Mercer International Inc (MERC) 2007 Q1 法說會逐字稿

Good morning, my name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Mercer International first-quarter 2007 earnings conference 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) Thank you. Ms. Tramont, you may begin your conference.

Thank you. Good morning and welcome to the Mercer International 2007 first-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, I 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 M. Gandossi, Executive Vice President, Chief Financial Officer, and Secretary. I would now like to turn the call over to Jimmy Lee. Jimmy, please go ahead.

Thank you. I would like to welcome everyone to Mercer International's first-quarter year 2007 earnings conference call. We are very pleased with the operating results, in light of the very significant increase in our raw material cost, especially in Germany. In the previous call, we had indicated that wood costs continued to escalate throughout 2006 and due to the rolling nature of the wood contracts, the full impact of higher wood prices in Germany would not be fully felt until the beginning of 2007. Moving forward, we are now seeing significant relief in our German wood prices, due to the very warm winter and the effect of the recent storms in Central Europe.

Our Celgar operations are continuing to show improved operating efficiencies from the initiatives we have undertaken. Celgar had a new record quarter as to number of tonnes of pulp produced. Celgar's mill availability is gradually improving, as we catch up on the maintenance work that had been lacking under the prior ownership. With the capital investments, which will be completed in the second quarter of 2007, Celgar's operating costs should show further improvements as well as improved quality.

Revenue for the three months ended March 31, 2007, increased 20% to EUR169.5 million from EUR141.7 million in the comparable period of 2006. This is primarily due to higher pulp prices, which were partially offset by a weakening US dollar versus the euro.

Pulp sales by volume increased marginally to 329 thousand 135 thousand tonnes from 327 101 tonnes (sic -- see press release).

List prices for NBSK pulp in Europe were approximately EUR578 or US$757 in the first quarter, compared to EUR514 or US$618 per tonne in the first quarter of 2006; and approximately EUR553 or US$730 in the fourth quarter of 2006.

Mill net pulp sales realizations increased to EUR512 per tonne on average from EUR425 per tonne in the prior-year period.

Fiber costs have increased by over 50% versus the same period of 2006. In Germany, this can be attributed to the reduced fiber availability as low harvesting levels in 2006, combined with the increased demand for wood residuals for renewable energy suppliers. Fiber costs at our Celgar mill increased primarily because of a weakened US lumber market that has caused a sharp reduction in sawmill residual production.

We expect that fiber availability in Europe will increase materially as the result of approximately 60 million cubic meters of wind-felled timber caused by storms in January. The greatest impact was in the southern part of Germany, opening up large quantities of spruce. This, coupled with an improved European lumber market, has started to provide some price relief. We expect further downward pressure on fiber prices for deliveries throughout the balance of the year.

At Celgar, the continued weakness in US housing will mean that fiber costs will likely remain at elevated levels until lumber markets significantly improve.

In the past quarter, we did not take any scheduled downtime at our pulp mills. In the first quarter of 2006, our pulp mills took approximately five days of downtime for maintenance and strategic capital expenditures. In the upcoming second quarter, we have scheduled 10 days of downtime at the Stendal mill for maintenance, and 14 days at the Celgar mill for maintenance and to implement the final phase of our strategic capital expenditure program.

Operating income increased by approximately 32% to EUR14.5 million from EUR11 million in the first quarter of 2006. The increase was primarily due to higher pulp prices and improved operating results at our Celgar mill.

Due to the weakening of the US dollar versus the euro, and an increase in long-term interest rates, we recorded a net gain of EUR6.6 million before minority interest in our outstanding derivatives at our Stendal subsidiary, which included a realized cash gain of EUR6.8 million on the settlement of our currency swaps. In the first quarter of 2006, we recorded a net non-cash holding gain of EUR40.8 million, which included a loss of EUR3.6 million from the sale of currency forwards.

We generated operating EBITDA of EUR28.3 million versus EUR24.7 million in the prior year period.

For the quarter, we had a net income of EUR1.1 million or EUR0.03 per basic and diluted share, which included an aggregate of EUR7.8 million net gain on our outstanding derivatives and foreign currency denominated long-term debt.

In the first quarter of 2006, we reported net income from continuing operations of EUR16.2 million or EUR0.49 per basic and EUR0.40 per diluted share, which reflected a net unrealized gain of EUR46.9 million on our outstanding derivatives and foreign currency denominated long-term debt.

The global rise in US dollar-denominated pulp prices has continued, and the market outlook continues to remain bullish. European markets have been and continue to experience positive fundamentals favoring the pulp producers. However, there seems to be an overly cautious approach to price increases in Europe by certain pulp producers when considering the continued weakness in the US dollar. It is expected that further price increases in Europe are necessary to bridge the gap between North American prices.

The restart of the approximately 140,000 tonnes NBSK line at Terrace Bay has had no negative impact on market sentiments. The US housing market continues to remain in the doldrums, causing lumber producers to take downtime. These capacity closures have kept wood residual supply rate tight in North America. This general fiber tightness in North America is expected to continue.

The fiber situation in Germany has completely turned around due to the warm winter placing less demand on wood fuel consumption, as well as the recent storms. The fiber situation has been less favorable for the Nordic European countries and Russia, as the warm winter resulted in reduced harvest levels. This event combined with the Russian log export tax announcement has tightened supply and increased production costs, mostly notably in Finland.

Going forward, maintenance shutdowns, higher fiber prices globally, and the continued growth in NBSK demand from global GDP growth will continue to keep NBSK markets robust. On that note, I would like to open this call to questions.

(OPERATOR INSTRUCTIONS) Andrew Shapiro with Lawndale Capital Management.

A few quick questions if you could help me. You said you expect the fiber prices to decline in the second half, and that you are already seeing this, of course. When you say you expect the prices to decline, are we talking about compared to Q4 '06 levels or down to Q3 '06 levels?

No, what we are seeing is basically a peaking of prices which basically occurred at the end of the last year. We are seeing now, as a result of both the warm winter as well as the recent storm, prices now starting to drop.

We believe this will continue to escalate because we are seeing also, of course, much warmer conditions. So there is potential for certain insect related problems if the wood is not cut rapidly. So there is additional pressure which is coming into the market.

Therefore, we believe that although prices have already started to drop quite significantly, we think that there will be a further accelerated price movement as we go further into the year; and it should continue likely into '08 as well.

Okay. Given the way your WIP works and all, should second-quarter '06, the one we are in now, should it see any benefit of the lower fiber prices? Or will Q2 '06 -- our current second quarter see -- still reflect the older higher-priced contracts?

No, you're going to see in the second quarter the impact of lower prices. But offsetting that, of course, is the much higher maintenance downtime that we are taking this quarter. So the full impact clearly in this quarter will not be felt.

You will see, as we earlier said, that the second half of this year, our assumption is fairly good price and widening of margins as a result of wood prices now coming down. So I think the second half clearly is going to be much stronger, significantly stronger than what you may expect based on our first-quarter numbers and the indicative second-quarter type of numbers.

The increase of inventories on a sequential basis in a very tough pulp market for paper companies, is this mostly raw or finished good (multiple speakers)?

These are more raw materials, because we are coming from very, very low raw material inventory levels to now one where actually we are having buildup of significant inventory of wood. Of course, this will continue to peak as we are buying now more and more cheaper wood. So I think that the inventory buildup is not finished product. Really, it is raw material inventory buildup.

Okay, with regards to your currency swaps, do you have any more outstanding? If so, what type of unrealized profit do you have in the remainder of the book?

No we don't have any more currency swaps at this point. Because of the difference in the euro and the US dollar exchange rate, we have to see or expect significant movements before we would consider reentering the swap. So at this point, we are not in a position to swap because, of course, the euro has strengthened.

Also the movement of the euro versus the dollar has to be much larger to really make a difference with the difference in exchange rates that still exists between the two currencies.

You had paid down a bunch of debt. The debt that got paid down, was it at one of your respective entities, the Restricted Group, or Stendal? Or was it parent debt?

Well, it was a combination of both. We had, of course, a significant repayment at the Stendal level of interest -- I mean, principal. Of course, you had the debt related to the acquisition of the minority interest, which was also paid off.

Foreign exchange also plays into this as well.

Okay, all right. The last question I have and I will back out in the queue, you have had some ongoing negotiations with your contractor at Stendal regarding various -- call it construction obligations, specifications. Some get met and some don't. The ones that didn't, you were negotiating make-goods, etc.

Can you highlight and discuss the resolution of that? Will the improvements get booked into the cost basis in any way on Stendal? Or this is just an -- be an improvement into the plant and equipment and its capacity without really from a book basis anyone seeing the increase?

Yes, right now, we are still not completed the ongoing settlement discussions with the EPC contractor. So clearly, I can't really comment as to what the end result may be. However, we did conclude some of the more critical aspects of some the deficiencies that existed at the Stendal mill.

One of the big items that we had to contend with early on in terms of the mill's startup was the reliability of the electrical generating turbine. It wasn't the turbine itself; but it was really the steam inlet related issues.

As a result of that discussion and settlement, what we have now after this maintenance shutdown is what we believe a much more reliable, much more robust turbine unit. Which we believe will not just mean that the mill will be more efficient in terms of energy production, but will be much more reliable in terms of ongoing production efficiency.

So I think that at least the big critical issue has been dealt with very favorably, which means that the mill will run much better moving forward; and the energy costs certainly will drop as a result of better reliability.

So there is a lot of other discussions going on, but I would say this was the most critical item. There's other items, but those are going to be settled either monetarily or through some improvements in terms of the equipment process itself.

Great, thank you. I will back out into the queue.

Steve Chercover with D.A. Davidson.

First question, now that downtime or capital projects have to be expensed in the quarter that they are incurred, can you quantify what the Q2 impact would be, please?

Well, in terms of the downtime that we are looking at, you know that in terms of the Stendal mill we are projecting downtime right now of 10 days. At the Celgar, you are projecting 14 days. So that will essentially equate to the per tonne average loss in terms of production volume.

I understand that, but in monetary terms, how much? Like do you expense it the way some of your peers -- not necessarily in pulp -- will give you a figure, like $10 million or euros in the quarter. Are you comfortable putting it in those terms?

We're not really ready to answer the question, Steve, on this call. We haven't typically done it, so. But we will give it some consideration.

I think the problem is that it is really impacting production costs, rather than sales volume. Because you know, sales will continue; but of course, your production costs in that particular quarter will increase as a result of the loss of volume.

Got you. Okay, well let's switch gears a little bit. You alluded to -- we know that in Nordic regions energy prices are substantially higher in Q1 and therefore had an impact. Yet you also alluded to rather warm weather in Germany this winter. So what would happen in a cold winter? Would it get a lot worse, do you expect?

No, I think what we had was this rather unusual case in 2006 which was related to the pellet business. What you had was the introduction of a lot of wood-burning furnaces, both industrially as well as domestically, which was being supported by various governments like Austria as well as Germany, to replace natural gas.

So what you had was a lot of homes which converted to pellets. You had a very severe winter condition in the prior winter of 2005. And there wasn't sufficient pellet production locally in Austria or Germany which could automatically feed this sudden increase in demand.

So what happened was that the consumers were caught with a lack of supply. So when the winter was over, they started to rush out and buy as much pellets as they could, in anticipation of another harsh winter. They didn't want to get caught out without the supply.

This fueled price movements which almost doubled the price of pellets within a very short period of time. But what we do now know is that production of pellets is increased -- not just in Germany, but also there's massive projects in Canada. Therefore, we don't think the speculative type of movement that we saw last year, which really pushed prices in Germany significantly, will happen, even if we go through a harsh winter condition.

Because it was also coupled with a lot of snow, which then of course meant there wasn't harvesting of wood. This kind of pushed this whole speculation, which drove prices further than what would have normally happened, because many people, the sawmills were holding out for higher prices.

Today, what we are seeing is completely the reverse of that. Sawdust right now is being built up where nobody wants it. Pellet prices have dropped to levels which were as low, if not lower, than the start of 2006. So you end up with a situation which is completely reversed all of a sudden because of the warm winter. And also it has taken away this speculative kind of balloon type of situation that we saw develop last year.

Okay, so the benefit of that will materialize in Q3 and 4?

Well, we are seeing it already. But you will see the significant benefits of it in Q3 and 4.

Got you. Then finally, can you quantify or tell us what the benefit of the conclusion of the Celgar project -- was it Blue Goose?

The Blue Goose basically it is taking [down] downtime this quarter to upgrade or expand the dryer, so that the drying capacity will be more than sufficient to produce 470,000 tonnes plus. So that is the last.

Our review of the project is that we came in budget. All of the anticipated savings from a chemical perspective seems to be correct. In fact, there is still room for additional gains that we will probably see as we move forward.

We haven't seen, of course, the impact of the dryer yet. But we feel very comfortable that it will do what we expect it to do. So I think all in all, the project from what we see is certainly ahead of what we would have expected in terms of cost reductions.

Okay. One last question if you will. I'm sorry if I might have missed this somehow. Could you tell us where your margins were better? Like maybe you can rank in order which mills had the best operating margins. Was Celgar better than Stendal and then Rosenthal was the lowest?

Yes, if you look at operating margins without fiber, of course Stendal had the best efficiencies. But if you include fiber, you had a complete switch around, where Celgar actually in this quarter had better margins than our German mills, slightly.

Got you. Okay, thanks guys.

Herve Carreau with CIBC World Markets.

Two questions. Can you tell us, first, what were the shipments at Stendal?

The second question, just -- we all know that softwood pulp prices are very strong. Just wondering if you have seen some signs of weakening on the hardwood side of the business at this point.

You know, while we are getting the Stendal shipment number, maybe I can give you an idea of how we see the development of pulp prices. You know, I strongly believe that NBSK pulp prices and hardwood prices can actually have a gap which is wider than $100 for an extended period of time. The reason I say this is because the impact of the $100 was really more substitution on the part of the producer rather than the end-user. We know that, based on whatever production could swing to softwood is and likely have already swung to softwood production. Because of the anticipated capacity increase in eucalyptus.

But at the same time, what you have to be aware of is that the availability of softwood, both Europe as well as North America, is very limited. Therefore, the ability of the hardwood or hardwood/softwood producers really to swing to softwood is limited now. Because, of course, the availability of softwood is quite tight.

So I think that substitution on the part of the producers is pretty much done. It seems to also be the case, based on the numbers we saw. What we saw is really at the end of 2006 it seems that the surplus capacity -- even with the increased softwood production, through swing capacity as well as debottlenecking -- seems to be still very much in balance at around 6% excess to demand.

Which is in line with what would be a very tight market condition; because, of course, mills don't run at 100%. You have to have maintenance shutdown, etc. So at the end of the day, the numbers clearly indicate, certainly on the softwood side, a very good market where you are not in overly a tight situation, but certainly a situation where the producers have a fairly good position in terms of further price increases.

In terms of the shipment at the Stendal sales volume, we had for the first quarter, 137.9.

Okay, thanks. Just back on the pulp prices, hardwood pulp have been quite stable lately. So have you from your perspective--? Just wondering if you saw some signs of weakness there on the hardwood side.

We haven't really seen any sign of any weakness. We seem to be able to keep the prices fairly steady. Also I think there is even more possibility that prices may go up because of the currency impact.

Okay. Thank you.

Mark Bishop with RBC Capital Markets.

A couple questions, Jimmy. Just coming back to your comment regarding the limited ability for producers to swing. How does that [foot] with the improved softwood fiber availability you see seasonally, just coming up in the second half, given what you have just been through? Is there not likely to be sort of one additional swing to reflect the improvement in availability in Europe in the next couple of quarters?

Well, you know, we are seeing that there seems to be a significant fiber tightness in Finland. This is both on the hard and softwood. This is not likely to change in the second half of the year. Of course, to really move a meaningful amount of wood from other areas to Finland is going to be fairly expensive. So I don't see that a lot of wood is going to move in that direction.

Of course, you're going to get competition for wood, certainly in the northern part of Germany, other parts of Poland, and the Baltic states. But this is not sufficient, really, to supplement the loss of volume that clearly we are seeing already in Finland.

And there is no other pulp producer, really -- a new pulp producer in -- all the ones in Sweden which could swing have already swung to softwood, as far as I know. All the ones which clearly are softwood producers on the continent are pretty much maxed out other than normal incremental debottlenecking. So I don't see where the new supply of softwood pulp is going to come from.

Okay, so you are really going to be the only real beneficiary of the improved fiber situation in the second half in Germany?

Well, I think it is regional, because of course the fiber situation is very good in the Southern area; not as good in terms of the Northern part, because the storm, of course, hit the Southern and Central part of Germany the most.

Also, it hit Sweden, so availability of wood in Sweden is good. That is why as I said, anybody who could swing to softwood has already swung up there. So I think the Swedish producers certainly are benefiting. We are benefiting.

It is a little bit more difficult in Finland and those areas where, of course, they didn't have the storm. They had a warm winter which made harvesting activity difficult. And you got this new tax kind of regime that Russia has kind of announced.

Right. The Finns have announced or certainly are trying to get the harvest levels increased in their own country by about 15 million cubic meters. Do you see that coming on say within the next 18 months to provide some relief to the Finns? Or do you think it is going to take longer to get up to that level?

I think it is a combination of several factors. Weather is clearly a very important component of that. So it is difficult to really give you a clear indication how successful they may be.

Everybody is trying to mobilize more wood; that is clear. Part of that clearly is going to happen. But at the same time, if you do have continued warm winter conditions, of course, it makes it more and more difficult to actually go out and harvest that wood.

Okay. Just switching gears to mill nets, obviously we don't have the visibility we had before. But I am just wondering if you could provide an indication both for Celgar and Stendal if you have seen any relative improvement in the discounts at both mills, say from the fourth quarter and third quarter last year.

I think moving forward into this year, you're going to see a better improvement in terms of the discounts that we are going to get, as well as the additional kind of rebates that we have paid in the past. So those are all tightening up throughout the year. So you will see improvements to the margins coming from that. Of course, it is not big numbers; but still, 1%, 2% is always helpful.

I think you are going to see further margin improvements from freight issues. Because we have improved a lot and we will continue to improve in terms of how we ship and where we ship. So those are going to improve.

I think that prices for pulp will remain high, so we believe that we are not going to get a price deterioration. We think we need to have further increases in Europe to close this gap in prices between North America and Europe. And to compensate further for the dollar weakness in euro terms, where we haven't really got a price increase because, of course, the euro continues to be strong.

So I think that we will have fairly steady kind of prices in Canadian and euro terms, but benefiting from the drop in raw material prices, certainly in Germany. We don't expect that to be the case in Canada, but certainly in Germany we are going to see a drop in fiber cost. So clearly, margin improvement right through the year.

For Stendal's discounts, should we be--? I think the original intention was that Stendal would essentially arrive at very close to Rosenthal's discounts.

It is already, the only difference would be the structural difference in terms of freight rates. So the mill net realization difference really between Stendal and Rosenthal is really the better location of the customers for Rosenthal. (multiple speakers) slightly lower freight rate than the Stendal.

But in terms of the actual discounts, etc., that we give to the customers, we basically have now come to the same levels at Rosenthal and Stendal. So there is no difference there.

Okay. Just switching to fiber cost, maybe coming at it a different way. Is there any way you could provide an indication, both for on average in Europe and for Celgar, the delta between Q1 '07 fiber costs and the fourth-quarter '06 in terms of percent?

I think we said that the difference in fiber cost overall from the fourth quarter to the first quarter for the whole mill was 20%.

20% for the whole system?

Yes, for the whole system.

So that would have been more increase in Europe, less so in Celgar?

Right.

Quarter to date compared to the first-quarter '07 in both locations, at Celgar have you seen another uptick in fiber cost?

We are not really seeing any real significant cost pressures at Celgar. But at the same time, we are not expecting any reduction in our fiber cost either. So we are expecting that it will remain fairly stable, fluctuate slightly, but really nothing of real significance.

When you seek the additional wood supply to get the mill running at 470,000 do you see any additional cost associated with the incremental wood?

No, we basically have budgeted based on the 470,000 tonnes of production. So our buying pattern, etc., is based on that.

Okay.

If you look at the first quarter numbers, for most of the days we are running pretty much on the budget to produce 470,000 tonnes plus.

Okay. Just one final question, Jimmy. Post second quarter, could you give us an indication of the second half downtime you are anticipating?

Yes, we only basically have the Rosenthal, which will go for the scheduled maintenance, which happens in the third quarter. So that will be about 11 days.

So fourth quarter should be maintenance-free?

Yes, fourth quarter maintenance-free for all intents and purposes.

That will really be the quarter we should see all mills running I guess at full potential, given that Celgar will be now complete with the dryer?

Yes, right. That's correct.

Okay, great. Thanks very much.

Patrick Yung with Raymond James.

Just elaborating a bit on Celgar, what are you seeing in terms of sawmill activity within your fiber basket?

I mean, there's been really no significant change.

So no new curtailments coming on?

No, what we are seeing is pretty much stable type of conditions that we saw at the end of last year.

Great. On to emission credits. Do you have any guidance going forward in terms of any emission sales for the rest of the year?

Well, you know, we have presold a chunk of the emission credit. So we know that based on the presales we do have a certain amount of revenue, which is locked in without --.

And of course, carbon credit prices have dropped significantly, so it is now trading under EUR1.00 per certificate. But overall, our original assumption was that we would get close to the type of revenues of last year; but based on what we know today, that is probably not going to be the case. But we will still have a reasonable contribution from the emission credit side because of the presales.

Right. Just for reference, what were the certificate prices, same period year-ago?

Well, a year ago, I think emission credits were trading in the 18s or something like that. I mean it pre -- kind of a just pre -- kind of collapse of prices. It was in the 30s and high 20s and then it dropped to the high teens; and then of course, it has continue to drop from there.

Right, so I guess we shouldn't be expecting too much contribution from emission sales, I guess.

Well, there will be a reasonable number, somewhere in the range of 4 to 5 million type for this year. But moving forward, I would not necessarily say that that will be the case. Because there is the second phase of the emission credits -- which we don't know exactly what it will mean. But prices for the second phase are much higher. They are around 18, 19, right now.

Right. that's all I had. Thanks a lot.

[John Helms] with Oryx Capital Markets.

Can you give us a sense, on a per-mill basis, the dollar change in fiber cost between Q4 and Q1?

Q4 and Q1?

And along those lines, do you have production by mill, tonnes?

Yes, we do have the production in tonnes. Hold on. For the first quarter, what we had in terms of volume of sales, okay? Or do you want production?

I would rather have production, actually.

81,000 tonnes at Rosenthal, 145,000 tonnes at Stendal, and 121,000 tonnes at Celgar.

, Okay, then, if you can come up with a dollar amount that would be great. In the meantime, let me ask one more question.

It seems like the market is looking for a decline in NBSK prices in the second half; been talking about it for the last six months or so. But it sounds like you are not really seeing that in what you are looking at. Is that fair?

Yes, we don't expect that is going to happen.

Okay.

For various reasons. Let's see, on a euro fiber cost fourth quarter to first quarter, they're of course different at Stendal and Rosenthal because of the mix of raw materials. But you are seeing somewhere on the order of about EUR7 per cubic meter difference in costs.

Okay.

You're seeing at Celgar between the fourth and the first quarter, in Canadian dollar terms, somewhere in the range of about C$8.

C$8 per meter?

Yes, cubic meter. But what we are seeing, of course, is kind of stable prices at Celgar at these kind of elevated levels. You know, moving forward at our German mills now, a decline in fiber costs.

Right, okay. Thank you.

[Iba Yung] with [Independent Capital].

It is [Cheryl Van Winkle]. Just a couple questions. First, could you tell us for the Restricted Group what capital spending was in the quarter, and what bank availability was at the end of the quarter?

It's David. Capital spending at Rosenthal was EUR1.8 million, and Celgar was EUR2 million; and Stendal was EUR0.2 million.

Okay.

Our bank availability, the Stendal -- I'm sorry, the Rosenthal revolver is still completely undrawn at [40] million. And the Celgar revolver is half drawn at C$20 million; 20 (technical difficulty) remaining.

So, the actual available then -- because I know sometimes not everything is available on the line. But you are saying the actual available on the Rosenthal mill would be the [four eight]; and on Celgar it would be the other half, the C$20 million.

Just to clarify, the Celgar facility is C$40 million. --.

Oh, right, right, right. So it had C$20 million drawn; and then I was asking -- is the other C$20 million all available?

Fully available; yes, it is.

Okay, okay. Okay, great. Thank you.

Aaron Rickles with CIBC.

Good morning. I was hoping you guys could provide us with an update on the Asian market for pulp in terms of demand we are seeing there. And just remind us again what percentage of your output goes into those markets.

Let's see for the Stendal operation there is about roughly 20% which goes to Asia. At Celgar, it is more closer to say 80% goes to Asia, of which the bulk of it of course is China.

In terms of the Asian markets, we're not experiencing any real change in terms of the demand situation. China is still very strong.

There was a little bit of kind of demand weakness in Japan. But that is really because of the Japanese in terms of their own kind of mix of their own domestic production and other things. But it wasn't really significant; and of course Japan is not a very significant market for us. Of course, Korea, same situation. But China, very strong as well as the other areas within Southeast Asia.

So would you expect any further price increases to follow price increases that might come in North America and Europe?

Well, I think moving forward, I think what is more critical right now is to see what we can do in terms of the European market. Because of course the strong euro, as well as the fact that there is this very wide gap between US and European prices, probably indicates that there is probably more room for further increases in Europe.

There is room for increases in Asia, but of course I think the immediate issue is to move prices to compensate for the exchange rate, certainly in the European markets, as well as to continue the good economic situation that is developing in Europe.

That makes sense. I guess, your thoughts on the spread between hardwood and softwood, would you extrapolate that to all markets, including Asian markets? Or do you think that is more of a European, North American phenomenon? How do you think about that?

I think the hardwood eucalyptus situation clearly is different, because towards the end of this year you have got significant capacity which is coming onstream.

But at the same time, the currency in those areas also has strengthened against the US dollar. So there to say cost pressure which is driven not just by the fiber issue also there in terms of land cost etc., but also currency-related type of pressure.

So I think the there is going to be resistance on the part of the hardwood producers to really have any deterioration in prices. They have already had deterioration mainly because of the exchange rate that has prevailed already.

In terms of the softwood, that situation is very different. We do have more of a pricing power because of the demand-supply balances that exist today.

That's fair. Not to ask another question about fiber, but I will anyway. Was there a material difference in the fiber cost between Stendal and Rosenthal in this quarter?

I wouldn't call it a material difference; because of course, the mix of the fiber is different, because we use more round log at Stendal than chips. Of course chips are cheaper, because of the distances involved for Rosenthal. We have 60-odd sawmills right around that area. So you do have a difference in cost and that has always been a structural difference. So this is not something that has just kind of happened overnight.

I guess going forward with the decline in fiber prices, is that going to affect each mill equally? Or will it affect more the Rosenthal? How should we think about that going forward?

The Rosenthal one will benefit more than Stendal, because of course it is in the heart of the storm-damaged area. Also, you have the principal benefactor which is the sawmillers; and of course the sawmilling activity results in a huge amount of chips.

But again, chips are used at Stendal, so we are drawing chips from all the different areas, but of course, transport cost is higher at Stendal. So it is not necessarily that the wood prices differ; it is just the logistics costs which influence that.

Also pine prices in the Northern part of Germany haven't really come down as rapidly for some reason. Because the OSP market for some reason seems to be very strong in Germany. Of course, OSP manufacturers are the primary competitors for the raw materials for the pine pulp logs.

Okay. I guess just one last sort of bigger-picture question. Obviously, you guys have done amazing work at Celgar, and I guess with the projects there starting to be completed. How do you think going forward strategically? Would you consider another Celgar-like project? Are you looking for something like that? Are you just going to sit with the mills that you have? What are you thinking about doing?

Well, you know, I think Celgar is unique. You have to remember this is a very modern mill. It fit our profile. It is a single line mill, which is unusual for this capacity in North America. So I think it was a unique acquisition.

Of course, we can never say that we're going to find something which is similar. But I think there may be potential. Right now clearly what we are focusing on is really to improve our overall performance, focusing on reducing the costs on the wood.

We have already developed a lot of programs, both from the logging as well as other things to really drive the price of wood down. Because we already told you at the end of last year that wood prices were going to come up. But we do have all of the stuff necessary to try to get it down this year, and I think those programs are working very well.

It is important that we focus on Celgar's operations, because we are very close to now making this a world-class mill. I think this year, this mill will certainly demonstrate its true potential capabilities.

So I think those are occupying a lot of our time. But I would never preclude the possibilities, given the right opportunity, that we certainly will look at everything. But right now, we don't have anything that I could say is that interesting that I would say we have to do this deal. There just isn't any of those type of mills in North America.

Fair enough, good luck. Thanks.

Mark Bishop with RBC Capital Markets.

Thanks, just a couple follow-ups, Jimmy. I guess just responding or commenting on your last comment there, I would imagine your best deal at this point would be if you could get your hands on the remainder of Stendal. Is that still the case?

Well, I mean, we would always consider increasing our ownership at Stendal. But of course, right now, we are very much engaged in this EPC contract discussions. As you know, they are the shareholder as well as the EPC contractor. So I think before anything can be concluded, I think we have to clearly come to a conclusion on the EPC issues, before we can even consider anything else in terms of discussions for that matter.

Okay. Last quarter I think you left us with the impression that you were still considering an equity issue. Is that still something -- if you did have perhaps the Stendal opportunity -- something you would pursue?

Well, right now, we do have adequate liquidity for the business levels that we are doing. I don't foresee that we need to look at an equity raise.

I think of course, given the right opportunities we would consider. But right now, clearly pricing and the environment doesn't necessarily reflect -- let's say on our part -- a desire to go out and raise equity. There is really no purpose at this point.

Okay. Just finally, one last question. Given where prices are -- and I appreciate you do expect that prices at least in Europe might increase further. At what point do you start thinking about the potential to lock in some of your volume with some longer-term forward contracts?

I think in terms of the volume, of course we have a lot of volume commitments from all of our consumers. It is the price issue. If you look at the pulp forwards, the negative is that, unless you are expecting that pulp prices will drop, what you have is basically you are paying into those swaps in the early part of the swap period. So it will be cash flow negative.

So unless you really believe that there is going to be a significant deterioration in the pulp prices, it isn't attractive.

It is actually more attractive from our perspective to use the currency as a bit of a hedge, because it does reflect some of the things that clearly are priced into pulp price movements. If we had hedged already in terms of pulp prices in dollar terms, it would have been quite negative because of the increase in, of course, the euro during this time.

So in a way, I think the currency side of it has more liquidity, more predictability in a way, and certainly less negative in terms of cash flow, than maybe the pulp forward sales or hedging type of activity.

So does that suggest that you might get more aggressive with your currency hedging going forward?

No, I would not say that. All I am saying is that as you have seen we have traditionally done currency swaps, which doesn't impact our cash flow significantly. But because of the wide gap of interest rate differential recently, over the last year, the swap attractiveness also has kind of diminished a bit.

Now that may change. Because as you know, euro rates and US dollar rates are now converging. So at some point, it becomes more attractive based on interest rate as well as the actual level of the currency exchange rate.

Okay, great. Thanks very much. Good luck for the quarter.

Bruce Klein with Credit Suisse.

Good morning. You mentioned the fiber differential impact, 1Q versus 4Q '06. What was the dollar amount? You gave us [I think] cubic meter. What was the dollar amount or the euro amount?

We gave it to you in terms of, let's say, the price per cubic meter difference. At our German, between the fourth quarter and the first quarter, it was roughly about EUR7 difference in cubic meters. At the Canadian operations, it was about C$9, which is similar to about EUR6.

So it is EUR6 in total for the two?

Well, the average would be around between the EUR6 and EUR7 per cubic meter.

Can you translate that for me into dollars or euros?

On a per-tonne basis?

There's 5 cubic meters of wood go into a tonne of pulp.

But if you look at it as a production cost increase, the impact was roughly a EUR35 per tonne difference fourth and first quarter.

Okay, thank you.

We have reached the allotted time for questions and answers. I will now turn the call back over to management for closing remarks.

Okay. I appreciate everyone's attendance at today's conference call. As I said earlier, I think considering the significant increase in raw materials, which we anticipated, I think the overall performance was very positive.

We expect moving forward actually Celgar's development will mean that, from a Restricted Group perspective of course, Celgar numbers will add significantly to that. At the same time, I think the first quarter in no way indicates the overall anticipated year-end performance that we think we will have this year. Because we are looking for further decline in raw material costs. As a result of that, I think that you will see that the overall year numbers are going to be quite attractive, considering the much adverse type of conditions that we are dealing with, both from a currency as well as an overall cost perspective overall. So on that note, I would like to conclude the call. Thank you.