Mercer International Inc (MERC) 2009 Q1 法說會逐字稿

Good morning, my name is Kristen and I will be your conference operator today. At this time, I would like to welcome everyone to the Mercer International first quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Ms. Alexandra Tramont of FD.

Thank you. Good morning and welcome to the Mercer International 2009 first quarter earnings conference call. Management will begin with formal remarks, after which we will take your questions.

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

As always, I will begin with some prepared remarks on the key financial aspects of the quarter, and then I'll pass the call to Jimmy, who will speak about the particulars of the market, our operating performance and some of our strategic initiatives.

And as you would expect, we have a few comments on the state of the credit markets, and how we are managing our mills to lower costs and maintain liquidity. As always, we'll be pleased to answer any questions that you may have following our remarks.

Let me begin by saying that while we were hoping for some early improvement from the markets, the quarter came in exactly where we had forecasted. The markets were virtually flat from levels of December, and while we experienced a difficult production month in January, as we closed the quarter, all three mills are running well again.

And as you know, the upward pressure on pulp pricing is beginning to return in recent weeks, though currency markets have been volatile. We also have a update on our recently restructured Stendal credit facility.

As you will have seen in our press release, we reported a net loss of EUR39.4 million for the quarter or EUR1.08 per share compared to net income of EUR37.4 million or EUR0.08 per share in the same quarter of 2008. And as you know, our earnings are sometimes heavily influenced by the mark-to-market gains and losses on our interest rate swap held by our 75% owned Stendal operation.

The swap is designed to fix the interest rate on the Stendal debt at 5.28%. Our earnings in the quarter included pretax accounting losses totaling EUR15 million on this instrument, compared to a loss of EUR7.9 million in the same quarter of 2008. While this instrument is serving its intended purpose of providing interest rate security, it occasionally trades some significant mark-to-market accounting volatility when interest rates shift.

We also acknowledge the continuing weakness in market pulp prices in the evaluation of our pulp and raw material inventories by recording about EUR4.6 million evaluation provisions in the quarter. Despite the [trough] pulp pricing, we recorded EBITDA of EUR1.1 million compared to negative EBITDA of EUR7.5 million in the fourth quarter.

The largest contributors to the improvement were the lower level of inventory adjustments in the absence of a maintenance shut in the current quarter, compared to the cost of Stendal's maintenance shut in the fourth quarter. The improvement is also despite the absence of the positive settlement of a group of carbon emission contracts that we recorded in Q4.

If I can switch to cash flow for a moment, we consumed about EUR9 million of cash in the quarter. One of the areas of focus during the past couple of quarters has been working capital management. We were pleased to have generated over EUR27 million in the quarter through management of accounts receivable and inventory levels.

Offsetting these cash inflows are about EUR8 million of high return capital spending and EUR4 million of net debt reduction. We currently have approximately EUR45 million of cash and EUR30 million of undrawn revolvers maintained by Rosenthal and Celgar.

During the quarter, we successfully concluded certain amendments to our nonrecourse Stendal loan 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 non-recourse to the Mercer shareholders.

The amendment secures us sufficient financing and creates a flexibility if pulp prices do not improve quickly. In consideration of the deferral, there are new 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.

We were able to maintain a debt service reserve account structure, which means we're entitled to maintain one year's principal plus interest in this account, as well as EUR15 million in free cash flow before any excess is swept to the banks. The amendment also had the additional impact of increasing our ownership in Stendal from 70% to 75%.

The second important step we took during the quarter was to extend the Celgar revolver facility. This CAD40 million facility has now been extended on identical terms to May 2010. And as you know, we have been working on new financing for the Celgar Green Energy Project.

After disappointment in the fourth quarter, when our proposed lender had to back out during the first days of the credit market collapse, we are now continuing our negotiations with a new lender. We have a signed term sheet, but we're not over the goal line yet. The devil is in the details. We are working hard on it, and will continue our negotiations, but we won't close on something which isn't in the best interest of all of our stakeholders.

And finally, after extending our existing CAD40 million revolver to 2010, we are now in the process of doing the same for our EUR40 million revolver at Rosenthal as well, from a 2010 maturity to a future date.

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, the only thing good about the economic aspect of this quarter is that it was as we had expected, and there are indications that we are now on the bottom.

While the comfort is limited here that the past three quarters have been punishing on our earnings and our share price, it is difficult to move forward not knowing if the bottom is indeed the bottom. As you would expect, the condition of the financial markets and its impact on our customers and us has dominated our focus during the quarter.

Cost control projects that have been in place for some time have a new sense of urgency, and the profile of our liquidity is much higher and much greater in our day-to-day decision-making process. One topic that is usually high on our list of strategic meetings is the influence of the markets on the major high return capital projects -- the most prominent, of course, being the Celgar Green Energy Project.

While we are preparing ourselves for a difficult year, we remain committed to doing so while keeping these projects on track. I'll talk more about this in a moment, but let me first comment about the mills.

We will not recall the first quarter as one of our better ones from a mill productivity perspective. While Rosenthal had a strong quarter, with production within a few hundred tonnes of record levels, the two larger mills both had a difficult month of January. At Stendal, we were forced to take the mill down for five days when the main rail-line into Castlegar was damaged by an avalanche for more than a week.

At Stendal, we also lost several days in January when a key piece of equipment in our bleach plant failed. While the repairs went well, it occurred at a time of extreme cold, which made the start-up of the mill very slow. In total, we produced approximately 346,000 tonnes of pulp compared to 361,000 tonnes in the same quarter of 2008.

Just as a reminder, after a thorough shut in Q4, we are expecting to complete the entire year of 2009 without a shut at Stendal, other than for, of course, unexpected equipment-related difficulties -- a maintenance practice that can only be achieved under a highly-practiced maintenance program.

And as for our other mills, their annual shuts are currently scheduled for the third and fourth quarters. We expect these 2009 shuts to be somewhat longer than in the recent past, as we will be tying in important equipment for the Green Energy Project at Celgar, and we will be performing a thorough maintenance of the recovery boiler at Rosenthal.

If I could turn to the pulp market for a moment, I would characterize it as weak but stable. Most of our large markets in Europe and China reached the bottom in February, and the list price for US fell further in March. But our sales volumes were solid and we're not forced to participate in heavily discounted spot markets like we experienced in December.

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, non-integrated suppliers who are trying to reenter the market after periods of curtailment or shuts. Others are mills that were integrated with paper mills that are placing pulp in the market, that was previously consumed by their paper machines.

In the past two quarters, NBSK producers have permanently closed over [1.6 million] tonnes of capacity. In addition to these permanent closures, there are now an additional three-quarters of 1 million tonnes of annual indefinite closures. And the total all temporary closures that have been taken are announced during the past three quarters now totals about 1.25 million tonnes.

We believe that the impact of these shuts is coming. We believe that many of these producers are only just now beginning to run out of inventory.

As is typical in the first quarter, our sales volume was down due to the New Year's celebration in Asia. Sales volumes totaled approximately 337,000 tonnes compared to 364,000 tonnes in the last quarter of 2008. For the Chinese New Year, the volumes have been steady, which should allow us to keep up inventories at more manageable levels. While volumes to Chinese buyers have been good, there is some concern that these purchases may be resulting in higher buyer inventories, a situation that may lead to some slowness in the near future.

The list price for NBSK pulp in Europe fell about $50 per tonne during January and February, and they remain flat in March at approximately [630].

Foreign exchange moved in our favor, with the US dollar strengthening by about 13% in the quarter against the euro. But it was not nearly enough to make up for the reduction in these prices. As you know, in the last few weeks, producers have announced small price increases in China and Europe, effective April 1. While these are not large increases, we see them as a sign that we've touched the bottom, and we now have a foundation on which to begin easing prices back up again.

The largest potential positive influences remain 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, would put added pressure on producers to take out high cost supply.

While we expect the volatility of the financial markets to settle relatively quickly, we are 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 markets. As we discussed last quarter, the markets have continued to settle, and the downward pressure on prices was quite notable in this quarter's results. When compared to the fourth quarter, our fiber costs were, on average, about 10% lower than the quarter four.

In Germany, wood prices fell for both whole logs and residual woodchips, and our average wood costs remain 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. And our ability to consume wood in either whole log form or residual chips has meant that we have been able to shift away from less abundant residual chips, and focus more heavily on the whole logs supply that were previously the target of the board manufacturers.

But we are now reaching price levels that are low enough to begin restricting supply. In recent weeks, we have noticed reductions in whole logs [they] brought to market by landowners who are holding off for better pricing. In addition, residual chips are becoming scarcer at sawmill productivity in light of the poor housing market continues to fall.

We now expect the fiber prices in Germany will not likely drop much further for the time being. And British Columbia's overall fiber costs trend is remarkably similar. We've been very successful in developing new supplies of whole log pulp wood for Celgar, and we believe that we have addressed the delivery cost issues that we were faced with when the Arrow Lakes towing operation ceased after the Pope and Talbot bankruptcy.

But like the German mills, while costs for logs and chips have been falling, we believe that this trend is near to its end. Sawmill residuals have been harder to come by, and while our new wood room will take some pressure off the reduced sawmill supply, we will become more reliant on whole logs, which have typically been more costly.

We believe that there is ample supply of fiber at the headlands of the Arrow Lakes system, due to the Mountain Pine [below] infestation in the central and northern interior. We are working diligently with the provincial government and 10-year licensees in our area to reduce the costs of the [routing] wood.

Perhaps our biggest area of focus in this regard is the provincial stumpage system, which we believe is not operating fairly. We remain optimistic that we will find a solution to reduce the stumpage costs. We're determined to add value to its source of fiber that may otherwise have been detained in the woods.

If I can talk about energy for a moment, we are pleased to have completed our first quarter as a participant in Germany's Green Energy Program. As you know, our admittance to the program gives us access to a tariff rate that we expect to be significantly higher over the long-term.

Our energy revenues in the quarter were almost EUR4 million higher than a year ago, primarily as a result of this program. At Celgar, the Green Energy Project is progressing, and the foundation for the new turbine is being currently poured.

We remain on track for a startup in early 2010. And while we regularly discussed the merits of this and other high return projects, given the state of the credit markets, we are still confident that we can push through these important projects through as quickly as possible and achieve the benefits quickly.

And while I don't intend to spend much time today on the topic, because I believe that the issue is well understood, the application of the American alternative fuel rebate is puzzling and disappointing. We believe it to be an unintended outcome of a well-meaning objective, but hope that it will be corrected quickly. The rebate will only support weak pulp and paper producers and has the potential to divert upward price pressures that would have otherwise occurred.

So to make a few closing observations, we continue to believe that this economic turmoil overall has temporarily interrupted a market for software pulp that was quite well-balanced prior to the fourth quarter. So we will now have to wait until the global economy and credit markets settle before resuming a pricing structure that reflects the long-term demand/supply balance for NBSK.

We are pleased at the market's stability in recent weeks and expect modest improvements through the quarter. And as David mentioned, we believe our liquidity is reasonable and our capital structure is supportable, unless we continue to have these depressed prices for the foreseeable future.

This, combined with our German government's support of Stendal and our low cost structure, will help us carry us through. We are forging ahead with our various strategic projects so that when the market settles, we're ready to take advantage of the demand for NBSK and energy.

So looking forward, despite the challenging global economy and the continued depressed markets, we believe that there has been a significant and continuing adjustment in global production capacity for softwood pulp. We also believe that because of the inventory levels at some of the shut mills, the impact of this loss volume is only now becoming apparent, and we expect that the supply/demand balance will return in a reasonable period.

We remain focused on increasing margins by reducing costs, as well as increasing the availability in all operations, and improving the return on our byproducts, such as excess power.

That concludes my prepared remarks. 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). Peter Ehret, Invesco.

Sorry if I missed this, I dialed in just a little bit late. But with the equity contribution you'd made at Stendal, did you discuss what you got for that? Did you get a greater stake? Has that been resolved?

Yes, I mean, we basically -- of course, put in EUR10 million into the Stendal Company. And the minority shareholders in this case did not participate. And as a result of that, of course, there was an overall dilutive effect to the minority and that's how our position increased.

Okay. So that's a settled matter? That's not in dispute?

No.

Okay. And the -- you said you've got a term sheet now for the Energy Project. It's encouraging to hear that you're still going forward with it, so you've confirmed that? That it hasn't interrupted the development phase of the Project?

Well, I mean, the discussion with the lenders are ongoing. We're hopeful that this will conclude to the satisfaction of all parties. And of course, based on the term sheet that was given to us originally, we, of course, have continued to move forward on the Project, on some of the more time-sensitive items, so that we're not delaying the Project as a result of the continued discussions, clearly. But we do have still flexibility to look at the alternatives if those discussions clearly do not conclude in a satisfactory manner.

So at this point, you don't see the Project itself as at risk or you don't have to stop it --?

No, I'm not saying that. I'm saying basically that at this point, we're focused on, of course, achieving the most time-sensitive type of items to meet the timeframe that we have entered into with BC Hydro to have the power, of course, available.

And as a result, we're moving forward on those items, which are, of course, long leadtime and very critical; but it does not remove the possibility that we will have potential for either a delay, in terms of our own wish to defer, or the possibility that discussions clearly may not conclude satisfactory to our satisfaction. Then of course we have to look at various options that the Company clearly has looked at it and is prepared to do.

And if you had it away, what are the consequences with BC Hydro?

Well, I don't want to speculate on that because clearly we have not entered into any discussions with BC Hydro. And at this point, we're moving forward on a timeframe where we believe we have adequate cushion in regards to the startup schedule. So I don't think that we presently will see at least a critical time issue under the present understanding with BC Hydro.

All right, thanks.

Andrew Shapiro, Lawndale Capital.

A follow-up question or two here on the Celgar project. So you have a signed term sheet on the power project, right? And the anticipated asset security you have to provide under this loan is what set of assets?

And also, what is the size of the financing that has been offered that you're trying to (inaudible) with?

Yes, so, initially, the lender that failed on us in December, the deal was basically a pledge of the power purchase agreement and some discussion that we might island part of the Energy Project. And that's what the market was at the time.

The world has changed a lot since then. So what we're prepared to offer is the Celgar mill as security and a pledge of the power purchase agreement. The size of the loan is CAD45 million.

Okay. So it's still CAD45 million. Now, how much has the Company advanced so far now and put into the project? And what is the anticipated remaining capital needs to complete the project, if (multiple speakers) -- whether it's financed (multiple speakers) --

Yes, we've incurred about CAD17 million of the CAD55.5 million. And the heavy spending comes later in the third and fourth quarter when all the equipment shows up and we tie it all in.

Okay. Jimmy mentioned that prices were increased April 1; it's April 30. Did this price increase take and keep? Or is it still under negotiation?

Well, we think although there, of course, there is continued pushback by end users in the China market pretty much has been accepted by the European market to a large degree and has been accepted. Of course there is a lot of discussion still ongoing, but with the current currency movement, et cetera, we don't expect that such increases to fail.

Two more questions and then I'll back out in the queue here, if I could. David, could you discuss the timetable on the Company's debt maturities between now and let's say the end of 2010 -- so, basically over the next two years -- what's kind of the timetable of maturities and the status of each of those lines of credit refi's?

Sure, so for -- okay, the first one would be Celgar. So it was May '09 maturity and then in the first quarter here, we've extended that out another year on identical terms. It's working capital, inventory receivable facility. It's at market, it's fine. We'll just keep extending it; it's not a big deal.

A similar situation at Rosenthal. That one's due February of 2010. And so just to give comfort to the stakeholders, we're in discussions with the existing lender to do a similar thing, just to extend it so people know what the deal is. And that's our house bank relationship here in Germany, so I'm confident about that.

The next would be the convertible debentures, which are October of 2010. And then following that would be the senior notes, which are out into 2013.

Okay. Lastly, and I'll back out -- the German Green Energy rates were supposed to jump for us, starting in January, according to the legislation that was passed last year and kick in. And I understand and I see the year-over-year increase on the power side. But what I'm a little bit at a loss for, and maybe you can explain maybe was forward sales from other things going on -- why sequentially is the -- are the power revenues flat rather than sequentially being up?

Because last year we felt that the power rates for the following year were likely to come down. And so, in anticipation of the overall rates coming into effect for this year, we locked into prices which were essentially very indicative of what we would have received under the renewable power rates.

So we sold forward normal power because it was actually trading at prices which were very close to what the Green Energy rates were. And as a consequence, what we did was we settled out those forward sales, because of course, prices of power or power rates have come down because of the economic weakness. And therefore, we were able to crystallize the gains in the end of the year. And that is why you're not really seeing power rate differences.

But if you look at it from the separate components of what those -- what constituted that, there was an increase in the quarter. And I said in my prepared statement, that you saw at least a EUR4 million change in the actual power receipts, if you separate out the forward contracts.

So how long does the forward contract impact exist or --?

It was just the fourth quarter and so there is no forward sales beyond that.

When you compare the fourth quarter, you just have to recognize there was some incremental income there.

The other thing that maybe isn't really clear is that the renewable structure that we have now means we've got an absolute floor on the price we have available to sell electricity. So while the gray rate for power in Europe is continuing to come down and it's come down dramatically in the last six months, we don't move down with it. We continue to sell at these higher fixed rates throughout. So the benefit that we always used to talk about, the benefit of this Green Energy Program, continues to grow as the power rates all around us go down.

So one could model then the current level of power generation until Celgar kicks in is kind of likely to be the range where we're going to be at? Or even if power prices and rates drop further?

No, I think -- that's a fair conclusion, of course, is dependent on pulp production in that quarter -- reach a fair conclusion but rates will not really have the impact. (multiple speakers)

Rates can't go down.

Yes, so rates are set but is -- and thus the price per megawatt is kind of set, but if you're scaling production one way or the other, that would impact it. (multiple speakers) But right now you don't have plans for Rosenthal or Stendal's production rates to have major shuts or maintenance cuts in the coming year either though, right?

Right. So at this point, we're not anticipating, yes.

Okay. I'll back out in the queue, but we have some more questions, maybe others will ask them, but come back to us. Thanks.

Aaron Rickles, Oppenheimer.

A question about the Rosenthal and Celgar revolving credit facilities. Are there limitations in using that liquidity to fund operations of the other mills? For example, can you take money from the Rosenthal facility and use that to fund Celgar to the extent that it's EBITDA negative or to pay interest expense?

Yes, so there are no -- on the surface of the credits, there is no direct limitations on distributing money back or forth. And we don't have any tax leakage issues.

But having said that, our view is with the Rosenthal revolver due in February of next year, we wouldn't be drawing on it to fund Celgar operations, for example. That just wouldn't be an appropriate thing to do, unless you clearly had the EBITDA-generating capacity to retire the debt. So that -- it's more that kind of a limitation, Aaron, than anything else.

But legally you can do it. Okay and then just would you mind going through production, shipment levels and CapEx on a mill by mill basis again?

Okay. We'll do production first. Rosenthal in the first quarter, 83,000; Stendal, 146,200; Celgar, 116,400 for a total of 345,600.

Sales volumes, at Rosenthal, 82,900; Stendal, 142,900; Celgar, 110,800 -- total, 336,700.

Did you have CapEx?

CapEx in the quarter was -- this is in euros -- for Rosenthal, it was EUR1.3; Stendal was EUR0.6; Celgar was EUR5.9 for a total of EUR7.7. And Celgar, EUR1.6 was the finish of the wood room and EUR4.4 was on the Green Energy Project.

Great, thanks. That's all I really had.

Rick Sherman, Oppenheimer.

You mentioned that you had EUR31.5 million of undrawn line of credit, but when I looked at the -- say, it looks like you paid back -- Celgar had drawn -- the 10-K says that the Celgar drew EUR22 million of the EUR40 million, and you've drawn EUR10 million of the EUR40 million from Rosenthal. So you still have EUR30 million from Rosenthal -- talking about within the Restricted Group.

Did you pay something back? Did you pay down the revolver at Celgar? The math doesn't seem to add up to the EUR31.5 million.

Yes, well, there's two things that happen. We paid down a little bit to our borrowing base, so the full CAD40 million isn't available to us right now because of the size of our working capital -- our invested inventory and receivables. So that borrowing base bubbles up and down, at high pulp prices and big inventories, then we've got a borrowing base that exceeds the CAD40 million. When we ratchet down our working capital and manage that, it reduces our borrowing base as well. So the numbers that [are reported] are the net of all of those factors.

Okay. And then I noticed that there is [EUR10 million] of current debt that increased, where did that come from?

We drew [EUR10 million] on the Rosenthal revolver and we reflected it as current.

As current? Okay. And I noticed that SG&A was higher in the first quarter than in the fourth.

Yes, so our SG&A, we keep cranking it down. So from an operational point of view, we keep reducing it but we've got volatility from foreign exchange that goes through there.

That runs through that number? Okay.

Yes.

And lastly, you talk about pulp realization is down about 26%, but costs being only down 10.4%, and that the cost side is pretty much leveling off right now. You don't expect it to go much lower. Has the realization side stabilized in any way?

Yes, I think that in terms of the costs, certainly at Celgar, we believe moving forward that we will be able to improve the wood costs because, of course, we're just starting to ramp up the new wood room. So of course you're going to get better efficiencies.

We've also of course improved our overall logistics in terms of wood purchasing, et cetera. So I think you're going to see further improvements there. And in terms of the freight and other things, probably not a significant type of improvement because we've had the reductions. We don't expect that the freight and other things will come down much further -- the chemical costs, the electricity costs, of course or energy costs is pretty much similar.

So it's still a gradual improvement and on an overall basis for the growth. And at the same time, we are seeing, albeit very small price increases, but moving into the second quarter, slightly better pricing certainly in US dollar terms.

If the second quarter basically runs through pretty much where it is, where everything is fixed right now, would, in your estimation, you see a minor improvement over the first quarter? About the same? Worse?

Well, I mean, it really will depend a lot on where the foreign exchange basically moves. We do have through price increases in US dollar terms in China, which we've announced. And it looks like it's definitely sticking. So on that basis, you're seeing about a $40 increase in US dollar terms.

But what will be the US/euro exchange rate for that quarter, that's something I can't speculate on and I have no clue. And the same with the Canadian against the US dollar. So in dollar terms, yes, we are seeing increases. How that will reflect in terms of the EBITDA results in the quarter, I will tell you it's going to be directly the result of the currency movement in a big way.

Okay, so it's not going to matter that -- because the list prices move but sometimes that doesn't necessarily change the realization numbers because of discounting. So apart from the currency, would you say that the (multiple speakers) --

Yes, you know the list price that we talk about in China essentially is the transaction costs [less] normal commission and freight. So we don't talk about our list price like in Europe and US, where you have a lot of differences in terms of discount to that list and all these kind of hidden rebates and all this stuff.

So I think on the China market, it's indicative of the fact that we have reached a floor, I mean it was -- albeit it was probably one of the lowest prices I've seen in this particular industry, if you factor in the currency and the cost. But I think we are starting to see real price increases and not just list price increases.

And you see that also in terms of the pick of pricing -- it has moved up. So I think it is indicative of an improved market condition, because there's been so much capacity which has been taken off-line since the fourth quarter of last year.

One last thing is -- how much of -- are you basically supplying the China market almost exclusively from the Celgar mill? And if so, how much --?

No, we do have a certain amount of tonnage from Stendal, somewhere between 50,000 and 60,000 tonnes.

How much of Celgar's production is being shipped to China?

Close to -- to Asian market, close to 50 plus percent.

Okay, thank you very much.

Paul Quinn, RBC Capital Markets.

Just a follow-up on the Celgar. 50% going to Asia; about 80% of the 50% or 40% total goes to China?

Yes. The bulk of it goes to China.

You mentioned the -- I guess the -- trying to find my note here. Just wondering about the -- and you mentioned this about the strong Chinese buying on the pulp side, we're seeing that up, shipments to China up 64% year-to-date.

Just wondering whether you consider that sustainable? I know you put in price increases, but obviously, they've got a (inaudible) [stockage] and credit is free there. Do you see any weakness in Q2 or Q3 if they back off the shipments?

Yes, I mean, we believe that -- of course, the shipments into China have had a big impact in terms of stabilizing the market. So in the first part of this year without the Chinese coming back in a big way to buy, we would have probably had essentially low prices, which we saw at the end of December probably continue and we would not be seeing an increase.

Our feeling now is that because of the amount of production, which is [low] and still down, that rebalancing of course, is now current. Unfortunately, we are headed into the summer months, which as you know, is a weak period. So going into summer is a bit of a concern for me in the sense that generally the European markets and North American markets tend to be weaker.

At the same time for us, we know that there's a lot of capacity which have been curtailed for many reasons. And they have been traditional suppliers to the North American market. And of course that gives us entry into a market that we have not been able to supply in a big way. And therefore, we do believe that we can start to increase our market share, certainly in the US and North America markets.

Okay. In terms of what you're seeing on pulp demand in Europe, can you give us some color on that?

Well, what we're expecting is that the demand side for the paper makers has essentially reached a point of bottom, because we know that their inventories, the end-user inventories are at historic lows.

But I don't think that they're going to come back in a big way to restock those inventories. So the recovery as a result of the low inventory at the end-user's level will not be as strong as what we believe traditionally happens. So we're going to see continued buying, because they need to restock, but it's not going to be as strong as what we've seen in past type of recoveries. And that's our view.

There is the question, as I said, as to the continued buying by China. But there's also the trade-off in the sense that we think that there's going to be further pulp curtailments in Europe as a result of fiber availability and all other reasons where they're no longer producing paper. And it doesn't make sense for them at that particular site to run both pulp and paper.

So I think there's going to be further readjustments certainly in terms of overall production. So, I think the European side is stabilizing, has probably stabilized. Moving forward, we think that things aren't so bad. And even with a weak summer, we think that the market should be reasonable.

Now the China question is something that I can't speculate on. Everybody has talked about this big buy; is it for just to take advantage of such low prices? But if you look at the wastepaper market, they haven't really started to pick up in the sense that there's not a lot of speculative buying to correct that kind of oversupply. And as everyone knows, the wastepaper prices are also very, very depressed.

So, at the same time, we know that there was a significant amount of old pulp paper capacity which was taken out in China last year for pollution and other reasons. And clearly, in terms of capacity, it's somewhere between 3 million to 5 million tonnes.

So their purchasing increase, if you look at it on an overall tonne base, is not that significant, if you look at the amount of pulp and paper capacity that was forced to shut down as a result of the environmental and other issues that China went into last year. So maybe it is real paper buying because there is essentially these mills which are not restarting.

Great. So that 3 million to 5 million tonnes that you've identified part environmental, is it also part -- I've been hearing in this market that it's also a cost issue, where we've had very incredibly weak pulp prices, so it just makes more sense to buy it at those cheap rates than run their pulp mills.

But the question I guess to you is, of the 3.5, what percentage or what do you determine is permanent environmental reasons? And what do you think comes back up if pulp prices rally (inaudible)?

Yes, it's too difficult for me to speculate on. But I think both are the reasons for this increase in demand. I'm sure that the cost are a big factor. As you know, the Chinese currency has been relatively shrunk. Therefore, it may not make sense for many reasons to continue to operate those mills, as well as the environmental.

We know that when these mills were shut down, some of them were essentially knocked down, so they would not be able to come back. So clearly, even if it was just cost reasons, they don't have the equipment anymore to restart these mills. So I think a big chunk of that I think will remain down, even if pulp prices starts to come back up to reasonable levels.

That would be good news. Okay, in terms of the forward selling on power in Germany, what was the incremental power income that you put forward in Q4 then?

4.5.

Sorry?

EUR4.5 million.

EUR4.5 million. Okay, and just lastly, just on the North American situation, you mentioned the (inaudible). What's your current assessment on how long that stays in place? And do you see any remedies from the Canadian side, given the constraints on the (inaudible) agreement?

Well, a couple of things. It's pretty difficult to know when and if the Americans will change the way they're administering that particular topic. I think what's clear in the US is that this is not the intended purpose for that legislation. The lawmakers that introduced it are very aware that certain companies are abusing and doing what they're doing.

Having said that, I think there's a very strong lobby by congressmen and senators in the states that are benefiting from this to preserve it -- more like an economic stimulus initiative type of thing. So anything can happen in Washington. We have no idea.

One of the things that's really clear for Canadians out of this for us, though, is that this is shining a lens on energy policies and other structural things that we need to communicate better to our government. It's really clear to me that Europe has a policy framework that is a mile ahead of Canada.

The Americans have got a policy framework that allows their pulp and paper industry to be a mile ahead of Canada. And then this tax credit is just layered on top of that. So that's got to be a big focal point for our industry, is to work with our Canadian government to establish a policy framework that allows our integrated industry to move forward into the bioenergy economy. That's really where we've got to go, I think, Paul.

All right. Great. Thanks, guys.

Andrew Shapiro, Lawndale Capital.

Yes. The provisions for the inventory write-off, first off, is that all out of Celgar or was that across some of the other facilities?

It was pretty mixed. It was EUR1.4 million unfinished goods at Stendal; EUR0.8 million at Rosenthal; and EUR1.2 at Celgar. And Celgar, because it's got that big log inventory up at Lumby, we took a EUR1.2 million further write-down on that pile for a total of EUR4.6 million. So it's really it's just a continuing flat pulp market and the realization of our inventories into those prices that we -- where we have to look forward that causes us to do this.

And then where in the income statement is the write-off experienced? In the SG&A area? In your cost of goods sold? And (multiple speakers) --

It's in the cost of goods sold.

Okay. And the sequential change in Celgar inventories adjusting for the, I guess, now a smaller part of that charge, we can back into that? Or can you give us a handle on what the sequential change in Celgar inventories were? (multiple speakers) and I want to just point out (multiple speakers) --

Yes, sure. (multiple speakers) Maybe the easiest thing for you is just to look at volumes. So we moved the Celgar raw material inventories from about 768,000 cubic meters down to 611,000. And we're going to continue to drive that down into the 300,000's. And the finished goods inventory, just looking on my pages here, closing pulp inventory for Celgar moved from 36,000 tonnes at the end of the year, remembering we were at about 67,000 at Q3 -- we sold that big slug in December. We're now at 41,000 at the end of Q1.

So it sounds like there still is some additional opportunities to harvest capital out of the Celgar working capita?

Oh, absolutely. That's our focus. We're going to grind those finished goods inventory levels right down to have it operationally would be the minimums. So there's still lots of room there. (multiple speakers)

So if you were to quantify (multiple speakers) --

And (multiple speakers) log inventory, we're still working through the consequences of last year's logistics issues. But given the state of the economy, the contractor base and around all the mills, we can bring those inventory levels down to historic lows and still feel comfortable operating.

So if you were to quantify these additional opportunities and harvest capital, not just at Celgar, but at Rosenthal or Stendal, what would you say -- what would the range be for each of those facilities?

I'm reluctant to put out numbers, but I mean they're tens of millions -- opportunity.

Okay. You spoke about transport savings using the lake near Celgar. Have you begun to see those benefits yet? Or when will you?

Well, transportation costs have come down nicely. We don't see any huge opportunities going forward unless we can have a better negotiation with CP Rail, which is our monopolistic Canadian freight company for Celgar. I think in Europe they, because of the competition, they tend to adjust fairly quickly to the energy prices, so.

But what you're seeing is in terms of the wood cost movement at Celgar because, of course, we're able to move now the round logs in a much less costly manner and also source the wood in areas that were not available to us, as a result of the barges or the tug boats no longer working.

Right. Now, there was an investment loss inside of Stendal this last quarter. What was this about it and where does this loss flow through on the income statement?

The basic loss was the result of the fact at the time of the project financing, as you know, there was a restrictive debt service account which was fully funded. And that was administered by an outside institution, which was supposed to be only invested in the most highest-quality fixed income products. And of course, the whole purpose of it was to maintain a reasonable return, preservation of capital and manage that restrictive debt.

And as a result of the dislocations, I guess, in the global financial markets, although they were supposed to invest in the most prudent manner, there was a significant amount of loss. And as we completely realized or sold all of those investments, that of course, has been completely taken. So you're not going to see any further investment losses at Stendal.

Where does that flow through on the income statement this quarter?

Other income and expenses section.

Other expenses, okay. And the lost productivity tonnes -- so you had a few unscheduled maintenance. You had the avalanche shut your transport wing, that impacted Celgar. Those were lost productivity tonnes.

Where and when does that show up in the income statement? Clarify that. It's just you have a higher dollar cost (multiple speakers) that goes into inventory and then it flows through in lower margins later?

Yes, essentially.

Yes, you absorb your fixed costs into the tonnes that you make and they go into inventory. Then you compare that to the net realizable value. And you book your inventory at the lower costs of net realizable value. In Celgar's case, there was a EUR1.2 million write-down from costs to net realizable values. Stendal was EUR1.4 million. So some of that would have been in all the calculations there. But it all just goes through cost of sales.

And in either of those unscheduled shuts, did they provide you any opportunity to do some of your later-on scheduled maintenance? Did you --?

Well, of course, they do whatever they can when they can. And when the mill is down and people are still at work, they do everything they can to keep people working. Stendal didn't have a large maintenance shut planned for this year. And sometimes they obviously would do what they can do, but it's hard to front-end something from that far out.

Minor equipment adjustments, but you can't really do any real substantive large type of equipment type of things. Because you have to pre-plan for these type of events. Only whatever small stuff that the maintenance guys could do. Of course we always do that when we are down for whatever reason.

I notice you guys filed an 8-K and put a road show presentation up -- out on Edgar. What is this next scheduled presentation or road show plans that you have?

The presentation actually was in conjunction with Pulp Week, which actually happens next week. So I'm presenting at that conference, but not really, I guess, for the purpose of the investment type of community, I guess. It's more focused on the industry type of presentation.

They asked me to speak at this conference where the subject really was involving, I guess, how we view the impact and, of course, the long-term capacity constraints that are likely to happen. And demand we believe is still growing, albeit of course with the economic downturn, we are going to reset at a lower level.

But if you look at any prior type of downturn, we've always had this reset. And then you go back to what used to be normal growth rates, which are of course very dependent on overall global population growth as well as overall global economic growth.

So we don't think that has fundamentally changed, unlike some of the other paper products where you seem to have a structural demand shift, where the demand side seems to be dropping rapidly. We don't really see that for softwood pulp.

Okay. And then do you have -- I would think it would be more debt refinancing road show or information than an investor at this time -- but do you have various paper conferences coming up here in the summer that you guys are still going to continue to go out to? Or is that on hold?

Well, I think focus on conferences, because it is a cost issue, will be minimized. I think the Pulp Week is an important get-together -- seeing suppliers and users. The Vancouver one is especially important for the Asian market. And that is probably why we have agreed to present but we tried to keep those costs down as much as possible now.

We are of course looking at various ways of improving our overall balance sheet structure. Those issues are still ongoing. We are looking at all avenues of additional liquidity, not just for this year but for the future years under the worst type of conditions.

So there's a lot of things that we are working on. We think it's important that we have all of these type of thought processes completed. And then there may be a time where we can then address, I guess, the community in terms of our thoughts in that regard.

Okay, great. Thank you.

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

Well, again, I would like to thank everyone. I know we are definitely in very difficult times. But if you reflect on the magnitude of the downturn that we experienced in the fourth quarter, I think the pulp, certainly the NBSK softwood pulp sector probably was one of the most rapid or the quickest to react to that.

If you consider the amount of production curtailments that were taken, it's a significant percentage of the installed capacity. So I think although the markets reacted very harshly in the end of last year, the industry reacted very quickly. I think we're probably better positioned than most other commodities in that capacity adjustments have been taken. And we think that at least we're now on more stable types of conditions and hopefully, the continued growth in demand will be reflected in prices in the nearer future than the longer term.

So on that, I thank everyone and I conclude today's call.

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