Mercer International Inc (MERC) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Brian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mercer International First Quarter 2008 Earnings conference call. All lines have been placed on mute to prevent any background noise. (OPERATOR INSTRUCTIONS.)

At this time, I would like to turn today's conference over to Ms. Alex Tramont of FD. Please go ahead, Ms. Tramont.

Thank you. Good morning, and welcome to the Mercer International 2008 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 remain 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 Gandossi, Executive Vice President, Chief Financial Officer, and Secretary.

I will now turn the call over to David Gandossi. David, please go ahead.

Thanks, Alex, and welcome everyone to Mercer International's First Quarter Earnings conference call.

The format of our call today will be a little different than in the past, but we hope that you find some of the additional topics we have in mind useful to understanding our results, our strategy, and some of our unique characteristics that sometimes are not always obvious from our statutory filings.

I will begin by making some prepared remarks regarding the results of the quarter and our financial position, and then I will pass the call to Jimmy, who will provide some additional detailed commentary on our operating results, our markets, and highlight some of the strategic initiatives we are advancing.

We assume you have had a chance to review the pres release we released yesterday, so our comments will focus on the highlights rather than the detail. And as always, we will be pleased to take questions before we conclude the call.

We were quite pleased with the company's financial performance in the quarter. Our sales volumes improved from the seasonally lower fourth quarter, and list prices in all of our markets continued to rise. We reported net income of EUR 2.9 million in the quarter, or EUR 0.08 per basic share compared to net income of EUR 1.1 million, or EUR 0.03 per share in the same quarter in 2007.

Our earnings in the quarter included pretax accounting losses totaling EUR 1.8 million for the mark-to-market changes in our foreign denominated debt and our derivative instruments. This compares to the same quarter in 2007 when we reported gains of 7.8 million on our then outstanding debt and hedging instruments.

As you would expect, our debt reduction schedule is one of the contributors to our lower interest expense, which was EUR 3.5 million lower than a year ago at 16.6 million in the quarter. When compared to the same quarter in 2007, we posted considerable improvement in our operating EBITDA in the quarter. Our quarter one operating EBITDA of EUR 32.8 million, or US $49 million, compares favorable to approximately EUR 28 million in the same quarter of 2007.

An analysis of the sequential changes in our EBITDA from the fourth quarter of 2007 highlights the impact of the continuing dramatic weakening of the U.S. dollar. Also, despite the absence of the nearly EUR 4 million of carbon credit proceeds in Q4 and exchange rate movements that impacted our comparative results by about EUR 6 million, we achieved EBITDA of 32.8 million compared to 37.2 million in the fourth quarter. Improvements in list prices, higher sales volumes, and lower manufacturing costs offset the impact of the foreign exchange and carbon credits.

During the quarter, we drew down our cash balance by about EUR 15 million. EBITDA of 32.8 million was consumed by about 3 million of capital expenditures and 43 million of semi-annual interest and principal repayments. We currently have a total of about EUR 120 million of liquidity comprised of approximately 70 million of unrestricted cash and 50 million of undrawn revolvers maintained by Rosenthal and Celgar.

Aside from these cash flow impacts, the main changes in our balance sheet were driven by foreign exchange movements. The two largest components of our balance sheet being property plant and equipment and debt were each reduced by approximately EUR 20 million. We believe that it is occasionally worth reminding our investors of several characteristics of our capital structure that make Mercer somewhat unique and play to our advantage.

The first is the impact government grants have had on our fixed assets and capital structure. The fixed asset values are reduced to reflect our accounting for over EUR 380 million of government grants, which were used for the most part to construct and upgrade our German mills. In accordance with U.S. GAAP, these grants are netted against the cost of construction on the balance sheet. If we were to adjust the assets values to reflect actual cost, the impact would be similarly reflected in a corresponding increase in the book value of shareholders' equity.

The second attribute of our capital structure that is really of note is our long-term debt. Two-third of our debt was incurred to finance the construction of the Stendal mill. It is non-recourse to other lenders and is 80% guaranteed by the German government. The guarantee feature of the facility attracts a much lower interest rate then we would otherwise achieve in the market, and as a result provides a very efficient capital structure for our shareholders while limiting exposure to lenders comprising a restricted group.

The facility is an advertising loan with maturity date of 2017. Within our restricted group, we have the Rosenthal and Celgar mills supporting our EUR 196 million of senior notes and EUR 42 million of convertible debentures. EBITDA on the first quarter from the restricted group mills was EUR 19.8 million, or about US $30 million, while interest expense on these facilities was EUR 6.7 million.

With that, I will turn the call to Jimmy to update you on our operational market and strategic developments.

Thanks, David. As David mentioned, we are pleased with our overall performance during the quarter. While operationally we continued to improve, the head winds created by what has been a steadily weakening of the U.S. dollar has been punishing to many in our industry.

Our productivity approached record levels of the fourth quarter. However, one fewer calendar day in the quarter and the preparation for Celgar's April annual shut resulted in our production being about 9,000 tons lower in the first quarter at 361,000 tons. This compares favorably to the same quarter in 2007 when our production was 347,000 tons reflecting the capital expenditures and mill optimization projects we completed in 2007.

We commenced Celgar's schedule annual shut in the final hours of the quarter, and we are pleased to report that the mill safely returned to full production after 12 days of maintenance. This shut is the only scheduled down in the second quarter and while it went as planned, you will notice its impact of reduced production and higher maintenance costs in the second quarter well compared to the current quarter.

Pulp markets remain in balance and we increased our sales volume by 25,000 tons from the seasonally slower fourth quarter. The list price for FKSK pulp in Europe increased during the quarter by about $30 U.S. per ton and ended the quarter at 880. This compares to 757 U.S. per ton one year ago.

Along with others in the industry, we have commenced a $40 per ton MBSK increase in Northern Europe effective April 1. We expect the increase to be fully implemented by the end of May.

We have experienced some recent congestion in our supply chain, which has increased our inventory particularly in Celgar where poor congestion on the west coast of Canada is particularly challenging. We're testing alternative shipping arrangements to alleviate this pre-sold inventory.

While the markets continue to exhibit overall balance, this can at times create some volatility, which we anticipate over the next few months. So, while additional price increases in the second half of 2008 are not certain, we believe that there is enough foreign exchange and cost pressures to support further increases the next six months.

With demand growth for chemical pulp at 7% year to date and the likelihood of additional mill closures, the balance should shift to the favor of the producers. Although from a U.S. dollar perspective MBSK prices are at historic high levels. From the Canadian and European producers' perspective, the prices are still at what would be trough prices. The bulk of the price increases to date have been due to the weak U.S. dollar as well as the increase in input costs such as wood fiber and not really reflecting the supply demand balance that presently exists.

We believe that with continued demand growth prices will continue to increase. Eucalyptus pulp prices have been increasing faster than soft wood and this should put additional upward pressure on long fiber pulp.

Let me now take a moment to discuss the developments in the wood market. When compared to the fourth quarter our average fiber costs were only moderately higher and similar to Q3 2007 levels. The fiber market is changing, however, and we are beginning to see some development that we expect will provide downward pressure on pricing in the months to come.

In Europe, we have been closely monitoring the Russian trade policy with respect to wood exports, the export tax that is now 25% along with recent recently enhanced border restrictions have placed considerable pressure on exports to Scandinavia. While we do not import directly from Russia, we have been watching to see if the restrictions will begin to impact pricing in Germany.

Experience in recent months now seems to confirm our earlier assertions that the tax will have limited impact in our markets due to the considerable cost in transportation between Germany and Scandinavia. Also, as we expected, fiber board manufacturers, who are often competing for the same fiber as our German mills, have begun to reduce consumption in the wake of the U.S. housing market deterioration. While lumber producers have been curtailing and therefore reducing supply of residual chips, demand from other consumers such as the board manufacturers appears to be taking the pressure off of demand.

In the short term, a relatively large January storm in Austria has failed a considerable volume of timber that will require the Austrian sawmill industry to consume. As a result, we expect the Austrian sawmills to step away from the traditional supply in Southern Germany for the better part of the year, which will put additional downward pressure on fiber in Germany temporarily.

In British Columbia, the outlook for fiber appears unchanged and our wood costs at Celgar were moderately higher when compared to those of the fourth quarter. The lumber market in North America remains depressed and as a result, residuals from sawmills are at historic low levels.

We continue to seek alternative suppliers of fiber and to optimize our existing supply to limit our reliance on certain suppliers that may be more exposed to the lumber down turn. We have recently been participating in direct timber sales from the Crown lands and have engaged new contractors for whole log shipping.

I am excited to announce a considerable milestone in our strategic objective. Also, in increasing our green energy production, our Board of Directors last week authorized management to proceed with a new energy project at Celgar. The EUR 35 million project will optimize existing boiler and steam facilities and include an additional second turbo generator that is expected to generate an additional 25 to 30 megawatts of incremental power, which should be available for sale. Completion of this project will take a better part of two years. However, key pieces of equipment, including the turbo generator, has recently been ordered.

While there remains much work to do including the identification of the buyer for the power, this is a significant step that advances one of our key objectives. We are also monitoring closely legislation developments in Germany that if enacted may improve pricing for green energy suppliers such as our Stendal and Rosenthal mills. We hope to have more to report on this in the Fall.

Looking forward, despite the challenging global economy and the continuing depressed lumber markets, the Mercer mills are all well positioned to continue to deliver strong cash flow in the short term while inventory levels imply market weakness, we believe the fundamental MBSK demand remain strong.

We remain focused on increasing margins by reducing costs as well as increasing the mill availability at all operations and improving the returns of our byproducts such as excess power.

That concludes my prepared remarks, so that on that note, I would be pleased to open the call for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS.)

Herve Carreau with CIBC World Markets. Please go ahead.

Yes, thank you. Just wondering if you first can tell us what are your fiber costs in British Columbia from the two different sources. And, second, just wondering if the congestion deport also reduce your shipments in Q1? We appreciate it, thanks.

David, you want to deal with that?

Sure. On the wood side, Herve, the -- maybe the way to think about it is on average wood costs in the southern part of the province are averaging around $50 to $55 a cubit meter. The woodroom all in costs for us now, we are seeing, they are about $20 a cubit meter lower than some of our remote chipping, so that sort of gives you the range. And our own woodroom would be competitive with sort of the average of what the sawmills are charging as for residual chips today. So, that is the scope of the cost in British Columbia. Total in our fiber costs in the first quarter are slightly lower than they were in the fourth quarter of last year.

In terms -- when you say that they are becoming more efficient, that all log shipping versus when you started it earlier last year?

Yes. I think the sequence of events would be best thought of this way. The sawmills, as the lumber markets got more and more challenging, needed to charge more and more for chips to stay open, and we were suffering from that. Then we started optimizing our woodroom, but it -- the failures in the sawmill industry were so dramatic, we had to engage Olog Chipping remote chippers, and that is our most expensive fiber.

And so, we are continuing modernization of our woodroom and updating its volumes will allow us to turn off those remote chippers. And in this current environment our woodroom will become a very competitive chip with the sawmills and will actually help us create a ceiling on what we need to pay for fiber generally because we will have the capacity ourselves at a price that is affordable.

Well that will increase your bargaining like position for residual chips?

Well, that is right. We just -- we are not just going to be hostage to fiber. We are going to make our own way.

Okay, thanks. And just -- and also just on the problem at the ports was that -- did that impact the Q1 and Q4, or with ...

I mean, it is continuing to impact Q1 and it will have an impact in Q2, but we are continuing to find alternative ways of shipping, and we think that Q2 and Q3, we have made significant progress to ship significant volume. So, that should relieve our inventory to levels which have been more traditional for the season. And so, the port congestion itself is not necessarily improving. It is just that we have been able to find alternative means of shipping the volume out and I do not think that the port congestion is necessarily going to de-bottleneck at least in the short term. It will take the duration of the year.

Okay, great. Thank you.

[David Post] with [Glen Rock Capital]. Please go ahead.

Actually, this is Mike [Tannenbaum] speaking in place of David. A couple of questions. You said in your press release that with the storms in Germany and Austria increased fiber supply by damaging the forest and effectively lowering fiber costs, and we were wondering, when do you think those supplies will be consumed and how will that impact fiber costs going forward assuming -- we are under the assumption that fiber costs will then increase.

And then, my next question is, this EUR 35 million project to generate 25 to 30 megawatts of power, I assume that is annually, and how much revenue will be generated from these sales approximately do you feel?

Yes, in terms of the wood that has fallen because of the storms, oddly enough, we have been experiencing significant amount of storms in the later part of the year and early part of the following year in Central Europe. And as a result of that, there has in the last nearly three years there has been a significant amount of wood which has fallen. And this, of course, has impacted the older trees and that is why there is discussion in regards to potentially shortening the cycle time and, therefore, we do see the overall damage resulting from these storms.

This would result in significant increase in volume for a significant period of time. The actual amount that was fallen in Austria represents almost a year's worth of consumption. So, we think that the wood certainly would have to be taken out to create economic value through the year. It just means that they will be reducing their purchases out of Southern Germany, but really the impact this year was not just a result of the storm.

But, really the competitive situation because of our immediate competitors for pulp logs would have been the board manufacturers as well as the OSD manufacturers. And, of course, because of the overall economic activity in U.S. in terms of housing as well as in Europe certainly the competition in that area has been reduced. And therefore we do not project that at least in the short to medium term that there will be a likely change in terms of the wood prices in Germany.

And, of course, in terms of our Celgar energy project, we believe that this of course will qualify for the energy, which has been called for under the renewable programs in British Columbia. And based on what we believe are alternative type of suppliers in terms of green energy pricing, that this power will have a fairly rapid pay back something in the order of about just over three years.

If we do not get the power under the renewable power program, we still believe that long term, power rates are coming up as well as the fact that there will be additional calls for power. So, it will range, but certainly we will have a fairly rapid pay back if the projections for green power rates in the short term are contracted for.

Okay, thank you.

Bruce Klein with Credit Suisse. Please go ahead.

Hi, good morning. What -- I am sorry, the funding for the Celgar expansion is that internal? How is that being funded?

Well, we think that clearly we do have the necessary funds, but because of the nature of the project, we think that it will be able to be financed as a stand alone project finance facility.

Okay. So, you are going raise money in the project finance market to do that? Is that what you are saying?

Right, because it will basically be likely sold under long-term contract to a utility.

That is on the balance sheet, the financing?

Yes. And it will be relatively efficient capital for us, Bruce, because it is like basically going to be a 20 year power purchase agreement will be the security from a government utility. So, it is a way to add some more cost capital to our capital structure and if that is not successful, and I cannot imagine why it would not be, but if it is not, we have got lots of liquidity in the company to do this in a very rapid pay back.

Okay. And your latest views, I guess you noted pulp inventories on a day and supply crept up a little bit. What is sort of your take on that? And it sounds like you are constructive because of the affects and the cost pressures, but is there a level where inventory bills were not quite of constructive or how do you view that?

Well, I think the problem has mainly in the Western Canada in terms of the port congestion. So, although we do have sales, it has been very difficult to reduce the inventory because we just cannot get the shipments out.

I was -- Jimmy, just maybe more I was talking more macro in terms of the overall level of market ...

Yes. I think the macro situation I think also represents a little bit of uncertainty in the markets that we saw in China, and I think there has been some inventory liquidation in China in the later part of the first quarter. And this is a combination of I think of the credit situation in China, because of course they are tightening down on credit as well as the increase in the R&B value and therefore some of the purchased pulp could be sold still for a profit in terms of dollars. And so, there was net selling, which tended to create a slightly weaker market in China, and there was also some loose pulp of course being let us say offered. And I think this kind of created a situation where there was some minor build up in inventory, but we think that moving forward, this weakness at least will be cleaned up very quickly.

Thanks, guys.

Ben Carlin with Wachovia Securities. Please go ahead.

Good morning. Question is about supply demand with regard to potential shut down of high cost capacity. Where do we stand with some of the higher cost competitors out there who obviously they have been experiencing tremendous pressure in the markets. Some of these are Scandinavian producers that are experiencing the higher wood prices coming out of Russia.

And also, in Western Canada, what is going on with the Pope & Talbot transaction? Has that closed? Is that capacity potentially to be shut down? How do you guys see the situation?

Well, we think that still there is any producers which are losing money even with pulp prices at these type of levels, and this is really the result of the fact that of course, raw materials have come up. Energy costs have come up as well as freight costs have come up. So, many in the industry are still losing money. We, of course, heard that some of the mills in the Pope & Talbot group probably fit into that category. We, of course, have also heard that the sale to ADP's subsidiary collapsed, and there is now a controlled shut down of the two mills in British Columbia, and also I believe the mill in Oregon. A (inaudible) will also be shut down in the very near future.

So, they are presently going through a shut down procedure. We do not know as a result of additional discussions with ADP or potential other buyers. Whether those mills will ultimately dissolve or even ultimately return in terms of production. But, let us say that it is a significant amount of pulp on an annual basis that, of course, the three mills produce something in the order 700,000, 800,000 tons, and of course just one of those significant impact in terms of the pulp factor depending on what finally happens to those mills. There is of course the other mill in Finland, Star Anvil's mill, which of course going through also closure, another half a million tons. And we still believe that there is room for additional, at least one other mill, probably in the Eastern part of Canada, which may also go down.

So, clearly significant amount of production which are under threat because of the high cost, because of fiber, energy, etcetera. And this could represent a significant turning point in terms of price development because it is a significant amount of the percentage of global market, I guess, case production. I hope that answered your questions, Ben.

Yes, it did, Jim. I mean, thanks, it was very helpful.

Aaron Rickles with Oppenheimer. Please go ahead.

Thanks. Good morning, guys.

I guess just a couple of clarifications. You guys said that the Celgar revolver is currently undrawn?

No. It has got 22 million Canadian drawn against it and it a 40 million Canadian revolver.

Okay. Can you run through the shipments of production on a mill by mill basis?

Okay. I was anticipating this. Okay, for Rosenthal, the production 85.1. Stendal was 155.1. Celgar 120.7 for a total of 360.9. And the sales for Rosenthal was 83.1. For Stendal 149.5, and Celgar 115.6 for a total of 348.2.

And then can you remind us what (inaudible) is the current inventory billed at Celgar is?

Well, it is probably about 20,000 tons higher then we would like it to be at this point in time, and probably will be 30,000 tons lower by the end of the third quarter.

Okay.

A couple -- the power program at Celgar, did you -- I do not think you guys said exactly when those costs are expected to kind of roll through. Can you help us out? I mean, is there any -- there is no spending for 2008. I guess ...

Yes, there will be. Yes, we will spend about EUR 9 million in 2008 on it, and then the largest come forward to spending will be in 2009.

Is there any way to think about that on a quarterly basis when that kind of hits?

Well, it is going to be even throughout this year and then it wraps up, big spending second quarter '09, biggest spending third quarter, and then ramps down from there. Very little after that.

And the anticipated revenue should start to come in, so, '10? Is that how long ...

Yes, first quarter of 2010.

Okay. And then, so when you talk about a three year payback, are you talking from the time of ramp -- revenue?

Yes. Yes, for sure.

And the green power rates, there was some sort of legislation sort of act that sort of happened in order to get the higher rates. Has that gone through? Is that what you are still sort of waiting for to see what happens?

Well, there's a number of things going on. One, we have got many choices to sell our power because of where we are and who our utility is. So, where we are in the province, we have choices, but B.C. Hydro has implemented what Jimmy mentioned is a bio-energy call. It is a call for power. We submitted our project and we would expect to be a very attractive power project for that call. And we will know by July this year if we are going to be successful in that particular power sale opportunity. And if we are not proceeding on that course then we have other choices for selling our power. And as Jimmy mentioned, the way we are thinking about it is, this is B.C. Hydro's call for power. Rates are going to do nothing but go up in the future, so we are going to be prudent as we go through and determine how we are going to wield our power.

Okay. That is helpful. Is the -- the CapEx as the restricted group, can you just let us know what that was?

Sure. CapEx for the first quarter for Rosenthal was .04. Stendal was 1.3. Celgar 1.3 for a total of 3.

Okay. And then I am going to ask one more little question. The down time at Rosenthal for the rest of the year.

Yes. Down time for Rosenthal will be 10 days in Q3 for about 9,500 tons.

Okay. Finally, on the wood situation, the Austrian wood basket seems like it is geographically a lot closer to Rosenthal than Stendal. Is that accurate and would you say that the impact will be felt much more at Rosenthal or equally?

Yes. I guess it is closer to the Rosenthal mill, so it will have more of an impact at the Rosenthal. But, what we are seeing as I said, the OSB side, which is the pulp logs, of course, is really more the stand out which is of course consuming more pulp logs. So, I think the combination of the two, the Austrian situation as well as the weakness in the board industry, is having a general type of impact on both of the mills.

Have you seen rates have started coming down already for Q2? I mean, is there any sort of order of magnitude that you can help us with?

Well, I mean, we are projecting that there will incremental in wood prices, but it is not going to be a material decline.

And then just finally, on the Canadian wood side, I do not think that your mill is close enough to Pope & Talbot mills that that would have an immediate impact on your wood cost. Is it there ...

It has no impact in terms of wood cost. Pope & Talbot, they are drawing from different areas.

Right. Okay, great. Thanks, guys.

Andrew Shapiro with Lawndale Capital. Please go ahead.

Hi, good morning. I have a few questions, most of which are follow-ups on your answers to prior questions.

First off, on the Celgar, David, you mentioned in responding about the 20,000 ton inventory level higher than you want, that you expected a 30,000 ton drop by the end of Q3? That is 30,000 tons drop from where you are now?

Yes.

Where normal are?

From where we are now, Andrew.

Okay, all right. So, that is probably a creation of more cash than you had otherwise seen in the particular quarter, freeing up some of that.

Can you give us a handle on the outlook for margins in the next couple of quarters are you are working off as inventory because presumable that inventory is from higher cost fiber at Celgar now flowing out and flowing through and, of course, that is offset by lower cost fiber coming through from Germany. Do you have some handle on that and give us some guidance?

Yes. I do not think it will be really dramatic because the fiber costs in Canada have not -- I mean, in the first quarter they are slightly above where they were in the fourth quarter. So, it is not really material. So, the tumbling through effect of the fiber cost in inventory is not significant. So, as those tons are sold, they will have a similar type of EBITDA margin as the tons you have seen sold in the first quarter.

Okay. We will just see more of it as you bring the inventory down?

That is right.

Okay. In terms of your maintenance shut. You have done the maintenance shut at Celgar. I think you said Q3 is Rosenthal and Q4 would be Stendal, did the maintenance shut at Celgar enable any improvements to capacity, and what are the updated capacities of the three plants, and your capacity expectations from the two German maintenance shuts that are planned for this year?

Well, I think clearly the Celgar maintenance shut improved the performance of the digester to the point that now that is running very steadily and is now putting pressure on the other parts of the equipment. We think clearly Celgar has the potential over time to get to almost 600,000 tons of annual production with very little investment.

From investment?

So, clearly the daily maximum run rates indicate that as well as Stendal, we think the mill certainly exhibits potential to get closer to the 700,000 tons annual production.

Now your Stendal number, is that after the upcoming maintenance shut, or with ...

No. We will be installing some additional equipment as part of the DC settlement contract and, of course, this will have a significant impact and therefore in the next year be able to further fine tune the balance of the mill to start to develop toward the 700,000 ton rate.

Okay. And what are the -- your current stated capacities for the three plants?

Well, we are looking at 620 or so for Stendal, and I think around 480 or so for Celgar.

Okay. You talked about towards the 25 to 30 megawatts of power that would be generated. I do want to clarify. This generation of the power is coming from your existing activity and just capturing in primarily the steam that you already generating and is going on in the atmosphere.

Yes. Basically it is tightening up the steam balances.

Okay.

So, there will be really very little additional type of let us say feel that will be required. I mean, because the production overall is increasing, we will also have more bark, etcetera, and therefore you have naturally more biomass to burn as well as more steam production. So, it is a combination of tightening up the steam balance as well as the overall increase in the projected production volume that will allow us to produce the excess electricity that we continue.

Now, so other than depreciation, which would be a non cash expense on the CapEx you put in, and then is what you are saying that there will be very little, if any, costs -- incremental costs that will go along with the revenue generation on this power?

Yes, essentially no costs hardly.

So, a huge margin. And in Germany you are right now you are selling excess power and the green power initiatives there, I think, they do not require CapEx. It is an issue of getting certain legislative milestones successful?

That is correct. Basically it involves no change in the present operation. Just basically the rates that we will receive in regards to certain incremental power exports.

And so, that again would then be basically 100% margin to the bottom line on incremental.

Absolutely.

Awesome. Okay. Now, the timing of hearing back on the Canadian RSPs, when do you expect to hear back on those?

Well, we will know in June and July.

Okay.

After the summer, we expect that we will have a clear indication.

Now, you talked, I think, about the timing of the CapEx payment steadily through the year. Is it correct that the CapEx that you mentioned here that that cash -- none of that has come out of Q1. It will be Q2 and then going forward?

Yes. There is a little bit that went out in the first quarter, but it was just deposits on equipment and because the long lead item is the turbo generator.

Right.

We have ordered that ...

So, the rest are just progress payments or other things?

Progress payments and finishing the engineering. That is right.

Okay. And when would the timing of the project financing likely occur that would finance this rather than drawing on your more expensive lines of credit?

Well, we are expecting to put a book out to interested parties probably within the next two or three weeks and go through a process. Might take a month and then we would expect to get a line in place that we can draw on as we spend the money.

So, most of this money even for 2009 -- I mean 2008, the up front CapEx, you would expect you can get covered?

We are for sure going to try.

Okay, all right. You generated a lot of cash. You made a substantial debt paydown scheduled principal payments for Stendal. Unfortunately that is your lower risk debt, I mean, and your lower costing debt, what are your thoughts regarding either refinancing the restricted group or an overall refinancing that starts addressing -- taking out your higher cost of debt, and replacing some it with lower costing debt as well as obviously paying more of that down as we get into -- we are not far from October when your right to redeem, or call the converts kicks in.

Do you want me to talk to that, Jimmy?

Yes.

So, I guess the best answer I can give you is we are still considering all of our options and we are going to have to wait to see how the year unfolds for us. We are motivated to [deliver] to eliminate high cost debt. We are very focused on the converts. Half our constituents think we should hope that we can convert those in equity and the other half say, "Hey, if you can avoid the delusion that would great." So, we are going to have to wait and see how the cash flow position is following from the pulp markets. We will have to see how our shares are trading in terms of the price and the affect that has on covenants for us. And to see what our options are going to be, but, Andrew, we are focused on [delivering] and obviously want to do at the highest cost debt that we can, and we will just have to wait and see.

Yes. Do you consider the converts right now to be with the share issuance potential in the high sevens to be your highest cost debt or is the senior notes, which have a very, amazingly right now high market yield in the low to mid double-digits?

Where the answer to that question depends on where you think our share prices is going to go in the future.

As one of your largest shareholders, I have an opinion, of course. I was just wondering if management and the Board had an opinion.

We are leaving our doors open right now.

Okay. But, it sounds like you are going to touch on at least one, if not like redoing the whole package.

That is correct.

Okay.

In terms of the word out, you have done a road show. I think it was primarily institutional focused, and I think we are actually down to one institutional cell side analyst from a year ago. I am just wondering what the prospects for one, expanding the institutional coverage and efforts there. As well as maybe some, I guess you would want to call it, a retail presentation and road show in terms of I guess finding a home for -- that is longer term orientated for the excess supply of this company stock. I just the valuation on it is just pretty appalling.

Yes. We are addressing the investor relations program with schedules both in Canada as well as in North America for the balance of the year. We are ...

What is the upcoming schedule? That is actually the gist of the question is what are your next -- you have done the road show. You do it maybe once or twice a year, you have interim road shows, or what are the interim efforts kind of planned in between running the company?

Yes, I mean, we are focusing in terms of not just saying the normal too that we traditionally have done. We are also looking at, of course, conferences where several of the institutional banks may be prepared to host us as well as going with some of the analysts. So, we are scheduled for one fairly shortly in Canada in the next few weeks to meet with some of the Canadian institutions, and we are hoping to further accelerate that program for the balance of the year.

Okay. Thank you.

And on the analyst side, Andrew, just to add a comment there. We have been sort of strong arming some of the analysts to, don't you think you should be starting to cover Mercer with the story is that in a challenging industry, the strong get stronger and the weak get weaker. And they are close, but they still are sort of monitoring it and trying to understand the global economics of the world. And so, I think there may be some additional analyst coverage coming in the next six months, I am hopeful.

What is the general criticism or hesitation that you hear in your interaction with the community?

Probably just the ...

It is not the global economic situation and the uncertainty of the Russian terror and, of course, they still have this short fiber, long fiber substitution question.

Um-hmm. Well, at least your last road show seemed to address a lot of that. Well, thank you much.

Thanks.

(OPERATOR INSTRUCTIONS.)

[Ronnie Caplin] with [Wolf Point Capital].

Thanks. Most of my questions have been answered. But, as far as Celgar is concerned, how much of that product are you shipping overseas versus North America?

Well, the bulk of the production is shipped overseas and of course the critical market is China.

Right. Have you seen any changes in that market over the last quarter?

Well, I think that the demand certainly in China continues to grow. It is a more volatile market mainly because you have several participants in terms of the buying side as well as the selling side. And I think some of the problems recently certainly in China has been the result of new entrance because, of course, certain of the North American producers have been looking to increase their market share or actually get into the market. And therefore you had some unsettled conditions because of this. You have also had, of course, the Russian pulp producers, which continues, of course, quite erratic in terms of how they sell the product in China.

But, I think overall, because of the moving forward, we think that the tightness in supply will ultimately will create further price increases in China. Aside from the fact that right now eucalyptus pulp prices in China are actually trading slightly higher than soft wood. So, in many ways, I think there is only one way that prices can go in China, which is up.

Okay. And then as far as the assets you own now, are you happy with that or would you consider making an acquisitions in the near future?

Well, I think, our focus is to run very good quality, highly efficient mills, and of course we have stayed true to our discipline. So, unless there is really a very compelling acquisition because of certain characteristics, yes. I think we are quite happy with what we are running. We are focused in terms of the byproduct stream. As we said earlier, and try to maximize additional EBITDA from sale of our byproducts, and we think that will become more of an increasing focus as well as an important cash generator for us.

And just a final question on your convertible notes, those you can call as of October, is that correct?

Yes.

And they are callable at par?

Well, they are redeemable.

Redeemable.

Yes.

Great. Thank you.

[Pit Barton] with Upper Valley Capital.

Hi, Jimmy and David.

I had a question about the Canadian capacity situation. The Vancouver Sun story discussing the Pope & Talbot shut down describes how the [Mackenzie] mill might be of interest to [Stora], which obviously is facing possibly 30% due to the increase of 50% in Russia next year. But, that facility is a '72 vintage with a '96 update, 230,000 metric tons or thereabout. If that transaction occurs, does not that put a price on your capacity in Canada that -- since you have got the most modern facilities, I am a little confused as to, we are clearly at the stage where private market transactions make Mercer look very cheap. And I am also interested in whether you would consider at some point maybe in the future like 2009 sending out a green power company for the people -- the investors who seem to be interested in those types of things. I appreciate your comments.

Well, I mean, we are presently increasing the old sale of green energy, and I think this will continue to develop at all of our mills. And presently, I think although they are very interesting, they are not of a size or nature to really to really focus on a spin off or such presently. But, depending on where we are in the next few years certainly we will look at various alternatives.

In terms of the Mackenzie mill, I think the article just basically pointed out that I guess Stora or some representatives of Stora basically had visited the mill. There was no indication that subsequent to such visits any bid was placed. So, as far as we know, under the Pope & Talbot bankruptcy, the only bidder for any of the assets was the subsidiary of A.P.P. and, therefore, just the mere fact that Stora may have visited the mill does not mean that they actually wanted to buy the mill.

I think the wood situation in Scandinavia certainly is a developing one, and this will mean that there will be a significant amount of additional closures in our mind mainly because it is not just the wood tariff alone in Russia, but really the very mild winters over the last two years has created a lot of problems for the wood harvesting activity in Russia. And I was just recently actually in Russia to look at the cost of harvesting and it is not really that cheap. So, wood in Russia is not being offered to the producers of paper as well as to pulp at prices that would really be that attractive in many ways, and it is a structural thing. The structural thing is you have a large number of small harvesters. You have huge cost related to building roads into the forest and taking out of the wood. Fuel costs have come up as well and, therefore, there is a structural cost, which means that at least in the near future, Russian wood is not as cheap as one would expect based on just the fact that there is so much of it. So, I think there is a lot more problem then just the wood tariff for Russian. It is availability of wood coming out of Russia at any price and it is very expensive to harvest right now.

Thank you.

Paul Quinn with RBC Capital Markets. Please go ahead.

Yes, thanks. Two questions. One, just you described looking for alternative shipping arrangements, I guess, primarily for Celgar. If you could sort of discuss that.

And then, just secondly, on fiber sources for the Celgar mill, it is my understanding that some of the -- historically Pope & Talbot chips went to that Celgar mill, and if you could just sort of describe on a percentage break down where those fiber sources come from.

Well, I mean, the Pope & Talbot sawmills have been closed for a few months already and, of course, we have been taking alternative means of getting the wood. And of course that is one of the reasons we have had outside pulp log shipping capacity that we have engaged as well as increased the amount of external chipping that we may contract out to certain sawmills as well as increasing the volume of our own production.

So, when the Pope & Talbot mills were running near capacity, they represented a significant portion of our feed stock, something north of 20%. But, presently because they are shut, currently they are not representing anything that is significant. So, all we are doing is essentially taking alternative means and we believe with the increase in efficiency at our woodroom through certain maintenance and other changes there that the capacity in our woodroom will increase significantly for the balance of this year and into next year. So, that even with continued market deterioration ...

You said they represented 20%.

Yes, 20%-plus.

We do not think that the Pope & Talbot situation clearly has not had a significant on our fiber costs to date and we are, of course, taking measures so that even if the lumber industry remains very depressed that we will have more than sufficient wood at reasonably prices.

Yes, Jimmy.

The trade situation, what we have done really is, of course, take an initiative and together with certain other producers essentially chartered ball carriers. So, without this initiative, we would have ended up effectively being held like the other producers in waiting for containers. So, we have taken the initiative and certainly we have now contracted volumes with chartered ball carriers that we know that we will have the shipments out in the second and third quarter.

Okay, great. So, just for clarification, whole log shipping represents what percentage of source for Celgar?

The whole log shipping ...

The numbers are -- so residuals for the first quarter was 73% of the volume, and the remote chippers that we have engaged brought in 12%, and the woodroom was about 15%. And the woodroom historically has hovered around 8% to 10% of our supply, and what we are seeing from the sawmills -- we are losing some sawmills because they are just not competitive at these prices. But, some of the other sawmills are chipping more for us then they used to, so it is a combination of both, and again the woodroom optimization, we would like to replace the remote chippers with processing wood through our own woodroom.

Great. That is very helpful. Thanks.

David Post with Glen Rock Capital.

Hi, this actually Mike Tannenbaum speaking again. I have a question about you G&A expense in Q1 here. Last quarter in Q4, and during the conference call, you had mentioned that some of your selling costs were reclassified from cost into G&A and that Euro at the 9.4 million run rate was something we should expect going forward. But, then we had a -- kind of a noticeable decline in G&A expense this quarter and I was wondering if you could address that and talk about what you think the real run rate is going to be going forward.

Yes. So, we are working on harmonizing our accounting between our three mills. And so, what you saw last quarter was an adjustment on selling expenses that we pulled out of cost and sales and put into SG&A. So, G&A turned into SG&A, and then this quarter we had a really good look at all the mills and in terms of what we classify as G&A versus what we versus operating costs and what we an almost equal amount reversed the other way. So, we are back down pretty close to where we were before our conference call the last time. And the run rate, I hope from this point forward should be fairly steady for you.

So, you are saying that we should consider the run rate approximately 6.9 to 7 million going forward, which would have went to this quarter.

Yes.

Okay. Thank you.

You are welcome.

At this time, there are no further questions, and I will turn the conference call back over to management.

Well, I thank everyone for, of course, attending today's conference call. As we said, we are very optimistic in regards to the overall balance in MBSK market, and we think that there is certain developments, which will further tighten up the supplies. There has, of course, been a certain amount of volatility mainly in the China market, which may have spooked certain producers as well as other market participants. But, we think that the fundamentals are very strong. The second half of this year looks still very positive, and as you can see, our mills are running exceptionally well, and will continue to make additional progress not just in terms of production volume, but also production efficiencies.

And, of course, our program in getting extra revenue and income from byproduct stream will also have a meaningful impact in time. Hopefully, certain changes in Germany will have a much faster impact, but certainly the developments in Canada will also be very positive for the future. And therefore we are getting stronger every year. It is unfortunate that the general market does not recognize that, but I am sure that in time it will.

So, on that note, I would like to thank everyone again and call this call to a close. Thank you.

Thank you again for attending today's Mercer International First Quarter 2008 Earnings conference call. This does conclude the conference call. You may now disconnect.