Mercer International Inc (MERC) 2008 Q4 法說會逐字稿

Good morning, I will be your conference operator today. At this time I would like to welcome everyone to the Mercer International 2008 fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a Q&A session. (Operator Instructions) Thank you, I would now like to turn the conference over to Alex Tramont, ma'am, you may begin.

Thank you. Good morning and welcome to the Mercer International 2008 fourth quarter earnings conference call. Management will begin with formal remarks after which we will take your questions. Please note that in this morning's conference call, Management will make forward-looking statements that were made in the press release. According to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks related to these statements, which are mostly described in the press release and with 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's fourth quarter earnings conference call. As always, I'll begin with some prepared remarks from the key financial aspects of the quarter, and then I'll pass the call onto Jimmy who will speak with the particulars of the market, our operating performance, and some of our strategic initiatives. As well, we'd be remiss if we didn't comment on the current financial turmoil we are experiencing, and how we are managing our mills to lower our costs and maintain liquidity. As always, we will be pleased to answer any questions you may have following our remarks. Let me begin by saying this was clearly a difficult quarter, despite a reasonable quarter from a mill operating perspective, including a large maintenance shut at our Stendal mill, we experienced a global collapse of pulp prices, which has been very dramatic.

As you know, currency markets have been very volatile in recent periods as well. Jimmy will speak more about this in a moment. But first let me talk about the numbers, as you will have seen in our press release, we reported a net loss of EUR59 million for the quarter. Or EUR1.63 per share compared to net income of EUR37.4 million or EUR0.20 per share in the same quarter of 2007. As you know our earnings are sometimes heavily influenced by the mark to market gains and losses on our hedging instruments. The most significant of these instruments is our interest rate swap held up by our 70% owned Stendal operation, which is designed to fix the interest rate on the Stendal- debt at 5.28% through the year 2017. Our earnings in the quarter included pretax accounting losses totaling EUR29.7 million on this instrument, compared to a gain of EUR1.4 million in the same quarter of 2007.

While this instrument is serving its intended purpose of providing security it occasionally creates a significant mark to market accounting adjustment when interest rates shift. Our interest expense is noticeably lower than the same period a year ago, as we continue to reduce our level of borrowing on the Stendal facility. This is despite the fact that due to the recent strengthening of the US dollar, our US dollar denominated interest is higher in Euro terms than a year ago. We also acknowledge the rapid decline in market pulp prices in evaluation of our pulp and raw materials inventory by recording an EUR11.3 million provision in the quarter. Now, this is made up of finished goods and fiber, the break down is EUR4.2 million and EUR7.1 million for fiber. All of the fiber was for Celgar and the finished goods break down was EUR2.6 million for Stendal, EUR0.4 million for Rosenthal, and EUR1.2 million for Celgar.

We occurred an EBITDA loss of EUR7.5 million compared to the positive EBITDA of EUR24 million in the third quarter. For those of you interested in the US dollar equivalents, this is about a $10 million loss in EBITDA in the fourth quarter compared to about $36 million positive EBITDA in Q3. The largest contributors to the reduction were the inventory provision of EUR11.3 million and almost EUR40 million of net US pulp price deterioration. The price reduction was cut in half by a concurrent strengthening of the US dollar. We achieved positive improvements in the sales of carbon emissions and green energy. We sold forward, earlier in the year, about EUR5.6 million of carbon emission credits, and we realized about EUR4.5 million on forward sales, which were made possible under our new energy arrangements in Germany.

If I can switch to cash flow for a moment, we consumed a total of about EUR33 million of cash in the quarter, reflecting the weaker EBITDA and higher working capital balances, including accounts receivable, which were very high after strong December sales. We also progressed our high return capital spending program during the quarter. We consumed about EUR8 million in cash. We currently have liquidity of about EUR98 million, which is comprised of approximately EUR55 million of cash and EUR43 million of undrawn revolvers maintained by Rosenthal and Celgar. And given the rapid decline in pulp prices, we took significant steps during the quarter to create additional liquidity in our capital structure.

First, we successfully negotiated certain amendments to our nonrecourse Stendal facility. The amendments allow us to defer approximately EUR164 million of principal repayments to the maturity of the facility in 2017. As you know, this is an important facility to us, as it is low cost, government guaranteed, and nonrecourse to the Mercer shareholders. The amendment secures the efficient financing and creates some flexibility if pulp markets do not improve quickly. In consideration of the deferral, the renew measures to provide protection to the lenders, including an additional EUR10 million capital contribution from Mercer and a cash sweep mechanism in the event that there is excess cash beyond the requirements of the mill. The second important step we took during the quarter was to extend the Celgar revolving facility.

This CAD40 million facility has now been extended on identical terms to near 2010. And as you know, we have been working on new financing for the Celgar green energy project. After disappointment early in the quarter when our proposed lender had to back out, we reinitiated a competitive process which will come to a conclusion in the near future. We have considerable new interest in the project and hope to have good news on this front shortly. So with that quick overview of the financials, let me turn the call over to Jimmy to talk about our operational, market, and strategic developments.

Thanks David. Good morning everyone, as David mentioned this has truly been a historic few months. As you would expect, the condition of the financial market and its impact on our customers and us has dominated our focus during the quarter. Cost control projects that have been in place for sometime have been a new sense of urgency, and the profile of our liquidity is much greater in our day-to-day decision making process. But while we are preparing ourselves for a difficult year, we're also forging ahead with certain strategic initiatives. After several consecutive quarters of a generally stable trend in productivity improvements, the fourth quarter was not that strong.

After taking into consideration the impact of the annual maintenance shut at Stendal, our average daily production rate was down slightly in the fourth quarter. The sequential impact of the larger Stendal shut in quarter four, when compared to the Rosenthal shut in the third quarter, was approximately 11,000 tons. The balance of our lower production of about 18,000 tons was due to a variety of smaller run-ability problems, which we believe have been corrected. Year-to-date, however, after removing the impacts of the shuts our productivity is at full 20,000 tons higher than 2007. As mentioned, during the quarter, we completed the annual maintenance shut at our Stendal mill.

The shut wasn't as smooth as we had accomplished in the past ,and our costs were slightly higher as a result of the slower startup. But thorough completion was particularly important as we're expecting to complete the entire year of 2009 without a shut at the Stendal mill. A maintenance practice that can only be achieved under high proactive and complete shutdown process. And as for our other mills, their annual shuts are scheduled presently for the third and fourth quarters. We expect those 2009 shuts to be somewhat longer than in the recent past, and we will be tying in the important requirements for the green energy project at Celgar, and we will be performing a thorough maintenance of the power turbine at Rosenthal.

Let me talk about the pulp market for a moment. The last time we spoke, three months ago, I told you that the markets were particularly unsettled and that there was very little buying, particularly, in markets such as China. Our belief was not that demand had vanished, only buyers were waiting for stability. We also believe that the uncertainty would be short lived as inventories were not that high. Now after three months, the stability in the markets is returning somewhat and volumes are trading. Of course as you know the stability is at extremely low pricing. We believe that this pricing is at levels that are not maintainable at current input cost levels for other high cost producers.

Some of these producers are traditional, nonintegrated suppliers, who are trying to re-enter the market after periods of curtailment or shuts, others are mills that are integrated with paper mills that are placing pulp in markets that were previously consumed by paper machines. The tightening of credit markets has left certain producers no choice but to sell into weak markets. Those sources of additional supply are introducing volume at a time when further demand has become uncertain. Hardwood pulp production is even more out of balance than softwood and prices for these grades have fallen significantly.

This situation is not helpful, as there is the possibility of some substitution of NBSK, which may shrink demand further. We enjoyed another particularly strong sales quarter in terms of volumes and totalled about 364,000 tons. Our stronger levels of sales, were due in part to some recent congestion relief, at one of our most important ports in Vancouver. The relief resulted in particularly high sales volume to China in the quarter at prices, which were of course low, but were not at the bottom of the dense spot market. We entered the year with more manageable inventories levels, which will allow us now to be more selective in destinations if the market doesn't improve quickly.

The list price for NBSK pulp in Europe fell about $180 per ton for the quarter and ended the quarter at $635, where it has remained. As David mentioned, foreign exchanges moved in our favor with the US dollar strengthening by about 14% in the quarter, but it was not nearly enough to make up for the price movement. Given the economic uncertainty, we are currently experiencing, we do not expect any material upward movement in prices for the next few quarters, while foreign exchange and cost pressures are supportive of further increases, the recent supply increase and likelihood of demand reductions will likely keep the upward pressure off. The greatest potential positive influences are the most uncertain.

We believe that the current pricing and oversupply situation is not maintainable at these prices. Current costs, in addition to the possible reinstatement of the Russian export tax, will put added pressure on producers to take out high-cost supply. While we expect the volatility of financial markets to settle relatively quickly, we're less certain about the length of the economic slowness in our key markets, which may influence demand. Let me now take a moment to discuss developments in the wood market, as they have been more stable, and there is a downward pricing trend that will soon be becoming more evident. When compared to the third quarter, our fiber costs were on average slightly higher at all three mills. In Germany, wood pricing is developing, as we described in our previous conference call, and continues to fall for both whole-logs and residual wood chips.

Our average wood cost remains significantly lower than the same quarter one year ago. The deterioration of the global housing construction that has had a dramatic impact on board producers continues to reduce our competition for fiber. Our ability to consume wood in either whole-log form or residual chips has been that we have been able to shift away from less abundant residual chips, and focus more heavily on the whole-log supplies that were previously the target of board manufacturers. But while log-prices have fallen and chip-prices have fallen, there remains a cost premium for whole-log chips, and as we shift from purchasing chips to whole-log chips, we're moving to a higher cost mix. We expect that our makeshift is now complete and that our average consumed wood costs will be noticeably lower moving forward as a result.

In British Columbia the overall fiber-cost trend is remarkably similar. We have been very successful in developing new supplies of whole-log pulpwood for Celgar, and we believe that we have addressed the delivery cost issues that we had faced with the Arrow Lake's towing operations season after the Pope & Talbot's bankruptcy. But like the German mills, while cost for logs and chips are both falling, the impact on our financial statements will not be evident until the first quarter when our mix settles. We're also excited that the woodroom upgrade at Celgar is in its initial days of startup, and expect improvements in wood costs and our ability to source an optimum fiber supply. The lumber market in North America remains depressed, and as a result, residuals from saw mills are at historic low levels. We're working diligently with the provencial government and tenure licensees in our areas to develop alternative supplies of fiber.

This lumber market, and our sometimes unique initiatives to find alternative sources of fiber, has highlighted significant deficiencies in the government regulations, with respect to pulp manufacturers access to wood. Our work with government officials centers around how to provide a supply of low-grade, often bug-killed, wood to pulp-producers at a time when the lumber industry is incapable of facilitating that supply. The government's response would best be described as supportive and committed to do the right thing. Many of the changes will require directives from senior levels of government, and we have been given assurances that this will be done. We're optimistic that we will find a solution to add value to a source of fiber that may otherwise have been decaying in the woods. If I can talk about energy for a moment.

We were pleased to be able to announce a few days ago that we have signed a green energy power purchase agreement with the BC power utility, BC Hydro. This agreement is an important piece to Celgar's green energy project, it allows us to sell at preferred green energy rates the full capacity of our new turbine for a 10-year period. The project itself at Celgar is progressing well. The new turbine, Turbo Turbine, is under construction and on-site preparations are continuing on schedule. As far as our energy market activities in Germany are concerned, we're participating as planned in the new green energy program effective January 1.

You will recall that this program will give us access to green energy tariffs, that until now, have been unavailable to us because of our unusual large size. Our participation in this program will occasionally allow us to contract in the spot market, when opportune, and we did so in December when we settled for wood sales contracts for net gain of approximately EUR4.5 million. We continue to believe that this economic turmoil has temporarily interrupted a market for soft-wood pulp that was quite balanced prior to the fourth quarter, so we will now have to wait until the global economy and credit market settle, before resuming a price structure that reflects a long-term demand-supply-balance for NBSK. As David mentioned, we believe that our liquidity is reasonable and our capital structure is supportable, unless we continue to have depressed prices for the foreseeable future. This combined with our German government support of Stendal and our low-cost structure will help us to carry through.

We are forging ahead with our various strategic projects, so that when the markets settle, we're ready to take advantage of demand for NBSK and energy. So looking forward, despite the challenging global economy and the continuing depressed markets, the Mercer mills are well positioned to continue to deliver stable cash flows. In the short-term, while inventory levels imply shorter-term market weakness, we believe that the longer term fundamental outlook for NBSK and soft-wood still remains positive. We remain focused on increasing margins by reducing cost, as well as increasing the mill availability at all operations, and improving the returns on our by-products such as excess power. That concludes my prepared marks. So on that note, perhaps, I can turn the call back to the operator, where we can then open the call for questions.

(Operator Instructions) We will pause for just a moment to compile the Q&A roster. You first question is from the line of Peter Ehret with Invesco.

Hi, good morning. A couple questions here. The BC Hydro deal, can you just walk us through, from right now from the quarter end, how much more cash has to be outlaid, and when does EBITDA start to flow from that project, and maybe just a guess about how much EBITDA that would be contributing.

Yes, the capital spending will trickle through in the second quarter and then the bigger amounts would be the third and the fourth quarter. And there's about EUR35 million to EUR40 million to go. And EBITDA for that quarter, for that project will really start to hit in 2010. Sometime in the first quarter when we start up the turbine.

Okay. And can you put an amount on that expected EBITDA.

Well, we have been pretty careful, I think the number on the last conference call that Jimmy Lee used was 20 million Canadian annually.

EUR20 million annual EBITDA from that project?

Yes.

Okay. And the EUR35 million, EUR40 million that you have yet to spend, can you just remind us where that's coming from.

Well, our plan is to raise a EUR45 million Canadian project finance loan for the CapEx. And on previous calls, we announced that we had a lender, we were fairly far along and with the turmoil in the financial markets the lender we selected backed off. And we reinitiated a process, just as soon as we got back from new year's, and we have got about 14 lenders competing, expecting turnsheets by next Wednesday, and we will see what the pricing is from there.

Okay, great. The additional capital contribution to Stendal, did you get, you don't own a hundred percent of that, right, it's 70%?

That's right

Did your stake go up?

That's still under negotiation.

Okay.

That's with the minority interest.

Okay. But at least at this point that asset isn't going to burn cash for you.

No, that's right.

Okay. And just now that your stock's a dollar a share, I would imagine, you would view your opportunities for raising additional capital as being largely foreclosed at this point. But having said that it's a fairly tight ownership set here for the Company, any ideas for potentially exploring additional capital there, perhaps well, Ford for example they raised stock to buy bonds back. Any kind of creative thinking like that going on.

Lots of thinking, but nothing we really should talk about on this call today, I don't think. Just ideas at this time.

It's pretty much just gut-it-out mode? And hope this passes?

Well I mean, we're reviewing various alternatives, of course, from an operating perspective it's important that we focus on liquidity and, of course, reduced costs, but on the financial side, of course, we are looking at what is realistically available to us to strengthen our liquidity, and also to improve, I guess, our balance sheet for the future.

And on the operational side, one of the things that's hard to see, just with this point where we are in the reporting series is with the price of our product coming down, prices of a lot of the inputs globally are coming down as well and that's going to take a little time to see in our results; things like fiber, gas, a lot of the chemicals, even suppliers, I mean, it's not just the end product pricing that's being depressed it's everything throughout the supply chain in all industries. So there's like a resetting of cost inputs at the same time that the price of the product is going down.

Okay. You talked about Vancouver port getting better, is it back to normal, would you go that far or is it just simply better?

Well, I think if you look at what we were able to do at the end of the year, it was the result of really the Charter vessel program that we had undertaken in the early part of the year, and of course we were able to line up charters for the second half. That allowed us to shift a significant quantity in the fourth quarter, while others really were still quite tied up because of the poor congestion, it was really more the container and the railcar issues. We still have issues related to weather related problems in BC because we've had significant avalanches, which has resulted in railcar issues, and therefore, it has been difficult in terms of the first part of this year for Celgar to ship, not because of the port, but really more railcar availability, as well as even the highway accessibility.

Okay, good, thanks.

Your next question is from the line of Steve Chercover with D.A. Davidson.

Thanks, good morning. First of all, I'm wondering is there any potential for asset write downs, I know you don't have goodwill but--

So no Steve. We did a very thorough review of all of our impairment risks, and we don't have any long-term asset write downs.

Secondly on the Stendal shut ,can you attempt to quantify what the financial impact was in Q4?

Well, we don't really disclose all that kind of stuff. But, you know, it's about 11,000 tons of production that was curtailed through the maintenance.

Sure. Then you said it was a tougher than usual startup, so that impacted costs, right?

So there was a heavy maintenance period of a very fulsome maintenance and a little bumpy on the startup.

And 2010 is a million miles away, but since you don't have to shut Stendal whatsoever in 09, is it subject to the same constraints of taking downtime in the winter, that means not going to shut til Q2 or Q3 of 2010.

No, it's going to run. I mean occasionally you will go down, parts of the mill will go down for short periods of time, for things like water wash or whatever the particular procedure is that needs to be done. But it's not going to have conventional maintenance shut until 18 months from the last one.

18 months, got it. Okay. Then finally , with energy prices coming down, and there are many stories how Cellulosic Ethanol is no longer on the front burner for anyone. I'm sure you don't reassess your BC Hydro plans or anything else, but if you weren't already halfway through these things would you still be full bore on them? Are the projects still as attractive as they were a year ago?

Clearly they're more attractive now, because although the no-more-input prices have dropped, the green energy rates have not dropped at all. So we have with the BC hydro a fixed energy pricing for a ten year period with inflation adjusted indexing so,we certainly receive significantly higher rates than what the market today is prepared to pay. And that's also true in Germany as well.

And from the jurisdiction's point of view, while times are tough, the carbon economy is coming very rapidly, the developments with the Western Climate Initiative, for example, is they're smoking along and they're going to measure carbon and carbon's going to be a liability and this jurisdiction is very focused on green energy, carbon-neutral energy, that's happening around the world. And I think we might see some leadership coming out of the United States on that front as well. So we're just early participants in something that's a wave coming at us for sure.

In fact it has no real consequences in terms of what today's electricity prices are, because we are guaranteed a certain pricing environment for a very long period.

Final question before I turn it over, I know it's difficult to opine on other people's positions, but we're well aware of one mill up in Mackenzie that BC government basically took over to avert environmental catastrophe. Do you have any idea of how many mills you think are going to go down once and for all?

Well, we know that a significant number of mills are essentially having negative cash flows with today's pricing. And I think that if you look at Celgar, Celgar essentially without the energy project in place, probably is in the middle of the pack. So, if you look at the NBSK production market, you got something like just over 14 million tons, so you clearly, Celgar being on that kind of middle, that means that you got about 7 plus million tons, which is on the other side of the balance.

Thanks Jimmy.

Your next question is from the line of Aaron Rickles with Oppenheimer.

Morning. If you guys can just run through the mill level of the CapEx production, shipments for the quarter.

Okay. Aaron, the production volumes for Q4 for Rosenthal were EUR83.5 million, Stendal was EUR134.7 million, and Celgar was EUR120.8 million. And the sales volumes for Rosenthal were EUR71.6 million, for Stendal EUR140.5 million, and Celgar EUR152 million. And then on CapEx, we've cut CapEx back at Rosenthal and Stendal to bare minimums, and the CapEx for Celgar, which was finishing off the woodroom at the beginning of the first quarter, and the green energy project will be EUR31million in 2009.

What was it in the fourth quarter, going in?

Fourth quarter spending at Celgar was EUR4.4 million.

That was EUR31 million for '09?

Yes.

The inventory write downs, as far as the EUR31 million, how did that break out, or even just restricted versus unrestricted?

So at Stendal, finished goods went down about EUR2.6 million, and that reflects the cost of the shut. Going forward, our expectation is that we won't see anymore of that. And for Rosenthal, it was a very small EUR0.4 million unfinished goods, and for Celgar EUR1.2 million unfinished goods, EUR7.1million on fiber. And the fiber story there is that for a lot of the year, we were accumulating inventory at remote locations and preparing to chip those with remote chippers and haul them in chip trucks to the mill. That's a pretty expensive way to go, both in terms of logistics and the cost of those chippers. So that fiber, we have had to write down due to the collapse of pulp prices. But we believe that the new logistics we have set up, and our access to fiber, and with the woodroom running, is going to produce a scenario where we're not going to have further write-downs of raw materials going forward.

That's helpful. When you talked about the shuts that you expect in 2009 for Celgar and Rosenthal being a little bit longer, more intense, can you give us a little more color around the tonnage that you expect to lose or the financial impact to cost?

Yes, the Celgar shut's going to straddle the third and the fourth quarter and it could be as long as 16 days, which would be about 25,000 tons. That's all subject to planning again, but that's our current estimates. The Rosenthal shut is on the books for 11 days in the fourth quarter and that's about 10,000 tons.

When you look at your ability to potentially borrow more money, I was looking at this this morning, I guess the test is $85 million or borrowing the base for secured debt on top of the bond. Can you give us a sense of how much room there is? There didn't look like there's much, at this point.

There's a number of things. You're right it's the greater of $85 million, or borrowing base, as calculated under the indenture for working capital, plus there is a $20 million basket for other debt, things like project debt, that kind of thing. There's another $20 million basket that's variable, and then there's a $15 million sale lease-back-basket. And those are available. Then on top of that there is an EBITDA test, where if your EBITDA coverage exceeds two-to-one, then you have got additional indebtedness room. Today we don't have any room under that measure, but we have room under the other four measures I mentioned.

So if you're able to secure the EUR45 million, that would tap into some of those additional baskets?

Yes, for sure we have got lots of room for that.

Okay. The Rosenthal credit facility, is there any near term maturities there that we need to think about or--

Well, it does mature in 2010. So we will be working on that this year, replacing it with a receivable and an inventory backed revolver, not something that I'm overly concerned about.

Okay. Then I guess just maybe the last question, Jimmy in some of your comments in the press release you talked about taking a variety of actions to conserve cash, reduce cost, and maybe some of that in the CapEx you touched on, but can you go into a little bit more depth about some of the things you think you're doing, maybe tie SG&A into that, because it looked like SG&A was very very low this quarter.

Well I mean I think there's a lot of things that go into SG&A, so that's not necessarily indicative of really the cost-cutting measures that we're taking. But clearly, we're focused in terms of preserving the cash, and therefore, any nonessential projects, essentially are stocked. So only those which are absolutely critical are going to take place. That's one measure. Clearly there is, of course, a certain amount of reduction of employment. In Germany, we are able to use some of the government supported programs, so we don't really have to undertake layoffs, you utilize more short-time type of programs, which allows us to tap into some of the federal supports, so that we're paying only 40% of the wages for certain number of our employees.

And we're also, of course, looking at our staff levels at Celgar very closely, in terms of reduction of staff. And in terms of salary freezes, of course, we instituted essentially all freezes on salaries. We are in discussions with the union, in regards to the agreed escalation of their wages to see if we can also agree to essentially freeze on that. That of course, as well as other issues, are being discussed with the union. And we of course have significant programs in regards to our most costly issue, which is the raw material supply. As you know our woodroom now is operational and will be ramping up to full capacity soon. Therefore, we have a lot of flexibility in terms of the type of wood that we need to purchase. We also, of course, sit on a significant amount of inventory, as you know.

So we will be making very good headway in terms of wood cost inputs at our Celgar mill. We hope that the government also would refocus, in terms of, how pulp-logs are being sourced and priced. We're not really depending on that, but I think there's certainly room for improvements there. Freight issues, we of course are tightening down significantly. We're expecting, also, our suppliers to look at their pricing to us, considering the severe economic downturn, and we hope that we will make progress in all of our suppliers, whether it's chemical or other type of services. So yes, we've tightened down quite a bit in terms of all costs, all areas, and all mills.

That's really helpful color. Is it possible, I guess there's a couple things you have already done, the woodroom being one and some of the labor issues in Germany. Is it possible to quantify how much you might expect to save in dollar per ton basis from those actions that you have already taken.

No, I mean there's lots of things happening. I think our primary focus is to make sure that we have adequate liquidity going forward, that's very important, and of course, we're focused on preserving cash. And costs, of course, is a big component to that, and therefore, each of the mills has got a program and we have, of course, a plan, and I think overall, although it's going to be a tough market, we're confident that unless the whole world kind of further implodes we should be able to get through this. Although it's not going to be, of course, the most comfortable type of situation.

Thanks and good luck guys.

Thanks.

(Operator Instructions) Your next question is from Mark Wagner.

Yes, with regards to the amendments to the Celgar facility, were there any modifications to the agreement other than the extension of the maturity date?

No there weren't Mark.

Okay. Great, thank you.

Your next question is from the line of Rich Sherman with Oppenheimer.

Hi, in regard to the project financing for the energy thing that you're referring to, assuming that does go through, do you have a general timetable when you thought, you think it will happen? And would it return, assuming you were able to take down EUR45 million, would it return any net cash to you for outlays already?

A couple questions on that. The total spending is EUR55 million. And we're looking for EUR45 million. Okay, so we won't get back everything we spent, but EUR45 million is the number, we think is the right number in these circumstances. And in terms of timing, we're expecting turnsheets by next Wednesday. It will probably take a couple weeks of answering questions and due-diligence type of things to get towards a commitment later, maybe three weeks. Then facilities like that typically take two to four weeks to fund. So puts us up to the end of the quarter.

Have you already laid out the EUR10 million difference or is that still yet to come?

Oh, yes, we have spent more than EUR10 million Canadian on the project so far.

Okay. Good luck, I hope you're just preparing for the worst and hoping for the best, I hope that's --

Yeah, well, we're preparing for the worst and hoping for the best. And that's true also with the green energy project.

Well, that's what you got to do now.

Right.

Okay, thanks a lot.

Your next question is from DeForest Hinman with Walthausen & Company.

Hi, you talked about working to get down our inventory levels, but looking back historically, we have been able to get inventory levels down much lower on a dollar basis just looking back at 2006, we were in the low to high 60 million Euros with inventories. With the way that fiber costs are falling and being proactive with how much whole-logs and chips we want to hold, how much more working capital can we squeeze out of that inventory line?

Well on the raw materials, there's got to be EUR15 million of acuity, just by managing the inventory. It's the kind of thing that we think is possible in this environment, because our suppliers are going through just as dramatic a downturn in their businesses as we are in ours. And programs that describe to them what their allocation, what their maximum volume of delivery is, periods of curtailment and all these other measures. It has to be a very proactive approach all the way through the supply chain. We're expecting to cut our raw material inventories by 50%, in terms of what we have in front of the mill. And eliminate risks by having suppliers geared-up and ready to supply to us as and when we need it. That's what we're doing. I think that's what they're doing with their harvesters, it's just everybody's going to have to tighten up. And there's more savings in managing the working capital liquidity than there is in cost reductions in the next, in the near term any way for the next couple quarters, that's where you will see the biggest cash infusion come from.

All right, and then on the receivable side, we talked about getting some bolts out of Vancouver, I think, in December. How much of the increase in the accounts receivable that we're seeing is timing, or did we have to extend some of the payment terms to get some of those inventories off the balance sheet?

It's not extending terms, it was big big push on Celgar in the fourth quarter in December, rather. They sold 151,000 tons for the quarter in compared to averaging 115,000 tons to 120,000 tons in the previous three quarters.

So we should see a working capital benefit from inventories in the first quarter '09.

Absolutely, cash is all tumbling in now.

All right. Then you talked about inventories being low for the industry, with the decreased outlook for demand, are people willing to take down their inventory levels even further, or do you think they're kind of as low as they can go?

Well, I think, you know, if you look at the end-user inventory levels they were quite modest. I mean if you look at China, essentially, our customers we're drawing down on all of their inventory and not buying for an extended period of time. And then rebuilding that supply. I don't think that the inventory levels, certainly for our end users, have really been rebuilt. I think they will continue to run at these very low levels.

Now in terms of the producer inventory levels, although they are higher than normal, but they're not significantly higher than what would be kind of normal conditions, but clearly they're above what would be tighter type of conditions. And this was at a cost of significant amount of closures in the fourth quarter, where the producers, especially the high cost producers, took a significant amount of downtime to adjust the production levels so that inventory levels would not rebuild. If you look at the inventory levels, although there was significant amount of downtime, the inventory levels didn't come down. But, it's good that at least it wasn't going up either. So I think we are now making some headway in trying to address the demand reductions that we have seen.

There is further curtailments going on, and as a result of that it's going to rebalance, where hopefully, we can start to now move the producers inventory levels to levels which would indicate much more balance type of market, and with the end-user's inventory levels being quite low, I think we got much more flexibility than the hardwood guys, where the hardwood inventory levels are extremely high, and it's going to take significantly more closures in the near future to really rebalance that position. So I think, although, the hardwood prices and inventory levels will continue to pressure the soft-wood, we think at least on the soft-wood side the oversupply is not as large, and certainly much more manageable going into this downturn, because there was really not that much new capacity which had come on line.

Now when I think about capacity going forward, it seems like there's, what you guys are saying, is there's overcapacity. In your mind how much tonnage needs to exit the market for there to be, kind of, this equilibrium again?

Well it's very difficult to say what the demand destruction is going to be, because we're seeing continued weakness in the global market. We don't have a good read as to what that impact is on China, because we're just coming out of the Chinese new year. Although the shippings have been stable into China, they have been at very depressed prices, but we have been able to move the levels of volumes that we would have expected. Europe continues to be weak, and we think there will be further weakness there. So we don't really know what that demand destruction's going to be. But I think that we have enough room, in the sense, that we have a lot of very marginal production out there, which represents a significant amount of tons of capacity. And clearly,it will only rebalance, essentially, if we have production curtailments throughout the industry and that's happening already. And I think, you will see a balancing based on that, so if the demand continues to drop, you will see further capacity essentially being forced to take downtime to correct for that.

Now, in terms of the, you talk about a lot of these marginal players, is it a situation where they do capacity curtailments, but they manage to squeak out with enough working capital where they can do a prolonged shut, then they come back and we're kind of in the same situation again? Is there something different this time around with the credit markets being so tight, whether either out of bankruptcy or equity holders, debt holders continue to give these guys more money to try to operate these facilities?

Clearly the financial markets are very tight, so the availability of traditional type of financings are not really available. So it would certainly be more difficult for mills who are forced to close to really get new money to maybe reopen. But this industry has always been plagued by this issue, where mills which had been shut, they find new buyers, somehow they come up with working capital financing, and off they go again. So I would never say that these things will be permanently shut, however we know that every time that these mills do go into closure it's becoming more and more difficult to restart them, for various reasons, whether it's financial availability, or really the need to bring in new capital for equipment maintenance and other issues, which are not available any more.

All right, thank you.

Your next question from the line of Paul Quinn with RBC Capital Markets.

Just trying to get a feel pulp-markets globally. It sounds like you're expecting further weakness in Europe, and you're hopeful things are balanced in Asia and China. What's your read on North America?

Yes, I mean, we do have pressure in North America too. We think that at least in the short term, we probably are close to floor everywhere, Europe, North America, and Asia. So I don't think that we're going to get any real further material weakness in terms of pulp-pricing. Assuming we're at these type of currency rate exchange rates right now. Of course if the dollar continues to strengthen materially, then of course from a dollar-based price of course we will have adjustments.

But with present prices, probably, this will be kind of representing the floor. We think the second-half will improve. We don't think it's going to be a material improvement though. We don't think that the balance is going to be as strong as we have seen in the past, when we come out of these situations. But we're reasonably optimistic that we will fairly get a better pricing environment than the second-half of this year. But not a material benefit.

And just a rough-cash burn in Q4 was about EUR40 million?

Yes, in order of magnitude.

What do you expect that going forward? Is that going to appreciably come down, given we're not seeing any, really not expecting any, big price increases in 2009, are your costs going to come down to lower that?

Costs are coming down. We have reduced the principal requirements on Stendal, expecting some cash infusion from the solar green energy project, and when we balance the whole thing together it looks like it fits, subject to not being any further significant deterioration in prices.

Okay. Just do you have a rough geographic breakdown, I'm trying to figure out where shipments are going into which markets at which prices.

Yeah, Celgar almost half of it goes into China. And, in our German mills basically about 40 something percent goes into Germany and then Stendal may export, maybe 10% overseas, the balance is rest the of Europe. Rosenthal, 40% to 50%, Germany the balance, Western Europe doesn't really export. And Celgar 50% China, about maybe close to 35%, 40% to North America and the balance to the rest of Asia.

Thank you.

(Operator Instructions) Your next question is from the line of Andrew Shapiro with Lawndale Capital Management.

Hi, good morning. I have several questions, but I want to immediately follow up on this last questioner. David if you could help, you talked about a $42 million cash-burn in Q4, you highlighted that some of this is Stendal, we got some fiber cost cuts coming this year, we got incremental cash flow from the green energy in Germany in '09. Can you kind of just break some of that down in pods, so that we can get a feel for what the adjustment, or the adjusted cash burn, might be, assuming we'll call it stable pricing at these levels.

Yes. It's almost like you're asking me to forecast our first quarter cash-flow statement, and I'm just not really in a position to do that here.

Let's go backwards, looking then, say okay of the $42.4 million of this cash-burn, how much of this is activities that have been sixed or changed, aka, the Stendal principal payments, and your fiber cost reductions. Can you quantify that, at least from a current reported quota point-of-view without expectations then?

Yes, we haven't disclosed the cash-flow for the fourth quarter yet. Andrew, so I'm struggling with your question.

Let's say the first quarter cash-burn is, aside from continuing to invest, in terms of green energy project.

Yes, not CapEx.

In terms of our operating side, we don't think that you're going to see, realistically, a significant cash-burn.

Okay.

Because we don't have a maintenance closure in the first quarter. We are adjusting our cost so, of course, January was a tough month, but we think that the subsequent months should improve slightly. Overall we shouldn't have a real cash-burn.

Okay, because what I'm trying to get at is, a comment that you made earlier on, is the the industry pricing is a loser for many participants. And it's down at levels that are below their cash costs, and it's been said, that Mercer is one of the more cost-efficient lower-cost producers around, and if we're producing, how close are we to our cash-cost, if we're producing below our cash-cost, everyone must be hemorrhaging, and that can't last forever.

Yes, I mean if you look at the prices in China that we saw at the end of the year, and based on Celgar's type of costs inputs at that time, Celgar was losing money. While our German mills were, aside from Stendal because of the shut down, without the shut down, it would have made money. And Rosenthal would have made money. So if you look at the December numbers, Celgar is kind of like in the middle of the pack, globally, in terms of deliver costs, then you saw that about half of the mills, globally, were probably losing money. And that represents more than 7 million tons. At what was the prices in China at the end of December.

Okay. So now can you remind us of the percent of contract business you have at each of our plants, and how much higher is this contract business in price-terms than the current spot, and how much contract business would be beginning to roll?

Well, I think, you know, most of our business in our German mills are contract. But I think the trouble right now is that, whether it's contractor not contract, you're getting a lot of pricing discussions. So, the traditional stability of having a contract price in a very weak market doesn't really exist. So I think, what we would say, is that essentially contract volumes really just don't have any real meaning presently, whether it's on a volume base or even a price base. Essentially we're getting discussion with all of our end-users on a regular basis, in terms of volume and price.

Well, like leases rolling off, are you saying that we're right now selling our products on a mix that is comparable to its mix, given the current spot markets, and what would be on contract in regularly negotiated every month? Are we subject to a big rent rolloff, in a sense?

No, I mean you're getting some producers, I mean, end-users, which actually, will adhere to their contracts, they're more your larger consumer products type of companies. And of course, they are very dependent on having the right pulp supply, and they match their products to the pulp suppliers. So typically, these would be more stable, although you will of course, have discussions about potential reduction in prices, but they tend to be far less pressures. The other ones, especially the [[Codet]] grade guys, they're under enormous pressure, so you're going to get pricing discussions all the time.

How much higher in our contract pricing is it --

I can't give you the exact number, Andrew, because each of them are, it depends on the end-user, whether they're tissue, whether they're North American or whether they're Italian, they're Chinese and each of the [[Codet]] guys are all different too, so I cannot give you that type of guesstimate because, that also will key into what is our end-users actually getting in terms of what list-prices and what are the spot price gaps.

Okay, fair enough. When will the winter have eased enough, that we might begin to see some of these higher cost competitors to be able to close their facilities, because in the winter there's all kinds of environmental issues of really shuttering these things down? And are you surprised that we haven't seen some preliminary announcements already for additional capacity shuts?

The things that have surprised me is that the mills that I thought would probably be shut already have not really announced real closures. And the ones, which I thought would probably continue to run actually did take closures. So that has been quite surprising. Also the level of closures, to date, has really not been as big as I would have thought going into this market. So there's a lot of things, which clearly are happening, where it's very unusual. But with the continued weak markets, knowing the cost structure and the financial strength of these organizations it's not likely that this can continue to be the case. So we're seeing significant closures by many of the other guys already, where half of their production is down for short periods of time.

Now, can you clarify the comments you made, regarding fiber costs, particularly I guess, it's really German in Canada. You mentioned that fiber costs benefits were occurring, you kind of implied, they're occurring now, and I'm just trying to get a handle on, do they start occurring here mid-quarter, and this is a partial quarter gain in Q1, and then full quarter in Q2, or do you get a full quarter of benefit from the reduction in the fiber pricing?

The way to think about it is on the log purchasing, essentially, the liquidity measure would be you turn that tap off for awhile, and we have 400,000 meters of log inventory in front of the mill. So we're going to run through that for several months. And then when the log buying comes back on it's going to be at a lower price. At the same time, the chip supplies are on a lower level because of the continuing curtailments in the saw milling industry, but our bid for chips for the mill are lower, much lower than they have been historically because fiber is repricing itself, along with the realities of the values of the end-products to the producers. If fiber costs come down, the producers won't buy it, there won't be activity. So as I mentioned earlier in my comments, the price of pulp drives its way all the way back to the supply chain to all the suppliers, and everybody has to reprice or activity stops.

Now, you've also mentioned that you took primarily at Celgar and primarily in raw materials, an inventory write-down here in Q4 that you just reported. Wouldn't that imply going forward the raw material cost-of-goods sold for Q1, would indeed have a full quarter of drop because of the write down?

Yes, that's right. I mean, but the way to think about that is the value of that inventory that was written down in the fourth quarter won't produce positive EBITDA in the first quarter. You can't write it down to the point where you're producing income again from it. So the positive EBITDA comes from lower prices on the new in-flow.

But you are allowed toward the accounting principles, basically had you write it down to break even?

You write it down to net realizable value, which is you go through, all the way through to what your nets are, and that's where you stop.

A few more questions, then back out in the cue. Capital injection into Stendal joint venture, you mentioned was 10 million. That was 10 million Euro, I presume and is that Mercer's share is EUR10 million.

Yes, that's right.

Okay. And you also implied, answering someone else's question, that the percentage ownership in Stendal might change. Is that a result of this being, in a sense, a capital call and if the minority partner doesn't put up dough, our percentage ownership would rise?

Well, basically the loan modification is not subject to the minority holder participating. So if we, of course, are putting new capital in, then we do have the flexibility, of course, of converting that into shares and diluting the interest of the minority. We are presently in discussion with the minority, in regards to what they would like to do. So nothing has been concluded.

Okay. And the timing of the EUR10 million, was that in our current quarter Q1, what was it EUR10 million outflow from the parent company goes in?

Yes, the deal will be closed before March 31, because as you know, there is a payment scheduled for that date. So of course everything, the loan modification, will occur before the end of the first quarter.

Okay. And restricted cash dropped quite a bit for the quarter, what's that a function of?

Well, that's because Stendal, of course, had to draw on two fund part of the requirement to pay down the principal.

Okay. And so that just gets replenished, or that's going to go away as a result of the loan modification?

Well, the loan modification basically reduces the principal repayment schedule for the next several years, as you know. It's detailed out. But we have a loan reduction in terms of principal repayment this year by EUR20 million. And whether that restricted cash or not is completed or rebuilt is going to be dependent on how we perform through the balance of the year. But clearly, we're not let's say, optimistic that based on today's forecast that likelihood of that restricted cash being replenished this year is likely.

Okay. And the PT&E drop from third quarter is sizable one, is that all just currency or is there other factors?

It went down from EUR904 million to EUR880 million, with about a EUR23 million drop. Just currency and accumulated depreciation.

Okay. Last question here on the energy. Can you walk through each of the energy initiatives at the facilities to tell us the EBITDA contribution, and clarify the currency, in which, it's coming and the reason is, of course, you can't just do Germany and Canada because one of the Germany facilities is in the restricted group.

All that information is going to be filed in the K, Andrew. But the real big picture of the numbers that we talked about before in Germany, about EUR16 million of incremental energy revenue compared to 2007. If you're going to compare it to what we would have been this year if we didn't have it, it would be much more significant because, obviously, energy prices in central Europe are dropping, but we have a floor, which is higher than that in our EEG rules. So very much a big positive for us over in Germany because it's a stable supply and it won't go down with energy prices, it has a floor.

And the EUR16 million between the two facilities breaks how?

Half and half. A little more to Stendal actually, but they both are selling close to 20 megawatts of premium power. Stendal has another 30 say that it is selling at that floor price, which is right now above the grey-market price. For Celgar, what we have said on the call today and the previous calls, EBITDA from it is roughly about EUR20 million.

Canadian okay

And we have costs to make that power, obviously we buy the wood and make the pulp, and everything, but compared to the way we ran the mill historically, this is all incremental EBITDA for us.

Excellent. Can you clarify the German green energy? You sold some credits, and it's not clear if you sold some energy forward in December, and if it was energy that you sold forward in December, is that the green energy rate that has been sold forward?

Yes, so without getting too complicated. When you know what your price of power is in the future, if the current price of power goes below that, you can enter into forwards-to-buy, and you can sell, and do all kinds of things because you have certainty and you know you will consume power as well. So essentially, we took advantage of the changing market in the latter part of the year to enter into some forwards, that we have since closed, that capture some of that difference.

Okay. And can you clarify how these streams will work in terms of their variability in how the cash is received, is there a lot of volatility, obviously it doesn't compare to the pulp volatility, but just in terms of the energy volatility, how smooth is it or is there some seasonality?

There is some seasonality, but the revenue stream is smooth. Gentle curve, obviously higher demand periods have higher energy prices, so there will be some seasonality.

Okay.

Not all of the German energy is under the renewable energy, remember only 20 megawatts are. So essentially, the excess, which is primarily in Stendal has to be timed in terms of when it's sold. But today's type of program, really there's really, no benefit in selectively timing it, but we did look at last year the optimum program in terms of when to sell under the green energy versus just spot. And it's the combination of those two, which will maximize the revenue stream coming out of that. And Celgar, basically, what we have is essentially all the new energy being sold at a particular rate. We do, of course, produce certain amount of excess when we run quite steady state, not a lot at Celgar, but that is sold on the spot market and that varies depending on the season, winter months tend to be more higher energy, summer depending on where you are, sometimes far less.

Thank you.

There are no further questions at this time. I would like to turn the call back to management for any closing remarks.

Well, I thank everyone for participating in today's call. I think everyone is very much aware, of course, of the extremely difficult market conditions that we are operating in. But as I said, we are optimistic that we will weather this, and hopefully after this year, there will be rebalancing and we will see much better improvements in terms of our product prices etc.. And thank you again, bye, bye.

This concludes today's conference, you may now disconnect.