, why that lower SG&A cost there?

Well, I mean in the first part of this year there were things which clearly are, let's say, not always the day to day items in terms of you have to remember the first part of this year we completed the acquisition of Celgar, which involved not just other capitalizable cost but also costs which may not be as capitalizable. Also, typically the first part of the year has other costs related to the financial and other type of items, which, of course, we try to accrue the bulk of that throughout the year, but, of course, not everything is predictable. So you may have actual costs, which are higher than what the original accrual may have been forecast. So I think those are the more transitory things which goes through our P&L.

So we cannot give you a prediction. All we can say is that based on the third quarter type of SG&A type of numbers, without unusual items happening, those are probably close to our run-rate.

Okay. Do you have the outstanding revolver balances at Rosenthal and Celgar?

Yes, I mean in terms of the Rosenthal right now we are slightly drawn at the end of September. I think we had drawn 2 million out of a EUR40 million revolver. So in terms of the Celgar, I think out of the 30 million U.S. we probably were drawing somewhere in the range of EUR17 million or so, roughly $20 something million U.S. (multiple speakers). But we still have close to 40 million on the revolver for Rosenthal and some little room in Celgar.

And given you are running Celgar fairly full or above capacity, you have inventory in place to cover the shutdowns or maintenance in Q4?

Yes, the inventory levels are fine. I mean these are all being preplanned, so there is really no problems in terms of delivery or inventory level.

Heather Untez (ph), Independent United Capital.

It is Sheryl Van Winkle (ph). A couple of things. First of all, you broke down the CapEx nicely for the third quarter for the restricted group. Could you give us that for the second quarter, also?

I actually don't have the second quarter.

Or was it year-to-date? Year-to-date would be fine.

Well, I can run you through. You just want the restricted group?

Just the restricted group.

Yes, so Rosenthal first quarter was about .6, then .5, 2.5, and Celgar was .1, .5 and then 1.6 call it.

Okay. And could you tell us what the thinking is for the restricted group for the full-year '05 and for the full-year '06?

Yes, for the full-year '05, Celgar has got some deposits going out on the equipment in the fourth quarter. So our forecast there is 8.6, and then the forecast of CapEx for Celgar for 2006 is 23.7 million Canadian.

Okay. So the 8. -- is the 8.6 also Canadian dollars?

Yes, it is. Sorry.

Okay, that is consistent. And then on the Rosenthal side?

Rosenthal next year, we're looking at about 13 million in total, but of course, that has got a waterwash -- a washing project in there, which is a direct offset of wastewater fees that we would otherwise be paying. So net of that, we are in the 4 to EUR5 million range.

Is that for -- I'm sorry, for '06?

For '06.

Okay. And for the full-year '05?

Full-year '05 for Rosenthal will be EUR7.3 million.

Okay. So I guess for both companies, CapEx is sort of skewed toward the fourth quarter this year?

Only because of the prepayment that we have to make in terms of Celgar's (inaudible) next year and the timing of the investment next year for Celgar.

Okay. (multiple speakers)

Delivery of equipment. So yes, they have been skewed to the end of the year.

So now it looks like maybe there's a possibility that you will be moving depending on how the pulp market goes and such, perhaps you'll move some money from other parts of the operation into Celgar next year to fully fund the CapEx?

Well, I think you know the combination of Rosenthal and Celgar certainly there is one sufficient room internally. There is also the possibility that, you know, that the cash flow generation comes with Celgar may pay down a big chunk of that. But clearly there may be need, and we can direct some of that from the Rosenthal.

Okay. So you can pretty easily move the cash? There is not a problem with --?

Yes, there is not a problem.

Okay. And then I just wanted to understand on the emissions credit, now what you sold -- I mean are you selling like annual -- are you selling like quarterly emissions credits, or you know --? (multiple speakers)

(multiple speakers) no, well we (multiple speakers) is basically the total emissions that is required for the year. And basically I mean it would be kind of silly for us to sell it all or not sell anything because we will not know what the full requirements are for the year until we have a better idea of total production volume, the type of fuels that we actually consume because there's different carbon emissions between natural gas. We also produced some organic oils that are also burnable. So sometimes we will sell them or sometimes we may actually use them in our own line and not use natural gas. So it's the combination of our own fuel production fuel consumption that we buy from the outside in determining how much credit we need and likely to need. And, therefore, once we feel comfortable that we have more, then we can sell those.

Okay. So essentially what we should expect to see each year is at the beginning of the year, you will probably sell a good-sized chunk because you know that you're going to have -- you're definitely going to have some extra. And then maybe not selling anything or not selling much for a couple of quarters until you see kind of toward the end of the year how much you really have available?

More likely that towards the end of the year because we have to deliver the certificates at the start of the next year or the end of this year, so we will know based on our actual production volume and all of that, how much we really have in total. So you'll have some sales activity or no sales activity as a result of that in the fourth quarter. The first quarter probably less so because there is less certainty in terms of the actual fuel consumption and the production volume. So, as you go through the year, you have more certainty as to what you really require in terms of certificates to deliver.

Okay. So maybe the middle of the year is, as we saw this year, is kind of when we will see the bulk of emissions credit selling.

Yes, you will start to see probably from the middle of the year more confidence in the number of certificates required, and that confidence level will be further enforced for the balance of the year.

But just as a general concept, I just want to make sure I understand it probably that if nothing -- obviously things will change -- but if nothing were to change for next year versus this year in terms of your production levels, type of fuel, all of that, would you have the same amount of, you know, emissions credits to sell. And would you get about the same amount of money for them or each year (multiple speakers)

You know, the pricing is not determinable because it is the pricing which happens. So we cannot really tell you what type of pricing we will get. (multiple speakers) and in terms (multiple speakers)

Okay. But the number of credits?

No, I mean clearly we feel comfortable that we have sufficient credit for the expected production volume and the mix of fuel that we intend to use.

Now the mix of fuels that we choose to use is also dependent to a large degree on natural gas prices, as well as the price that we may receive for our own fuel production. So it's really all of those things which come into play in determining okay, how much emissions do we want to sell or not sell.

I may just jump in and give a little bit of additional commentary. We don't know for sure what the volumes are going to be until the end of the year, but we have a pretty good idea. We don't really know what the price is going to be at any particular point in the year. As the emissions market evolves, we will get a better feeling for that. So our strategy has just been to average along.

But the fourth quarter we believe we will have some emissions credits left that we will sell, and the price of that we don't know what it will be, and the actual number we don't know what it will be. But it will be a good number. And then we would expect next year if all things stay the same, production parameters stay consistent and the market that we're seeing today stays consistent, you will see very much a repeat next year of what you have seen this year.

And just generally, does it seem like -- I mean what we saw, for example, in the third quarter with what you got from your emissions and what you got from the second quarter, is that kind of pricing -- I know obviously it is going to change because natural gas -- or I don't know -- (multiple speakers) --?

Related to coal prices and other factors, but it's highly influenced by coal price.

So is the coal price what? Rises --?

Carbon and credit emissions tend to also rise. What happens is that you see when oil prices are high, many of the utilities end up substituting oil by using coal. Coal emits more carbon, and therefore, they need to have more carbon certificates to compensate for the higher volume of carbon emission. So it is really a trade-off between price, both between the carbon emissions certificate, as well as the coal and the overall BTU volume that they expect to generate for that price compared to oil.

Okay. So when oil gets to be higher relative to coal, then there is an increase in the price of the emissions?

Yes.

Daniel Paren (ph), Lawndale Capital Management.

This is on behalf of Andy Shapiro. I just wanted to ask a quick question regarding your targets of contract versus spot market, business going forward, especially given what prices are? And --?

Well, I mean Rosenthal right now runs close to 90% on contract arrangement. We expect to move all of our mills to those types of percentages. It will take time in Celgar because the Asian buyers typically are not really contract type of buyers. So they will be resistant, but we are pushing for contract arrangements.

On Stendal you will see that there will be a good chunk of it, not quite 90, but certainly in the more of the 70 type of range hopefully and maybe even better. But in the next short while, we will be moving and pushing towards the 90%.

And Celgar, did you say that?

Celgar is going to take a little bit longer because you know the way that the Asians and in particular China buy historically, you're going to still have a fair amount of volume, which is not strictly contract but really what you call delivery type of agreements where you know the volume that they will buy, but it is not as tight as normal type of contract arrangements that we have in Europe.

I guess that ties in a little bit to kind of your marketing strategy. You said you were changing a little bit for Asia. Could you go into a little bit more detail on that?

Well, I think that Celgar clearly the natural home market is North America. You know, there's a lot of tonnage in the Eastern part of Canada, which is high-cost NBSK production because of wood costs, as well as energy costs. And, therefore, we think that we certainly provide an alternative in terms of the customers who may be interested in a mill, which clearly is going to make investment in quality and continues to show very good cost development. And what we are trying to focus is a lot of tonnage to the natural markets in North America. And, of course, we have to be in China and the rest of Asia, but I think the best pricing overall will be to focus.

Andrew Shapiro, Lawndale Capital Management.

A few questions here if I could. In October it seemed as if Mercer was one of the leads in instituting price increases. Was that the case that you have become more of a price leader or one of the price leaders in the industry, and have those October price increases pretty much stuck?

Well, I think because we are a very large producer of marketing in NBSK, I think as our executives are now in position and we build further our sales team, we have to be part of that leadership position in terms of price. So you will see further actions in that regard.

In terms of the actual pricing development, we don't expect that the full price increases will be accepted in one go. I think it will take a little bit longer, but we are seeing at least some of the price increases that have been announced being implemented.

And then, you know, you're in London, the pulp period occurs traditionally this time of year. Are there particular windows for which price increases or price declines take place here? Is another one, for example, mid-November, post pulp week? What is generally the trend? Is this the buyers or the sellers time of year?

Well, I think in November it is more of a confirmation of whatever discussions that were occurring coming into the meeting in terms of volume commitment, as well as the indicated type of prices that may have been announced prior to that. And then after London pulp week, you see confirmation of both volume, as well as pricing. It is not likely that we will probably see at least considering there is only, what, just over a month left of the year, that you will see much further action. And typically winter months are weak in terms of the actual paper production. So I don't think we will see a lot of activity I think after the pulp week.

And then, of course, there's the next conference in the early part of next year for the Asian side happening in Vancouver. So that will also have some impact. But I think we will have to see as we come out of the winter months how these inventory levels are for pulp and the paper demand, and then we will see what sort of actions in terms of price can happen.

You cited how there are -- we will call it several facilities in aggregate over a million tons that are on the bubble. They are right now below their cash production cost. They are thus losing money. Do you have any insight or indication as to how long they might be able to hang on, all things being equal on the pricing and cost structures presently, when some of these might drop -- when some of these players might drop out?

Well, I mean that is -- I guess (multiple speakers)

-- out a question?

But really at the end of the day, all I know is that there is several million tons of very high cost production, not just 1 million tons. In fact, in Eastern Canada, there is almost 2.5 million tons of very high cost production. At the end of the day, the decision to shut down will be really based on factors, not just price and cash flow, but corporate types of decisions and all these other things, which are unpredictable, and therefore, all we can point to is that present market conditions are such that there are many producers who are actually moving cash money even before any other costs, and therefore, you cannot have this type of situation which is sustainable over long-term. But something has got to break. Either that capacity has to be taken out or prices have to move of. It is just not a situation where you can have -- continue for an extended period.

In Eastern Canada, in particular, you just cited that one of the cost factors that are impacted and I guess you would say would be legislative or regulatory based with respect to their fiber supply. Can you give us a little bit more insight on that, and are there any particular milestones that are coming up that might put the nail in the coffin here?

No, we know that Québec has already announced and is implementing the overall reduction in harvesting. I think that is 20% reduction. Ontario also has a similar type of policy in terms of reduction of forestry availability, but that is not really the only driver. I think what you have got is sawmills which unfortunately are older, and therefore, you have sawmills which inherently have higher cost versus the interior British (inaudible) mills. So the sawmill industry as such in Eastern Canada is also weak. And, therefore, the mechanics of this industry are that you need healthy sawmills providing residuals to pulpmills which are healthy.

But if you have both weak components, then it is more likely than not things have to change. Because the sawmillers themselves are not really making a lot of money and finding huge pressures from let's say more efficient producers in British Columbia, and the pulpmills again are under pressure because there is much better producers both in Canada, as well as in Europe. And I think it is these combination of things, not just regulatory issues, which are going to make the difference.

Does the substantial rebuilding needs in the Gulf Coast in Southern United States work its way up and find its way into your raw materials or other cost structure supply at all?

No, I mean those have really no influence on us.

If you were to enjoy a price windfall, the supply dropped out of there, price went up and these people are not reopening or just something happened where there was a windfall, and this company started to generate substantial amounts of additional cash flow, what is the sense of the Board of Directors in your strategic plan with respect to that cash in terms of prioritization? Is it debt paydown? Is it acquisition? Where would you be deploying this incremental cash? Into the paper operations? What is your priority? What are your priorities?

I think the priorities are the highest return for the investment. And clearly when you have that high cost debt and you know you are paying a big chunk of that, clearly there's a big motivation to strive to reduce that cost. But, you know, we will get to those decisions once we have that scenario, but clearly we know that the finance cost certainly is high both -- and there is a strong motivation why we should probably try to look at reducing those costs.

Okay. And speaking of the paper operations, because obviously that could be some sort of cash as well for a similar issue, paper ops are not really generating all that much return. (multiple speakers)

Paper operations, as you know, has really not been a big focus for us. We continue to make improvements only because we feel that, of course, being there's really not that many alternatives in terms of -- I mean we would certainly look at all available alternatives, but at this point what we're focusing on is to make sure that we maintain the focus on production efficiency, the cost, and we are not really interested in putting a lot of money into the paper operations if any.

Right. And is that similarly in terms of senior management time as well?

Well, I mean we don't spend that much time in terms of the actual paper side. I have very good executives running the paper. I mean there is a certain amount of time clearly in terms of the strategy and other things that we have to discuss. But I would say the bulk of my time, as well as the other executives time, at Mercer's level is focused on the pulp side.

Now, are these particular businesses you have three fabulous pulp facilities that are some of the lowest cost production costs in the world in your sector. Where do the paper ops stand in terms of their age and production efficiencies?

Well, I think on the Heidenau side, the world paper, it is competitive, but the industry is under pressure, a little bit like newsprint in a way that the actual consumption of paper-based wallpaper is dropping. We have been able to implement the production of nonwoven, which is a product which is growing. We're a leader in that particular product. So I think all in all considering the weak conditions of that particular product, Heidenau is certainly doing a good job.

In terms of Fahrbrucke, clearly it is a graphics machine, very small. We would be one of the poorest producers in terms of cost addition for that. (multiple speakers)

Strategically, Jimmy, does it make any sense to possibly -- I mean these are not really already considered by it seems like those core assets. Wouldn't it make sense to monetize them and redeploy the capital and debt paydown?

Well, I mean we are always looking at the alternatives in terms of the paper operations. I think that our focus, as you know, is on Paul. We will be looking to make further changes in terms of the paper operations because we think that clearly in terms of subsidies and other costs that go with that we also have to include those in determining what is the best strategy for an exit.

But you are open to it if that made sense, you are open to it? There is not --?

There is no reason why we would not be open to that.

Ladies and gentlemen, we have reached the allotted time for questions and answers. Management, are there any closing remarks?

All right. I thank everyone for coming to today's call. You know, certainly I think there was a lot of interest in terms of the questions that I heard today. So again, I thank everyone, and let's hope for further improvements in the pulp condition. Thank you.

This concludes today's conference call. You may now disconnect.