Mercer International Inc (MERC) 2005 Q4 法說會逐字稿

Good morning, my name is Kimberly and I will be your conference operator. At this time I would like to welcome everyone to the Mercer International fourth-quarter '05 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Eric Boyriven of Financial Dynamics. Please go ahead, sir.

Good morning and welcome to the Mercer International 2005 fourth-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 that were made in the press release. According to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 we'd 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 now like to turn the call over to Jimmy Lee. Jimmy, please go ahead.

Thank you, Eric. Good morning and welcome to Mercer International's fourth-quarter and year 2005 conference call. The fourth-quarter results and the year as a whole reflect a continued weak pulp market, the strong Canadian dollar against the U.S. dollar, and the continuing ramp up of the Stendal pulp mill.

Significant accomplishments were achieved during this year in all our pulp operations. As examples, Stendal's cash cost per ton decreased from C$513 per ton in 2004 to C$465.54 per ton in 2005. This reduction in production costs was greatly matched by the strong Canadian dollar. Stendal also made strong cost savings with cash cost steadily improving month over month, moving from EUR325 per ton at the beginning of 2005 and achieving a cash cost of EUR306 for 2005.

The year 2005 represented a transition year and further gains in production efficiency lay ahead. Also, the efforts made during 2005 in our sales and marketing will now be realized in the coming years. The fourth-quarter and year-end results were greatly impacted by the strength of the U.S. dollar against the euro. This was positive from an operational point, but was negative for the non-cash valuation on our long-term debt. At the Stendal facility debt has been swapped to U.S. dollars.

In addition long-term rates in Europe were slightly lower than the prior year which had a negative impact on the non-cash valuation of our fixed interest rate swaps. As a result for the fourth-quarter we had a non-cash valuation loss of EUR16.3 million related to the currency before minority interest which was offset by EUR12 million before minority interest valuation gain related to the interest rates on our long-term debt.

For the year we recorded a total unrealized non-cash holding loss of EUR70.3 million related to currency before minority interest and an additional EUR3.2 million unrealized loss before minority interest related to the fixed interest rate swap on our long-term debt. An additional EUR2.5 million was realized on actual payments related to long-term debt for the currency and interest.

Considering the weak market conditions prevailing in 2005, we were able to generate positive operating EBITDA throughout the year -- the project financing for the Stendal facility anticipated the cash buildup needs for the interest and other required payments that resulted from the startup inefficiencies and the continuing ramp up of the mill. All indications are that the ramp up of the Stendal facility is going according to plan and that the available long-term financing structure is sufficient to meet all of the needs under present operating conditions.

The fourth-quarter performance at Stendal was negatively impacted by the shutdown for maintenance and tie in of the two new additional digesters. At Celgar a short maintenance period was taken because of industry wide issues with the B.C. Boilermakers Union. However, several unscheduled equipment related downtimes occurred in October and November, greatly reducing plant efficiency. With the recent organizational changes made we believe that such occurrences will now be minimized moving forward.

Celgar has deferred the balance of the maintenance work for the first half of 2006 and a total maintenance downtime of 15 days will occur in 2006 resulting in about 19,500 tons of lost production. Although much has been gained at Celgar as to efficiency, we believe that there is much more room for cost savings and better mill net realizations even before the completion of the announced capital project investment. Celgar in 2005 produced a record volume of 444,676 tons.

Rosenthal had another solid performance this quarter, even though performance was negative impacted by a plant shutdown which was moved from the third quarter to the fourth quarter. All plant maintenance was completed ahead of schedule which allowed for an early start up and additional production. For the year Rosenthal achieved a record production of 316,601 tons and realized continued incremental cash reductions over 2005 -- 2004.

Continued focus on mill availability or uptime will result in further production volume and lower unit costs at all our pulp mills. The paper operations were impacted by continued weak market conditions and in particular low prices for wood free graphics grades. The wallpaper production at Heidenau weathered the conditions better due to continued growth in nonwoven wallpapers. We expect that the conditions for wood free graphics grade will not change much due to intense competition from new facilities located in the emerging markets. For the nonwoven wallpapers we expect demand growth to continue.

As we enter 2006 we're optimistic in light of recent developments. The much anticipated shutdowns at small inefficient North American pulp mills is finally happening due to the strong Canadian currency, high-fiber and energy costs. There are still additional production facilities that are running with insufficient cash generation for basic sustaining needs and thus face some hard decisions in the coming year -- coming months.

There is no new NBSK pulp capacity to be built in the coming years while demand is still expected to grow at approximately 2 to 3% per year. China continues to be the biggest contributor to this growth. The growth in China's import of NBSK pulp is approximately equivalent to one Celgar capacity per year and growing. On that note, I would like to open the call to questions.

Operator, I believe we're ready to take questions.

(OPERATOR INSTRUCTIONS). Bruce Klein, Credit Suisse.

Good morning. If you could just help us a little bit more with Celgar. How many days -- I think there were 30 days -- I apologize -- 30 days or 30,000 tons of downtime you guys took in the fourth quarter on a consolidated basis. How much of that was in Celgar versus Rosenthal versus Stendal?

Hi, Bruce. Yes, Celgar produced 101,000 tons in the fourth quarter compared to 118,000 tons in the third quarter. So that's 10,000 tons order of magnitude.

Was that all downtime or was that some market?

No, it was related to unexpected equipment failures which occurred in October and November. One of the issues was, of course, the way that Celgar had organized the maintenance department. And of course, that has been changed. But of course, historically the organizational structure meant that the maintenance was not always well coordinated and therefore there was some equipment-related downtime which was expected and this was quite acute in October and November and resulted in a significant amount of tonnage, of course, not being produced. The organization has been rejigged and the plant and equipment I would say is running much more reliably from that moment on.

Okay. Was there some note in the press release regarding – Celgar, I think, is it two-thirds to Asia? And I think there was some reference to lowering that amount. What's the targeting goal and timing?

Well, we're shipping as much of the volume to North America and, as you know as a result of the recent developments certainly in the eastern part of Canada, we expect to make very good progress in that area this year. I can't really say how much of that total volume which used to go into China will be reduced, but we expect to try to move at least somewhere in the range of about 80,000 additional tons out of the China market.

Okay. And you're seeing productivity you said materially better since October/November at Celgar or is that too strong a word?

Well, I would say that the mill from the time that we took to go over in February has progressed quite nicely month over month. It was only in October and November we had these unexpected equipment failures which, of course, created enormous costs and it skewed the cost curve quite a bit in terms of the progression that we had reached to that date. I would say that we're now back on track. We are continuing to make very good production levels in December and January as well as February. So I think that overall the cost curves are progressing as expected as long as we don't have these unexpected downtimerelated equipment failures.

And how much downtime was at Rosenthal in the quarter?

It was basically maintenance related.

It was maintenance related, Bruce, and it would look like it was, I'll call it 7 or 8,000 tons.

And just the revolver availability at the restructured group, Celgar and Rosenthal?

The European revolver is completely undrawn at this point, so there's EUR40 million of availability there. And for the Canadian revolver it’s probably about 10 million U.S.

Available?

Available, yes.

And David, maybe just remind us the closest covenant you have on those facilities and where you're at now versus the test?

Well, a European revolver doesn't really have the same financial covenants that you’d expect in North America, so it's fully available. And for the Celgar revolver, it has the typical financial covenants, you know, total funded debt to EBITDA, current ratio interest coverage and distribution coverage ratios. And our approach would be if the EBITDA, because of the Canadian dollar as we go through this improving period is not sufficient to take the full cash on a growing base that we might otherwise want. We'd just fund it through cash that we have in the system. We can bring money up from the Rosenthal system for example. We have lots of cash and liquidity without relying on that revolver in any particular way. It's just a matter of sort of being as efficient as we can with where our money is.

And lastly and I'll pass it on -- just the energy side. Remind us again how much natural gas you use at Rosenthal and Celgar?

I don't have the metrics where I can give you that breakdown, but I can give you some flavor for energy costs. In Rosenthal when we had quarters like Q2 and Q3, we were producing profit on a net energy basis, so roughly in the EUR4 or EUR5 per ton positive. In Stendal in the same periods it was a little better, in the EUR6 per ton. In the fourth quarter where your tons are down because you had maintenance shuts Rosenthal goes down pretty close to zero. Stendal is pretty close to zero. And the Celgar mill in the first three quarters averaged around a net EUR18 per ton and in the fourth quarter, because of the upsets and the lower tonnage was down and our energy costs shot up to about EUR38 or EUR39 per ton. So that's where (multiple speakers) where you see the big impact of lower volumes and upset production.

Celgar in the fourth quarter you referenced 38, 39 bucks. That was the energy cost per ton at Celgar in 4Q?

That's right.

And the emissions -- could you just explain that one more time and how much is left and if energy prices stay where they're at, expect further emissions credits into that cash?

The emission allowances are basically issued by the German government pursuant to their Kildow agreements and, of course, within the frameworks of the European Community. And the allowances are based on several factors -- consumptions of fossil fuels as well as the production levels as a whole. Therefore the available allowances will be dependent on the consumption of fossil fuels versus other forms of fuels available as well as the overall production volume as compared to the expected production levels through the year.

And through a combination of that what we have is available allowance, if you may, where we have access to that required based on the overall consumption of fossil fuels as well as production levels. And we have been able to turn that into cash through the available markets that are present now, and you saw that in every quarter in Rosenthal and Stendal, we have had available allowances for sale. And we continue to believe that moving forward, because of the efficiencies that we will have as a result of the combination of fossil fuel consumption as well as overall levels of production, that moving forward this year as well as next year, our expectation is that we will continue to have excess allowances.

Now the available allowances after 2008 will be then reviewed this year. And as of 2008, moving forward the available allowances will be adjusted, depending on whatever levels that the government feels is warranted by the industry. So for 2006 and 2007 we believe, based on our present run rates and the type of fuels that we use, that allowances will be available to us to monetize.

How is the value on the balance sheet? How much or --?

We don't basically have a valuation on the balance sheet. It basically comes in as a -- I'd say reduction of expenses.

And those numbers that are on the income statement are cash?

Yes.

They're cash each period?

That's right.

And when you're netting out -- when you're looking at the energy net number you gave us earlier, those reflect these emission allowances, I assume?

No, they're there as a separate line item. So the energy component does not include the allowances.

Okay. I'll pass it on. Thank you, guys.

Ted [Wolf], U.S. Financial.

Good morning, Jimmy.

Good morning, Ted.

I have two questions. The first is on the industry. We've seen some movement on the shutting down of noneconomic capacity. I wonder if you have some idea and could give it to us, of how much excess capacity is available to be shut down? And how much has already been shut down and what do you think about the rest?

You know, we believe at this point approximately a million tons of NBSK production has gone off-line from, let's say. about the third quarter of last year and the first quarter of this year, in the sense that they've announced closures or moth balling. Of course, those tonnages take time before they go through the system in the sense that, as an example, Squamish went down in January but, of course, tonnages will be available until all the inventory is sold out. Also Neenah Papers with their Terrace Bay mill basically shut down because of wood-related issues, but of course they have inventory which will work through the system.

So when you say x amount of tons it doesn't automatically reflect on the sales volume and, of course, it takes time before it reflects on the pricing. There is, in terms of the NBSK grade, probably another million, 1.7 million tons which is slated to be very high cost production. So there is anywhere between say zero to 1.7 million tons of potential shutdown which could occur in the coming months.

In terms of hardwood, there is approximately somewhere in the range of 2 plus 2, maybe 2.7 million tons of capacity which probably is also marginal. But really that grade is not our competition. Our competition really is the NBSK or the softwood producers. So we think that certainly there's a lot of tonnage which is still very high cost and is potentially available for shutdown.

First of all, the 1 million tons that's been announced, how long do you think it would be before that is out of the system?

Well, I think by the second quarter of this year we will probably have all the inventory out of the system.

What do you think about the second million tons?

Well, it depends on the pricing scenario or the pricing development of NBSK moving forward. Because clearly, if prices continue to move up significantly, then this will buy breathing room for the high cost producers. Right now the increases are still -- although they've been very beneficial with the continued increasing Canadian dollar, let's say it hasn't been as beneficial as one would expect it to be. So I think continued price increases certainly will mean that there's probably potential breathing space for them and there will be at least maybe further months before they actually announce shutdowns. But we'll have to see how it develops.

The 2 million tons altogether, is that all Canadian?

I would say that it essentially is Canadian.

I see. Now along another line, if you look at Rosenthal as an optimum operation -- and of course, they never are -- but Rosenthal stands among the three as the optimum, I would say. If you look at Rosenthal as 100 that is optimum, how would you rate Stendal and Celgar? And what time frame would you put on moving them up to 100?

I think the best answer for that, Ted, is that if you actually go back and look at the cost development curve of Rosenthal and our indications are Stendal is progressing very close to the cost development curve that we had at Rosenthal. So it's going pretty much according to plan. And therefore in the next few years, the cost development and the mill net realizations will be very similar to what we have in terms of margins at Rosenthal.

In fact, Stendal's production cost is lower than Rosenthal's today, but the reality is the distance to market, the fact that it had additional discounts because of the introduction of that particular grade last year meant that the margins, of course, was much lower than Rosenthal. But if you look at strictly cost of production because of the economies of scale, Stendal is already at a level which is better than Rosenthal.

Now Celgar on the other hand, we've had some teething issues. We believe that the cost development curve is now starting to go according to the Rosenthal development curve, if you take February as the starting point. So if we say rather than Celgar as being completed, but really we took it over in February, and if you take that as the construction completion date and you do the progression, then Celgar is moving pretty close to the development curve too.

The only hiccup we had was unfortunately in October and November which set back some of that development. And clearly Celgar still has very good cost development in Canadian dollars, but you don't really see it because of the big increase in the Canadian dollar against the U.S. dollar.

I understand that. I wasn't talking about pricing or currency. I was talking about operations.

Yes, and I think that if you look at all of them you can't just say that Rosenthal is like the premier unit and how do they rank --.

No, I didn't mean that. What I meant was that Rosenthal is, after all, an established mill running about as well as it can.

Yes, so if you say Rosenthal started in 2000 and Stendal -- if you look at the development curve, clearly Stendal is like after the first year of the startup compared to Rosenthal and the same with Celgar. So the curve development of the cost is projecting very closely to what Rosenthal's development was after its startup in 2000 on a proportionate basis.

So you have a couple of years to get to that optimum in each case?

Well, even Rosenthal is still making incremental progress in its cost, but of course it's plateauing. So what you're going to get is the best development in the first two years and then, third, you're starting to see it starting to plateau. So I think you'll see very good progress this year because this clearly is year two and we'll make further progress year three and then you'll see it starting to plateau after that.

Thanks, Jimmy, that's very helpful.

Mark Bishop, RBC Capital Markets.

Good morning, Jimmy. A question first on the sales realization, I'm just wondering, they did particularly for Stendal move in a direction that I wasn't expecting. Just wondering if you could provide maybe the mix changes in the quarter that might have impacted that or what other explanation there might be for the weaker realizations at Stendal. It looked like the discount to list actually grew quarter over quarter.

Yes, and it had nothing to do with quality. Basically what you have is that when you are a spot seller, which unfortunately Stendal was a spot seller all the way through last year, you have a much bigger impact in terms of sales discount to list when the market is weak. So if you look at the fourth quarter the market was very weak and, as a result, the discounts widened.

Typically the first quarter, if you look back last year, the discounts were much better between Stendal and Rosenthal in comparison mainly because the market was stronger. It's really indicative of the way that the spot market works. Clearly China is a big component of that and China influences that discounting from the list price and it's just the nature of the spot. It had nothing to do with quality or any other thing.

So as we look into this quarter obviously we've seen some strength in the pulp markets and particularly (indiscernible) in China. Do you expect the mix for Stendal with respect to the markets to be about these same so that we might see that impact from the China (multiple speakers)?

What you're going to see both in Stendal and Celgar is that as they move away from the spot type of selling to contract volumes, as well as the reallocation of the production to better logical customers, what you're going to clearly see is a significant improvement in terms of the discounts that we have to give. And plus the market is stronger, so automatically you're going to get a tightening in terms of that discount plus the fact that you get additional improvement resulting from redistribution of the customer base and, of course, contract volume.

Okay. If you were to compare like for like sales at Rosenthal, say into Europe or the U.S. market, Rosenthal and Stendal on a contract basis, are you now seeing very comparable discount levels?

What you see actually is that Rosenthal, which is an established player at a good market versus let's say a spot market, what you get basically is a deterioration between Rosenthal and Stendal, Celgar somewhere in the range -- if you're a spot volume, somewhere in the range of 4 to 5% additional discounting. But as the market improves the discounting between the contract and spot basically tightens to maybe more like a 3 to 2%.

Okay. Great. And just back to Stendal -- or sorry, back to Celgar if we could on the upset, is there any additional required capital cost as a result of what happened in the quarter or was that strictly -- was that addressed in the quarter?

No, it was just basically equipment basically having operational problems. Some parts of the machine basically would break down and we would have downtime to repair that. So there wasn't any major equipment failures, it was just normal but numerous equipment failures resulting in the mill having to go down to address that particular repair issue.

Okay. I guess what I was thinking was you're starting now in this spring the washer project. Did this breakdown bring to light perhaps any bottlenecks that you might start to run into, that you have identified that you need to spend time (multiple speakers)?

No, there were no new equipment issues that we did not already identify.

And if you could, the next couple of quarters just lay out the Celgar downtime as it refers to the closures required for the washer project?

In the first half of this year we're going to have, of course, additional downtime related to the deferment of the recovery. So we expect that somewhere in the range of about 13 days in the first half of this year and another two days in the fourth quarter.

Okay. And just for your overall pulp sales, do you have a number for the mix between China, U.S. and Europe?

We're hoping that -- in terms of Rosenthal, of course, we don't sell any to China. Stendal, last year I think we sold somewhere in the range of about 160,000 tons into China. We believe that volume will be reduced significantly, maybe less than half of that volume will go into China this year. I think Celgar -- I think we shipped somewhere in the range of about 180,000 tons into China.

In '05?

And I think we would expect that that volume will be reduced, maybe not to half of those levels, but significantly. Maybe 80,000 tons of that will be moved away from the China market.

Okay, thanks very much.

David Frey, Stanfield Capital Partners.

Thanks for taking my question. Back on Celgar on the realizations, can you kind of quantify what you expect both in terms of more contracted volume versus spot as well as freight savings on the less tons into China. what you think that's going to do to the realizations at Celgar?

Well, it's a bit of a moving target because clearly what you're having is that the freight rate that we have into China is quite favorable compared to North America. So in terms of the freight savings it's really not the most positive area in terms of the U.S. sales, but where we get the benefit in U.S. sales is basically the higher list prices and of course the lower discounts overall, because they're more steady type of buyers. So what you're getting is a better discounting as a result of a more reliable customer and you can then better improve the freight and other issues so you would get margin improvement.

In China what we are also demanding, and the rest of Asia also, is that they all have to go into more contract type of buying arrangements, which clearly they are not used to. So it is going to change in terms of the mix of the customers away from essentially all spot type of volume to now 80 to 90% over time into contract type of arrangements. Now this takes a little bit of time, but we believe that the margin difference -- the target, I think, is we're trying to achieve somewhere in the range of about a 2 to 3% improvement in terms of mill net overall.

Okay, great. And then, in your conversations with Chinese buyers and elsewhere, given the capacity closures over the last six months, are you seeing any indications or hearing any indications of people increasing their usage mix towards hardwood with the Latin American capacity coming on and the NBSK capacity decreasing?

If you actually go through this argument about the substitution issue, if you actually go back in historic data, you know the substitution played initially a big role in terms of the mix for the graphics type of grade. But if you look at the overall consumption volume NBSK has continued to grow because it has become more important in other components of papermaking, as example, tissue. So the component of softwood and tissue has grown and of course in printing and writing grades, NBSK consumption has declined.

So overall on a broad mix of paper production you still continue to see that NBSK is a very important component to the paper maker's recipe, but only if you look at the particular grades then you'll see either a positive impact or a negative impact. And that's why we just look at the overall growth over a long period and say look, NBSK continues to grow at 2 to 3% per year. Yes, there is substitution, but in other products it becomes more relevant and therefore demand grows there.

And we see in China, although hardwood imports last year actually was not that good because of the Hainan facility coming online, if you look at NBSK demand growth and shipment into China, it continued to grow as expected which was somewhere in the range of Celgar's quantity of about 450,000 tons and it's continuing to grow. So this year we believe that the consumption will grow in excess of 500,000 tons in imports. So where is that marginal increase going to come from when we've had 1 million tons basically disappear from last year?

I guess that's the question. In looking at where the Canadian dollar continues to go, one would expect more NBSK coming off-line, but we also know there's a lot of hardwood coming online. So I'm just wondering if there's ability on the buyer's perspective to turn the dial a little bit further.

Certainly in terms of printing and writing grades, the level of NBSK in their production has dropped to levels where there's very little softwood being consumed for that. But at the same time in terms of the other grades, as you know, China's production of tissue is going to grow quite significantly because of APP's stated ambitions in this particular area. And we know that tissue production consumes a significant amount of softwood. So we don't see the substitution issue actually being relevant at all in terms of China because the mix of production in China is changing also and it's changing really to the grades which demand more softwood versus hardwood.

So my expectation actually is for continued growth in China, especially in regards to NBSK, less demand growth in terms of hardwood because they are also looking to become more and more self-sufficient in hardwood production or pulp as a whole. But we know that unless they're able to tap Russian wood it's not likely that NBSK or softwood type of production is realistic.

And this certainly means that for the next several years and 10 plus years, it's not likely that you're going to see any real capacity growth in China for softwood. So that means that the demand has to be met somewhere and it's only going to be met from the existing producers. So we believe that we are looking actually for much better times in terms of NBSK production once this transition period is over. And we think that we've finally reached the stage where a lot of people are throwing in the towel.

Right. And then just lastly on the restricted group, what would your seasonal working capital bill be for this quarter? Is their liquidity there significantly less due to inventory builds, wood builds, anything else seasonally?

No, not in the working capital, David, it's not a -- the non-cash working capital, there's nothing really huge in the seasonal issue going on there. The liquidity in the restricted group is good, as I mentioned. We've gone lots of cash on hand in the Rosenthal system and we've got a full EUR40 million operator available to us.

There's not like a big woodchip build or anything in Celgar and at Rosenthal?

Well, I mean, you're going to have, of course, now a rebuilding of some of the wood inventory because we're now coming out of the winter. But at the same time with the better markets what you're seeing is, of course, diminishing inventory of finished product. So on an overall basis, I think you're not going to get a lot of changes in terms of the current assets build because of the change of, let's say, finished product inventory versus raw material type of inventory.

Okay, great. Thanks, guys.

Tony [Delterone], Federated Investors.

Hello, gentlemen. A couple of quick questions for you. Capital expenditures at the restricted group level in 2004 and 2005, could you provide those, please?

Sure. Let's do 2005 -- so in Rosenthal, it was EUR6.8 million and Stendal – well, it completed the project recently so we didn't have a whole heck of a lot, but you could call it 2 to EUR3 million just on our EPC settlement. And for Celgar we spent EUR5.2 million.

And anything at the corporate level worth mentioning?

No.

And then in 2004 what would those numbers have been, please?

I don't have them here in front of me. Stendal obviously was huge.

Celgar was zero.

Celgar was minimal and --.

Rosenthal about the same.

(multiple speakers) at the EUR5 to EUR6 million a year range.

Very good. And you mentioned the amounts available on the restricted group revolvers. Are there any letters of credit outstanding against those or any required minimum balances such that those are reduced?

No. You have the financial covenants which are EBITDAbased, so depending on how the EBITDA in Celgar develops, the borrowing base does go up and down. But the cash in our system more than compensates us. Nothing that is on our radar screen is a concern at this point in time.

And on the European side on the Rosenthal credit facility there is no, let's say, LCs that have been issued against that line. It's unencumbered.

Very good. And is that typically the case at both of them, that those would not be outstanding against the lines?

Yes.

Okay. And then with regard to downtime, was there any downtime at Rosenthal in the fourth quarter?

Yes, just the normal maintenance downtime at Rosenthal. The third-quarter maintenance was deferred into the fourth quarter.

Okay. And can you give us an idea of what that was in days and tons, please?

It was actually shorter than the actual budgeted.

The production in Rosenthal dropped from the third quarter about 83,000 tons down to call it 76.5.

And is it fair to say that that was all essentially the maintenance downtime days?

Yes.

Okay. And then you made the comment earlier that at Celgar essentially the delta that we saw from 118 days in third -- I'm sorry 118,000 tons in third quarter to 99,000 tons in fourth quarter was essentially, again, all the downtime only here, of course, it was some unexpected downtime. Was there any unexpected downtime in December or in first quarter to date at Celgar?

Let's say that you always have some equipment-related issues, but there was no material downtime in any of our mills related to equipment problems.

Very good; that's comforting to hear, thank you. And amidst the downtime that will be taken at Celgar in the first half of next year, can you give us a sense of whether the downtime that you've mentioned would be more first quarter versus second quarter? And can you give us an idea whether production at Celgar will be more on a third-quarter base or a fourth-quarter base?

Yes, we basically are projecting about five days will be in the second quarter and eight days -- I mean, the first quarter and another eight days in the second quarter for Celgar.

And then two days in the fourth quarter?

Yes, so it's five days and eight days -- first quarter, five, second, quarter eight.

Okay. And then zero and then two.

Two in the fourth quarter.

Right. Okay, very good. So fair to say that -- and let's see, we had how many days of downtime at Celgar in the fourth quarter of '05? 13 days?

(multiple speakers)

No, there would be more like 13 plus days.

It was 13 plus days equals that 17,000 tons differential?

Yes, and as you had five days of scheduled maintenance, but then you have to translate all the unexpected downtime into days.

(indiscernible) 900 tons a day.

900 tons a day at Celgar, okay. And could you then -- again, assuming there's not unexpected downtime, I guess it would be fair to say that production ought to be up in first quarter versus fourth quarter, maybe not quite back to third-quarter of '05 levels, but closer to that than the December quarter numbers?

I would say that the production volume in the first quarter certainly will be much better than the fourth quarter because the maintenance downtime in the first quarter is much lower than the prior quarter.

And can you speak to contractual arrangements for Celgar? Is it fair to say that in 2005 you were selling very little volumes, if any, under contractual arrangements, that all that bout kicks in in '06 to the extent that you're able to shift volume over to contracts?

Yes, you'll see the shifting over into contracts throughout this year.

Okay. But essentially the number was zero on contracts in '05?

For all intents and purposes.

Very good. So it's just going to be a work in progress, slowly working your way forward and it's probably amidst that 80,000 tons you want to shift into Canada that you'll find your contractual volume. It will be some part of that.

And also we're demanding contractual arrangements to a lot of our Asian buyers as well.

And from the Celgar mill, obviously you had mentioned that about 180,000 tons last year went to China. Is it fair to say that essentially 100% of the rest was Canada or maybe a little bit in the United States?

No, you have additional tonnage into the rest of Asia. Japan represents anywhere between 30,000 to 35,000 tons, Korea another 30,000 to 35,000 tons, that type of thing. You have some into Indonesia, even. And of course, North America represents a big area of growth for us because, as you know, there's very little production of market NBSK in the U.S. while there's still a significant amount of paper production in the U.S. So Canada is a very small market but really the U.S. is the big market for us.

Okay, very good. Thank you, gentlemen.

Can I just correct you on the tons per day? I had Rosenthal in my mind when I gave you the number. For Celgar it's 1250 a day.

1250 a day for downtime whereas Rosenthal is more like 900?

Correct.

Thank you very much.

John Helms, ORIX Capital Management.

Yes, what was the outstanding Celgar revolver at year end? Actual amount drawn on the revolver?

Okay. So we've drawn EUR10.6 on an availability of about 45.7. That equivalent is 12.5 less on the 30 million U.S. available.

Okay. And what is the timing of the increased production of Celgar? When is that going to hit? It sounds like early 2007.

You're going to see actually several stages of increasing production. You're going to get continued efficiency gains, so we'll be moving more to the 450,000 tons without any equipment changes. And with the equipment being modified in the third quarter of this year you're going to see some incremental benefit. And then the final stage will be in the end of the first quarter of 2007. So you'll see a gradual ramp up from presently around the 445,000 tons gradually to more than 450,000 with really no capital investment and then moving onto 470,000 after the completion of the projects. So we will see the 470,000 type of level probably going into the second half of next year.

Okay. And then for Stendal you have capacity increases coming on there too, right? When is that going to hit?

No, Stendal will just incrementally grow because, as you know, last year the production was about 88% of the installed capacity of 550. We believe this year we will be slightly exceeding that. So that means that our production volume should be more than 550,000 tons. And then we will gradually ramp up from there further. And with the two additional new digesters we expect that the overall, let's say, volume available in terms of production capacity will be more like 600,000 tons, based on the two new additional digesters. So you'll see Stendal gradually moving from the present rate to more like the 550,000 plus and then moving forward to the 600,000 tons.

Okay. It looks like at Rosenthal, SG&A was a little bit lower Q4 over Q3, same at Celgar. Is there any trends we can count on there, or is that just noise?

No, I don't think the SG&A is really that critical. Overall where we're seeing the real focus, clearly, is in terms of the variable costs, in terms of the raw materials, etc., etc.

Right. And then can you put a dollar amount on the maintenance problems at Celgar for the quarter? It seems like production costs on a unit basis were up quite a bit and I'm trying to get a feel for that.

It's difficult to say. All we can say is that the lost tonnage means that if you look at an EBITDA basis quarter to quarter, you're looking somewhere in the range of, let's say, from third quarter to fourth quarter of somewhere in the range of about C$70 per ton cost impact.

Per ton of production?

I mean uro, yes.

Euro, okay. All right, thank you very much.

Andy Shapiro, Lawndale Capital Management.

Good morning. (technical difficulty) I wanted a clarification. I know you've said it, I'm sorry to have you do it again, but I'm trying to get the right number for each of the (technical difficulty). I understand in '06, correct me if I'm wrong, you expected 15 days of downtime 5, 0, 8, 2 in terms of the quarters.

For Celgar.

For Celgar.

Yes.

(indiscernible). I'm trying to understand, in Q4 you had equipment failures, this and that and issues in certain equipment that caused downtime and reduced production (technical difficulty) primarily October and November (technical difficulty) the fourth quarter that also I think planning to do your general annual maintenance. So can you tell me again, and I think it is again and I'm sorry, how many days of downtime you had in Q4, the three months related to the equipment failures? And then how much related to normal maintenance and the total lost production tons so I could back this out and try to figure out what you were -- kind of normal cost per ton would have been for this (inaudible)?

Well, I think we had 17,000 tons roughly of lost production. We produced -- at Celgar you take about 1,200 tons as a daily production volume.

Not 900?

No, that's Rosenthal. And so if you look at the actual lost days, we had five days of scheduled maintenance and then the rest were basically related to the equipment failures.

Okay. And then for the coming year when you say 13 and then 5, 8, 2, that's really just your normal maintenance you're expecting for the coming year?

Well, this is a little bit different than normal years because we have to, of course, do the recovery boiler maintenance which would have occurred in December. But we have to defer that because of the problems with the B.C. Boilermakers Union industry wide. And therefore all of the pulp mills which were scheduled to have their recovery boilers maintained in that quarter had to defer it into the following year.

So there will be a lot of pulp production which actually will come down this quarter in Canada, because a lot of the B.C. mills which were supposed to take downtime at the end of last year have deferred that into this year. So there's going to be that related and, of course, the first-quarter downtime is really because of that particular issue. So it's not our normal (multiple speakers).

(multiple speakers) industry wide -- normally that would have been Q4, the labor issue has been resolved and everyone is scheduled for this now for first quarter?

First quarter and second quarter, the ones which were anticipated to do it at the end of last year.

Okay. Now Stendal and Rosenthal have purportedly been net energy producers. Celgar seems to be kind of on the periphery -- sometimes a small producer, sometimes a small net user. Am I correct in that? And what kind of level of production is needed by Celgar to be a net producer? Was it a net user of energy this last fourth quarter?

Yes, it was. And you know, through the year it was a small net user of energy. It still continues to be a net consumer on a net net basis. We believe that once the capital investment is completed and we're into the 470,000 ton range, then we would actually be a small net energy provider.

And this is in contrast to the Eastern Canadians which are all facing huge energy price increases?

That's correct.

And those older facilities, none of them are net producers to your knowledge, are there?

Well, it requires a significant amount of investment into their boilers to actually get the right balance. Because the older units, of course, were designed for lower pressures and therefore their inefficiencies will never be there. For them to then upgrade to the type of efficiencies, they would have to upgrade to much higher vessels which means that there is a significant capital cost to do that.

So as your buyers -- savvy buyers -- might allow price increases in the pulp marketplace to afford pass-throughs of energy cost increases, because Celgar is a net net producer or nonconsumer, do you expect then you're going to get the benefit of any price increase pass-throughs that are just occurring to keep people call it just barely breathing?

Yes, I mean, clearly our margins will improve as a result of the fact that we will be a net energy producer. And we know that based on the existing profile of the producers that they are still net energy consumers, certainly in North America, and therefore, of course, our margins will be improved as a result of that reduction in cost.

Another cost input for Celgar. Can you update us (technical difficulty) fiber input dynamics, if they are still favorable where you have the Western beetle generating excess supply and on the Eastern side you have cut limitations imposed by certain provinces?

In Eastern Canada of course, the fiber issue is a big problem because they are all trying to limit the available cut or annual cut and this has been one of the factors which has driven fiber costs up in Eastern Canada as well as the high energy costs, of course, in Ontario. But if you look at B.C., the interior situation as a result of the beetle problem means that moving forward there's a significant amount of wood available. And of course, the B.C. government is allowing more and more harvesting of these diseased wood to cure the spread of this beetle problem.

It is not directly in our wood basket area, but what it is doing, of course, is that as a result of the wood available in the interior means that the wood in our wood basket, of course, is not going anywhere else. And of course, it means that pricing pressures is significantly reduced and we are seeing improvements in our wood price. And we continue to get further improvements as a result of generally a large availability of sawmill residuals as well as pulp loss on the coast because of shutdowns in the interior because of the B.C. beetle problem. And therefore, moving forward we will continue to see what we believe to be very favorable wood conditions in terms of price.

In Stendal, the new equipment has now been installed and is up and running and working, or is it still in a rampup stage in that new equipment?

No, we installed it in the beginning of December. There were really no startup issues with the tie in; it tied in very well. We are now, of course, continuing to optimize the overall balancing of the mill, but we would say that the two additional digesters have made it much easier in regards to the overall balance of how the process is running.

And about what percent of Stendal do you have under contract rather than spot sales now?

Our hope is that we will be moving from the very nominal type of contract volume towards the 80% this year.

Okay. And so right now it's nominal?

No, I would say that we have a significant amount of our customers under contract, but our goal is to have at least about 80% under contract by the end of this year.

And in terms of the Company's total sales under contract?

On Rosenthal we have somewhere in the range of about 90%. And in Stendal we're hoping to get the 80 and eventually between 80 and 90 because you never do a 100% contract base. And Celgar again, we're trying to shift more towards the contract arrangement where overall about 80%. But of course, the Asian contracts are different than what we would normally expect under normal contract type arrangements. But clearly, in terms of overall contracted volume, both Asian as well as North American Celgar what also move towards the 80% type of level.

Last question for me and then I know my associate, Daniel Paren, will join the queue in the next round of questions here after some people go ahead of us. Mercer is now one of the larger producers around there and I'm just wondering if you've become more of a price leader and if you've announced March price moves already or not?

We are gradually becoming more and more of a price center. We would say that we are working in regards to the next price development. I think that the market knows what our expectations are moving forward into March and I think that as we move further into this year that we will clearly be a price setter. But at the same time, I think that we have to reflect on the fact that we are of course just new to be one of the larger producers and it will take a little bit of time before I think our price setting well have an impact as to traditional price setters like [Celgar] and, of course, Weyerhauser, etc.

I'll back out in the queue. Please come back to us later after others have asked questions.

(technical difficulty)

Good morning. I was wondering if you could tell me -- in this current release I don't happen to see a cash-flow statement whereas you had one in the prior release and I'm kind of curious as to why not?

It will be coming with the K in three or four days.

Okay. Was there any particular reason or just --?

Just the size of the press release. They always come out within two or three days of each other, so that's what we decided to do.

(inaudible) worth an extra page. If we could just look forward into the first quarter in terms of what's happening in working capital and how that may impact your cash balance going into the first and second quarters. I noticed payables rose in the fourth quarter. I'm kind of wondering if you'll get a swing back in Q1.

Yes, I don't have guidance for you on changes in non-cash working capital. There aren't huge swings per se. It's just normal industry stock and we've got lots of liquidity. So I don't have a specific answer for you on that.

And can you just elaborate for me -- and I apologize if you've answered all this already -- but when you say total liquidity, can you just define that for me and how much of that is available as of (technical difficulty) to today.

Sure. In the restricted group it's close to EUR50 million of cash.

50?

Yes. There's almost 30 at Rosenthal, four at Celgar, 15 at corporate and then we've got a EUR40 million revolver at Rosenthal and we've got undrawn revolver at Celgar. And at Stendal there's about EUR35 million of cash. We've got 7 million coming in on the final settlement of the grants. And we've got funding that comes from our facility to top off our debt service reserve account and so it's got the liquidity there. It was all baked into the original project finance facility.

And we look out to CapEx and depreciation for the year, what are you expecting on those [firms]?

I've got that here somewhere. I'm flipping pages, it's not coming to me just at the top here, but Celgar obviously is the heavy CapEx in the group with about EUR17 million in the year dealing with the washers and the tie ins in our energy project. For Stendal there really won't be much at all. And for Rosenthal, as we've discussed before, it's usually the EUR5 or EUR6 million range and then it's got another -- we're doing the washer there that relieves us from wastewater charges, so it's a net net flat. But it will be about EUR6 million in the year. But as I say, if offsets other -- a cost that we would otherwise incur on our wastewater piece in Germany.

So that's a little bit of a longer-term benefit?

Yes.

Okay. And if we look at current market conditions, the prices that you're seeing today, would you expect as we look out to year-end a net improvement in your debt situation or do you have any particular targets with respect to debt?

You know our position with our convertible, we really are very simple in that regard. We've got our convertible debt from senior bonds and the revolvers and then Stendal's project debt that becomes term debt, 80% guaranteed by the German government. And then given they have cash on the balance sheet. So it all comes down to what is pulp pricing and what do exchange rates do? How much EBITDA do we generate? And we'll move forward. It's not the type of term debt that you just normally buy down. It's a difficult question to answer for you.

And based on current pricing would you expect a cash improvement. If we can't talk about the right side so much can we talk about the cash? Do you expect cash to improve?

Yes, I think that the EBITDA should improve throughout this year. So if we look at the pricing, which is comparable to the prices that existed last year, I think you'll see better EBITDA margins both at Celgar and Stendal. So you should see a better cash-flow overall.

But I'm talking about cash -- not so much EBITDA -- I'm talking about actual cash.

I think right now there's not going to be any requirement for -- I mean, other than the capital projects that clearly in Celgar we have slated for. So that will, of course, come out of some of the cash reserves under restricted. But overall I would say that the cash buildup at Rosenthal, and if we can get now Celgar to really generate those improvements, the reduction in cash reserves as a result of the capital expenditures at Celgar should be not let's say significant. It should be nominal. So cash -- of course you're going to get some reduction but I would say we still should end the year with a comfortable cash position and not having to tap into our European revolvers in any way.

Thanks so much for your time.

Matthew Armes, Goldman Sachs.

Good morning and thanks for taking so much time. Two quick questions, one on the energy situation at Celgar you mentioned that it had spiked up in the fourth quarter and the number I wrote down was EUR39 per ton, if you can confirm if the number was correct? And also what are you burning? Is it oil? Is it bunker or is it natural gas?

EUR39 per ton is the correct number and Celgar does burn natural gas in its kiln, and also it burns natural gas in its boiler if it is required and that can occur during an upset period or if you're ramping up or ramping down from equipment failure, those kinds of things.

So given those were unexpected expenditures that was all at the prevailing naked market price?

Yes, whatever the established price was. Of course we have long-term natural gas contracts with certain ceilings and expected consumption through the year but we expect with natural gas prices now starting to drop that clearly overall prices should be more favorable. But also if there is not any unexpected downtime then the consumption of natural gas is far less. Because it is only used during the normal ramp up after a maintenance shutdown and for a little bit at the kiln level.

As I just think about the quarterly progression of costs there should be elevated costs in your inventory as that rolls through cost of goods in the first quarter, but we should come back out of that in the second-quarter as you look at more normalized production levels?

Right.

The last question is on acquisitions. It seems as though with the Canadian dollar where it is right now there is quite a bit of pulp assets making their way onto the market. Can you talk briefly as to your beliefs or your intent on acquisitions? Where you would look to apply your capital and when you see yourselves re-entering the market or do you feel comfortable with your current cap structure or do you intend to work through integration a little bit longer before you start to buy assets?

I think the most important thing for us is to improve the overall efficiency of the assets that that we have right now and I think we have done quite well. I think we continue to make very good progress and there is certainly a lot of cost that we believe is still available to us to take out. If you look at the mix of assets we have today, we believe we have probably overall the best within the industry on average. Because we clearly have three mills which are very large, very young and therefore we have no immediate desire to be looking around for assets which do not fit into that particular profile.

And as you know, the ones which are going to be available for sale clearly do not fit into that profile in terms of capacity size and age and efficiency. So automatically I don't think that we would be likely potential acquirers of these types of assets. And our focus clearly is in regards to the assets that we have today because we know that we can get far better margin improvement from what we have at our existing mills than trying to look for something because that actually would take away from what we have today.

Any interest in a greenfield project then say in Russia?

I will say that it's very difficult at today's price type of levels even with Russian type of wood cost to justify a greenfield project for NBSK. I think it's different in terms of eucalyptus hardwood and all of these. But I think as an NBSK producer I would say that unless you have the type of financial structures available like we were able to utilize in Stendal with today's existing type of price development and currencies it's highly unlikely that you can get an economic model which would work if you're looking just strictly commercial type of interest rates and other type of costs. And therefore that is why we believe strongly that the availability of further capacity in NBSK is going to be very limited unless we have significant price development in the near future and stay at those levels for an extended period of time.

Great, thank you very much.

Bruce Klein, Credit Suisse.

I was just following up -- CapEx, I think the numbers -- I can't find my notes, but I thought you said -- was it 12 for the year at the restricted group? And I thought I had 15 million for the nine months?

For the restricted group CapEx?

I thought you said Rosenthal was 6.8 and Celgar was 5.2.

Yes, that's for the year, that's right.

Celgar in euro or Canadian dollars?

That's Euro.

I thought you guys had 15 for the nine months.

We had a total of 16.2 for the year.

I lost you.

We had 7.8 in the fourth quarter and 16.2 for the full year. And then there's eliminations.

Maybe it's me, I thought Rosenthal was 6.8 for the year and Celgar was 5.2 which equals 12. I thought you just said 16.2.

Yes, well, there's a little bit in Stendal.

For the restricted group. You're still saying the restricted group is 12 million for the year?

Yes.

I had 15 for the nine months; I'm not sure why.

It could be the currency because we (indiscernible) are in euros.

Come back to me after the call, Bruce.

And the net -- I guess the net energy situation seems like, Jim, you may be a very big positive. Energy is typically 10 or maybe 15% of the Company's cost structure and Rosenthal and Celgar I think are netting out to positive. That would seem like a huge comparable advantage unless I'm missing something.

Clearly our German operations, Stendal and Rosenthal are net energy providers. So all of the new mills in Europe and, of course, the new mills in the Southern Hemisphere for hardwood also are net energy producers. All of the older type of mills, and that means most of the mills in North America, are net energy consumers.

So you can see even with Celgar, which clearly is one of the larger units and one of the more modern facilities, if you look at the fourth quarter we had somewhere in the range about EUR39 per ton of cost and we were averaging around EUR18, maybe EUR20 per ton through the year.

So clearly that is a big component that gives us a big advantage in our European operations versus the North American operators. But we know that Celgar, once we do the investment Celgar will again be one of the net energy producers, which will be the exception in this case in North America.

And Celgar, the 18 was a cost, not a credit, correct?

That's right.

Okay. And it's (inaudible) in the quarter. And David, the other 6 CapEx, I think you said Celgar was 17, Rosenthal was 6 for 23 for the full year in '06 for the restricted group?

Well, Rosenthal normal was the EUR5 or EUR6 million and it does have the (indiscernible) project as well. So that's more like 10.

And then 17 for Celgar?

Yes.

They're both in Euros, so that would be 27 for the restricted group?

Yes.

Thanks, guys.

Mark Bishop, RBC Capital Markets.

Jim, I just wanted to clarify something with respect to fiber costs at Celgar. I understand that you're out of the primary impact of the mountain pine beetle. The last two orders and in particular the last quarter we saw a substantial reduction in wood costs of the northern interior producers. Are you actually seeing any change in the formula pricing for chips in your area? And if not, are you not actually seeing any impact from cheaper fiber that might be available in your region so that we might be some sequential reductions in overall fiber costs in the next quarter or two?

I think that -- let's say the formula essentially is no longer existing. So it's really just a question of what the price is going to be set by the end-user and the producer. What we are seeing is certainly a significant reduction in our fiber costs from the beginning of this year to the end of this year. The further decreases in prices, we think that -- in terms of strict wood price from the sawmill residuals, we're going to make some progress but I would say that it's not going to be as marked as maybe some of the interior mills will see.

But what we are seeing is that the available volume of residuals in the interior as well as the coast means that the sawmill residuals, which are available to us, will have really no room for price increases. But where we're seeing potential improvement is really the mix of our suppliers, which means that we will be, of course, getting better prices on average as a result of the location of the suppliers themselves as well as the mix of pulp logs versus sawmill residuals which we will improve this year.

So I think that as a result of those issues we will see fiber costs coming down, not merely just a price determined type of reduction, but really more of a managed reduction based on the logistics of the supplier as well as the mix of pulp logs and sawmill residuals.

Okay, great. Thanks very much for that.

Andy Shapiro, Lawndale Capital Management.

I was pleased to see you guys chose to be staggered with (technical difficulty) directors annually. Can you tell us when the annual meeting date and the location, what that's anticipated to be?

I think that we are forecasting that the annual meeting will occur in June, the exact date will be made publicly available. It will occur in North America. I think the location has been in Vancouver in the past. One of the reasons of course is that there's a lot of legal and regulatory related issues and it's difficult to move a team of our legal advisors to locations.

And there are some complexities related to tax and other things because we have, of course, a mix of U.S. and Canadian as well as European directors and there is issues related to doing business in the U.S. versus whether we hold the meeting in Canada or in Europe or whatever. And therefore traditionally the meeting has been held in Vancouver. It's expected that that will be the case as well.

Great, okay. Thanks a lot and do you have any other further improved governance enhancements in the works?

Well, I think the lead director who you know, Ken Shields, has been very active in that area. And of course, the Company has now been changed from a trust structure to a corporate structure. There have been new governance policies established and the committee, of course, is working to establish the best practices in all the areas that the Company is involved in. And of course corporate governance is one of them.

Excellent. Thank you.

There are no other questions. I would like to thank everyone for attending today's conference call and goodbye.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.