Mercer International Inc (MERC) 2010 Q1 法說會逐字稿

Good morning. My name is Christy and I'll be your conference operator today. At this time, I would like to welcome everyone to the Mercer international first-quarter 2010 earnings conference call. (Operator Instructions). Thank you. I will now turn today's conference over to Mr. Eric Boyriven of FD.

Thank you. Good morning and welcome to the Mercer International 2010 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 Security Litigation Reform Act of 1995, I would like to call your attention to the risks related to these statements, which are 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 and Chief Financial Officer and Secretary. I will now turn the call over to David Gandossi. David, please go ahead.

Thanks, Eric, and welcome, everyone, to Mercer's first-quarter earnings conference call. I'll begin with some prepared comments on the key financial aspects of the quarter, and then I will pass the call to Jimmy, who will speak about the particulars of the markets, our operating performance, and some of our strategic initiatives. As always, we'll be pleased to answer any questions you may have following our remarks.

Let me begin with a few comments about our financial performance. As expected, we experienced a significant improvement in our results, driven primarily by a remarkably tight pulp market. We completed a major maintenance shut in the quarter, and after removing the impact of this shut, Q1 2010 was also a strong one from a productivity perspective. In addition to steady price improvements in the quarter, the Euro has been under a great deal of pressure, giving us an additional boost.

As you will have seen on the press release, we reported a net loss of EUR7.5 million for the quarter, or EUR0.21 per share, compared to a net loss of EUR39 million, or EUR1.08 per share, in the same quarter of 2009. The loss arises due to the mark-to-market valuations of our fixed interest rate swap in U.S. dollar-denominated debt. Were it not for these non-cash items, EPS would have been a positive EUR0.12.

We recorded EBITDA of EUR31.8 million in the quarter, compared to EUR23.5 million in the fourth quarter of 2009. In U.S. dollar equivalents, this is about $44 million of EBITDA in the current quarter, compared to about $33 million in Q4.

The most significant contributor to the increase in EBITDA was the improvement in pulp pricing and a weaker euro, and was partially offset by the impact of high-fiber prices in Europe.

We also completed a planned maintenance shut at Stendal during the quarter. The shut itself lasted 10 days and positions the mill well to run full for about 18 months before its next maintenance shut.

If I can switch to cash flow for a moment, overall our cash position is marginally lower than at year end. Outflows included EUR16 million due to seasonal increases in working capital, EUR6 million of high return capital spending, and EUR23 million of interest and debt payments. These outflows were offset by EUR32 million from EBITDA and about EUR9 million of cash inflow from the Canadian government's Green Transformation Program to fund Celgar's Green Energy Project.

We have EUR29 million of undrawn revolvers available at Rosenthal and EUR10 million at Celgar. We currently have cash of about EUR49 million, which is comprised of approximately EUR26 million for the Restricted Group and EUR23 million at Stendal.

As you know, in January we completed a second exchange of almost all of the remaining 2010 convertible notes for the new notes with identical terms as those issued in the December exchange. After the second transaction, we now have only $2.3 million of the old 2010 notes remaining. This latest exchange gave rise to a EUR9,000 loss, which will be reversed through interest expense in 2010 and 2011 as the debt is accretive down to its face value.

The refinancing of our old convertible notes was an important step in improving the valuation of all of our securities.

Considering the lag effect of pulp price increases achieved throughout the first quarter, and for April and May, we're expecting improved financial performance in the quarters to come.

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, after a pretty difficult year in 2009, 2010 has started well for us.

We were generally pleased with the progress in the quarter, particularly in light of tightening fiber markets and our scheduled maintenance shut at Stendal, and I remain satisfied with the rate of construction at our Celgar Green Energy Project.

We have grown very confident in the pulp market's ability to return to normal and support price increases, so marketing has returned to the forefront of our focus. Like our marketing efforts, we remain committed to bringing our high return strategic projects to conclusion. I'll talk more about this in a moment, but let me first comment about the mills.

Our two mills in Germany ran well in the quarter, although Stendal's production was hindered somewhat early in the quarter by a number of operational upsets, including the loss of a key transformer late in December.

We also slowed the mills down for a period to manage short fiber inventories. In total, this impacted production by about 17,000 tons.

But we are particularly pleased with Celgar. Productivity there continues to generally improve, and both daily and weekly production records were broken during the quarter. In total, we produced 330,000 tons of pulp, compared to 357,000 tons in the fourth quarter of 2009 and 346,000 tons in the first quarter of 2008.

And while Stendal's general maintenance shut limited our ability to export power for a couple of weeks, we nonetheless sold 107 GW in the quarter compared to 112 GW in the same quarter last year.

If I could turn to the pulp markets for a moment, I would generalize it as remaining extremely tight. As you know, current pulp inventory statistics remain positive with producers' global soft wood inventories falling to about 23 days, which is amongst the lowest levels in nine years. The February earthquake in Chile and recent labor disruptions in Scandinavia have compounded the shortage of pulp to the point where the spot market is currently well in excess of the published list pricing.

While most of the Chilean producers are planning to return to full production in the next few months, we believe that the markets will remain significantly strong for the balance of the year, due to the significant loss in production.

So on the strength of the low inventories and remaining improving shipments, the industry implemented $90 to $100 per ton of price increases in all markets in the first quarter alone. In addition, price increases totaling another $70 to $90 per ton have been announced for April and May.

The price increases by us and certain competitors will take the price to $960 per ton in Europe, $1,000 per ton in North America, and $870 in Asia.

As you know, our sensitivity to the list price is significant. Each $20 per ton increase in the price of NBSK is about EUR20 million increase in revenue on an annual basis. It is, however, worthy to note that the implementation of price increases is not always immediate, as we're committed to pricing that was in effect when we took the order. There is approximately a 30- to 60-day lag effect, depending on the market.

Our sales volume was at normal levels for the quarter. For our maintenance shut, sales volume totaled 333,000 tons compared to 352,000 tons in the first quarter and 337,000 tons in Q1 2009.

We believe that the upward pressure on prices will remain and that the momentum will increase, particularly since the value of the U.S. dollar remains at historically low levels. The U.S. dollar equivalent for euro today is about $1.32 compared to $1.30 just one year ago, and the Canadian dollar has reached almost parity against the U.S. dollar.

Let me now take a moment to discuss developments in the wood markets. As we discussed last quarter, after falling for most of 2009, wood pricing in Europe has been rising. On average, our wood costs were about EUR5 million higher than in Q4. We expect on average that our wood costs will increase a further 10% to 20% in the second quarter, due to the supply demand dynamics, and should flatten out for the second half of 2010.

In Germany, wood pricing is up for both whole logs and residual woodchips. To put this in perspective, I should remind listeners that the deterioration of the global housing construction through 2009 had a dramatic impact on board producers, which reduced our competition for fiber when compared to prior periods.

After reaching cyclical lows in the summer of 2009, our fiber costs in Germany increased 6% in Q4 and 17% in Q1. We're expecting a similar increase in the second quarter, but following this the cost should flatten out for the remainder of the year.

But while the market is tightening, 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 log supplies that were previously the target of board manufacturers.

During January and February, much of Europe was impacted by severe winter, including large volumes of snow. As I mentioned, due to tight inventories, we took the precautionary measure of easing back on our production for a few weeks in January. We slowed production by the equivalent of about 17,000 tons. Current fiber inventory has indicated no further curtailment is necessary.

Residual chips continued to be in short supply as sawmills' productivity, in light of the poor new housing market, remains low, but we see the situation improving slightly as we move into the summer.

In British Columbia, our fiber cost trend is very encouraging. The new supply chain for whole log pulp wood that we have developed has significantly addressed our delivery cost issues, and while sawmill residuals have been harder to come by, our new wood room continues to improve its productivity, and so we believe that the downward wood cost trend at Celgar will continue for at least another quarter before settling.

If I can spend a moment to talk about energy, our Green Energy Product at Celgar is progressing nicely. Most of the key machinery is now on-site, and we don't anticipate any significant problems achieving our fall start-up for this important project that we expect will add about CAD20 million to CAD25 million to our bottom line. As you know, the project will consume 40 million of our 58 million Green Transformation Fund grant, so we're working hard to narrow down additional qualifying projects, which we'll talk more about in due course. All of our options carry cash-on-cash paybacks of three years or less.

So, to make a few closing observations, we continue to believe that the tightening market that was interrupted by the global economic crisis has returned. We're buoyed with the market strength in recent months and expect this market tightening to continue well into the year.

There is much speculation about softening as capacity re-starts, but our view is this will be more evident on the hardwood side. The fundamentals for NBSK supply and demand remain favorable, and we're very optimistic for this year, and with continued global economic growth, the supply/demand balance for soft wood should remain favorable for the next several years.

We believe there's been a significant and continuing adjustment in global production capacity for soft wood pulp. We also believe that because of the pre-existing inventory levels, the impact of this loss volume is only now becoming apparent.

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

So with the conclusion of my prepared remarks, perhaps I can now turn the call back to the operator where we can open the call up for questions. Thank you.

(Operator Instructions). [Emil Schiffino], Cantor Fitzgerald.

Good morning. Could you talk a little bit more about the capital spending? I believe you said it was 16 million for the quarter, is that right? And that is well above maintenance. Can you give me an idea of the nature of the projects, please?

Most of the capital is related to Celgar, which is funded by the pulp and paper Green Transformation Program.

Okay. So you do show that as a capital spending line -- item?

Yes, it is.

Now, the -- your net debt levels didn't really changed much. But debt at the Restricted Group in the quarter went up to -- from 279 million to 297 million. But what facility was that under?

What you're seeing really is the mark-to-market impact of the U.S. dollar. We really just have the senior notes and the converts. So it's all mark-to-market is all it is.

Can you give me an idea of how much was invested in operating working capital for the quarter?

I don't have that number off the top of my head. Sorry.

I guess my last question is with the improving markets for pulp, and then the -- what has been an attractive capital market, are you considering anything to address your 2013 maturity?

There's nothing that's been announced that we can discuss at this point in time.

I'll get back in the queue. Thank you.

Bruce Klein, Credit Suisse.

The Green Energy Project, you said 40 or 50 was going to be spent on the project in Celgar, and then I didn't hear the last part. You said you might be working on an additional group of monies?

40 out of a total of 58 is being spent on the turbo generator at Celgar. So the remaining funds will be spent on something else, which we're analyzing. Jimmy mentioned that all of our options are very accretive, better than three-year paybacks, and we'll be making those decisions quite shortly, I think, and maybe on the next call we can talk a bit more about it.

Can you just remind us of the estimate of the sort of the bottom-line benefit, that 20 to 25. How much variability is that? Is that -- do you have a contract on the other side or how does that work? What sort of drives the contract or what creates the variability of the 20 to 25, if you could help us with that?

Well, it's a fixed-price contract with an escalator for inflation for 10 years. It's really just -- it's all about fuel. So when the mill is running well and there isn't a maintenance shut in that quarter, then there's more power. If you're in a maintenance shut period, there's slightly less.

The estimate is -- we're just hedging our bets a little bit, but it'll be probably closer to the 25, based on normal operating run rates. Unless there is some significant production issues, which we don't really expect, it will be probably closer to the higher number. So we're giving a range because, of course, it is very dependent on pulp production.

And did you disclose or are you disclosing who the contract is with?

It's with BC Hydro, the government utility.

That contract is a signed done deal?

It's all done.

All approved. Everything.

For a 10-year contract. We're looking forward to receiving the power. It's going to happen, Bruce.

And then, remind us, do you have a euro -- you mentioned the euro a couple of times and how it helped. Can you remind us, the euro sensitivity to the Canadian dollar (multiple speakers)

We put a number in our K as, I think, EUR0.01 cent is about EUR8 million annually.

Okay, great. Lastly, just the -- any color on what is going on in the Chinese pulp market these days, if you can help us with that?

What we're seeing from what we hear is some of the, let's say, mothballed mills are starting to start up again. These would be primarily non-wood base.

But we don't think that there will be a significant number of these mills restarted because of the environmental issues, but whatever facility that they can restart because of the pulp price being at these levels, they certainly are trying. This really impacts more the hardwood pulp demand side rather than soft wood because it's more of a hardwood substitution. In fact, it probably will improve the soft wood consumption because, of course, they require more reinforcement qualities because of the lower quality of their pulp.

So, all in all, the Chinese market seems to be holding up. There has been no significant change in terms of what we're seeing in terms of the demand side, even though prices have reached historic high levels.

Thanks, guys.

Bill Hoffmann, RBC Capital Markets.

I wonder if you guys could talk a little bit about down time in the second quarter, as well as in the third quarter, because I assume when you're transitioning Celgar you're going to have some downtime. Just want to get a sense on what you expect production levels to be available both in the second and third quarters?

So Celgar's maintenance shut has just happened. They were down for 12 days. So that is Q2, and Rosenthal will be down for 12 days in Q3.

But as we mentioned on the call last time, we're signaling that in addition to the 12 days of maintenance at Celgar, it's time for its turbine revision, which means that the turbine will be off-line for 50 days. So the mill will run, but we'll be purchasing power, so it will be a tough quarter for Rosenthal in the third quarter.

(multiple speakers) Does that affect the pulp capacity or just the power sales (multiple speakers)

No, just the power sales. Basically, we'll be running the mill on imported power at Rosenthal while the turbine refurbishment is completed.

At Celgar, because of the maintenance shut that we've taken, all of the tie-ins that were needed have been completed. So there will be no further shut-down requirements to essentially start the turbine once it is all completed.

Okay, thanks. And then, Jimmy, just -- if you can talk a little bit about fiber sourcing up in -- for Celgar. I'm just curious whether, with lumber demand up again, what is happening with residual fiber supplies and what you're balancing because you said you were still using more whole logs up there?

Yes, at this point we are still consuming mainly pulp logs. The residuals still are not as plentiful.

That's because, of course, there has been certain re-starts, as you know, of additional lines on the coast, which, of course, increases chip demand. So chips are kind of moving from the interior to the coast, which is offsetting, say, some of the increase in production.

But we think with the restart of, again, sawmilling capacity in the summer, as you know, Interfor has announced that -- their plans to potentially restart the Castlegar mill this summer. That will certainly aid in terms of availability of residuals.

So moving ahead, of course for us things are starting to improve even better than what we had originally forecast because, of course, we were not expecting any real significant increase in lumber production in our area.

All right, just conclusion-wise from a fiber cost for that site, you expect to be able to contain what the (multiple speakers)

Yes, we think that we're going to trend further down in terms of costs, at least for the first half of this year, and then stabilize for the balance of the year.

And then, with regard to Rosenthal, similar issue on the fiber side. Has fiber sourcing stabilized over there?

Well, we think that it will continue to increase into Q2 and then stabilize in the summer, and then stay stable at those more higher elevated levels throughout the year.

David, could you give us the production at Celgar and Rosenthal?

Sure. The production for Rosenthal was 79.6 and for Celgar, it was 130.7 for the quarter.

Perfect. Thank you.

Joe Stivaletti, Goldman Sachs.

I heard your outlook on the pulp market, and it sounded not only positive for this year but into the next couple of years. But I just wondered if you could talk a little bit more about that in terms of -- do you think that the current pricing levels we're seeing are sustainable? When you talk about a positive outlook out beyond this year, are you thinking we'll see some sort of dip by the end of the year or into next year, and then a recovery? I'm just trying to understand what exactly your outlook is and what the assumptions are behind that?

Clearly, we can't expect that this high price levels are sustainable for an extended period of time, because of course the paper makers are having difficulty implementing price increases.

So, I think, on the paper side, there is likelihood as we have pulp prices at 1,000 and potentially higher that you're going to get production curtailments as well as you're getting restarts of marginal mills. We're already hearing several and already some have restarted.

So our expectation is that certainly towards the end of this year and possibly maybe Q1 of next year, probably there could be a short period of extreme weakness. You know, the pulp markets, as you know, historically don't go in a straight line. It tends to go up very quickly and also come down very quickly in terms of price.

But we think the duration of the weakness when it comes will be quite short because it will have a big impact on the marginal producers, very much like what we saw last year because of the global economic crisis. You're going to get a short drop in price, a shake-up, and then prices will move back up again.

We don't think the price floor, though, this time around is going to be that low because of the Canadian dollar being quite strong against the U.S.. So I think we'll probably reach a floor which is probably higher than what we saw in the prior period.

And then after that shake-up, I think prices will start to move back up again, and -- because I think the supply and demand balance globally is very good for soft wood. It's just an issue of this kind of marginal capacity coming on and off, which has, of course -- influencing the cyclicality.

I think the prices will trend higher, but we may not get much beyond what we're seeing right now, and the next cycle we'll again see good prices. I don't know what the next peak will be, but certainly 1,000-plus seems to be historically the peak levels in the past.

That's very helpful perspective. And specifically following up on the China question, what do you think is -- when the PPPC numbers showing 23.5% volume decline in China for the first quarter, I just wondered what your perspective is on what's going on there in terms of are they -- were they -- they just bought a lot for inventory a year ago or are they -- what exactly you think is going on there?

We were expecting certainly a reduction in terms of the shipments because of the significant increase in the shipments in the prior quarter. So we didn't think that those type of shipment levels were sustainable.

So I don't think it came as a surprise to anyone that the first-quarter shipment numbers were down. I think the Chinese were caught offside because they thought that with this, prices may moderate. But then, the Chilean earthquake happened, of course, and this created a crisis in China because, as you know, Chile is a significant supplier for soft wood into China.

So, I think we're going to see probably shipments stabilize because, one, you're not getting the capacity. The Chilean shipments are no longer there. So we don't think it's more of a demand-driven thing, but really the reality that there isn't production available to be shipped.

So I wouldn't look at the shipment volume as indicative of the demand situation. I think you have to put that in perspective with the inventory levels at producer as well as the consumers.

Sure, sure. My final question was more specifically, you mentioned in your press release on page two about the Celgar mill and some of the progress and the initiatives, the incremental EBITDA coming from the new turbine, and I wondered, have you quantified -- when you make the comment about a significant boost in your cash earnings at the mill, have you talked or can you quantify the, on an apples-to-apples basis, the benefit you expect from the initiatives at that facility?

I think what you have to look at is the historic wood price trend. Before we were able to bring on the efficiencies at our new whole log shipping facility, wood prices or wood costs were significantly higher.

So if you look at prior-year numbers and the trend, we were heavily impacted, negatively, by this wood price. Now that trend has gone the other way. So, because of the significant cost reduction in our wood costs, which will probably stabilize a little bit lower than what you saw in the first quarter, that really is the big benefit that we're seeing in terms of the efficiency, as well as the fact that the mill itself is running way better.

There were some issues with the mill that were unexpected. It took us a lot longer to stabilize it, but now it's running much more stable. So the reliability certainly will also improve the margins, and the 20 million to 25 million incremental benefit we'll get after -- well, into Q3 and beyond certainly will drop right to the bottom line. So those are really the significant gains that we've been able to see.

So I think it will be easier to see the improvements as we move forward into this year. I can't give you an exact number because you have to calculate it in terms of the wood benefit from average prior year, and make that as kind of like the improvement, and then add on the 20 million to 25 million extra EBITDA.

Okay, thank you.

Andrew Shapiro, Lawndale Capital Management.

I got the Rosenthal and Celgar production numbers, and I didn't write quick enough for your -- or I missed your Stendal production number?

Okay, Stendal's production was 119.1.

Okay, great. Now more substantive questions. On Celgar, you issued one or more 8-Ks that provided the agreement with BC Hydro and the 10-year deal and all that. If I recall, and please educate us or correct us if I'm wrong, it's a variable rate, but the variable rate is with a premium spread because this is bioenergy?

Yes, the way it works is we have a seasonal commitment. So four seasons, it's quarterly. They call it seasonal, so it's a little different from daily firm. It's seasonal firm, so we have a fixed volume of power we have to deliver each quarter, and depending on the quarter, there's a slight premium or discount to our negotiated power rate. In the freshette season, it's a little bit lower. In the peak of the winter, it's a little bit higher.

But all in all, it hovers around the rate we negotiated, which we redacted in the agreement. BC Hydro still is negotiating power agreements with others, so we can't discuss the number. But it's a number that is intended to reflect the combined power efficiencies of the facility, it's green energy, and it's online with other power deals that are being done in the province for green energy.

So, because the government wants to incentivize green energy, etc., can you at least generalize that the rate that you're getting paid is some premium rate to regular power?

Yes, it's a premium to the heritage rates in British Columbia. There are some very low power cost assets in British Columbia.

The rate we're charging is what it costs to make power, actually. We're getting credit for the cost of the fuel and running the facility. But it is a premium to the industrial power rates in the province, for sure. And it is because governments are prepared to pay for green power. But this is what it costs to make green power.

And now, so you get the green power, you got your rate. I think someone asked a question that you're running the CapEx for the Celgar facility through the financials as CapEx, and I guess, then, you're offsetting it with the government grant money that's being provided to offset it, right?

Yes.

Okay, and so, but on the last call when we discussed this with you, I just want to confirm, it's a $55 million or so plant of which Mercer has or will have put in about 10 million to 15 million that you will have on the books as your costs, and the 40 million or so the government is paying will not be in your gross PP&E? Or it will be with an offset?

It is with an offset. So the total PP&E will be there, and then you deduct from it the government grants, and the government grants amortize at the same rate as the property, plant, and equipment. They net zero on the P&L, and over time on a gross basis, the number accrete away. But when you look at our financials, you won't see them, Andy.

Okay, so when the plant is running for the next 10 years, 20 years, etc., the amount that you're going to depreciate against them and then there's -- for depreciation expense would be, what? Just your 15 million?

That's right.

Okay, so absent the depreciation expense, we'll just call it EBITDA, and your selling the energy, are there any other costs associated with this or is this pretty much 100% margin cash flow?

It's pretty well 100% margin cash flow. There is a little bit of labor effort and maintenance on the turbine and stuff, but all those people are there anyway. It's almost like a fixed cost. There is -- it's primarily driven by black liquor, which is a byproduct of making pulp, so there are no new incremental costs to speak of.

All right, so it's all dropping to the bottom line. The Celgar maintenance shut is now behind you?

Yes, it is.

That's been done? And was that all during this current Q2?

Yes, it was.

So can you break out how the margins have improved at Celgar at all? We can see the Restricted Group margin, but we can't break it out between Rosenthal and Celgar. I'm just trying to get an understanding. When I look at your overall margin for Mercer as a whole, it looks like the gross margin is, like, 14.5 and the operating and EBITDA margin was at 12, it was some higher level. It looks like your margin levels you're running at with these pulp prices in Q1 were some of your highest margins since the end of 2007, and I'm just trying to confirm that Celgar facility is up at those margin levels as well?

I can't -- I have to be careful I don't get too far into Regulation FD with granularity. But I think we can confirm that. Celgar is going to be a very impressive mill this year from a margin perspective.

Yes. I think Celgar is finally running at the margin levels that our German mills have historically run. So I think what has changed this year is the fact that Celgar was always underperforming, so it was like Mercer was essentially running with two pistons, rather than three.

This is really the first year that we're seeing all three mills run at the levels that we thought they should be running at. So certainly Celgar's margin is improved, and it is more in line with our German margins, and we expect that to continue. In fact, with the turbine coming in latter part of this year, certainly it should be on par with our German assets.

Okay. And am I correct that your margin levels for the quarter just reported have hit levels that were -- we haven't seen since the end of 2007?

Yes, you'll see because of the price trend that our EBITDA margins will, without the maintenance shut, certainly be upwards of the 20 and approaching the high 20 type of percent, if price continues to go in the direction that we've already announced.

When you say that, just so I -- I'm trying to get -- are you dealing as your trailing price catches up to the current price or does that require even further price increases in the market to get (multiple speakers)

What you're seeing is really a lag in terms of the actual net realized prices at the mill level because there is at least a 30- to 60-day lag. So what you're going to see is certainly the price increases that we've announced in the first quarter really starting to show in the second quarter, and the second-quarter numbers really going into the third quarter. So, we think that with the prices that are already being pretty much announced and implemented, certainly the first part and into Q3, etc., is still quite strong.

So if prices -- when you say catch up, if you don't announce another price increase, but we don't have price reductions, and you catch up with your 60-day time lag or 90-day time lag, right?

It's a more like 45 days on average.

(Multiple speakers) I'm trying to say is if prices remain where they are today, and whether it's another price increase comes and then there's a price decline, but if they basically on average remain where they are today, and your catch-up situation works, is that sufficient to get you to that 20% EBITDA margin you're talking about or you still getting more increases?

No, I think you'll see if you look at the numbers without -- and take out the maintenance shutdown we had at Stendal, I think clearly based on the trend that -- with present prices already implemented, we're going to have EBITDA margins which are certainly in excess of the 20%.

Right. But of course, you do have the big Rosenthal shut in Q3 and you had Celgar's shut in the current quarter.

Right, and that's why you have to essentially look at those numbers and take out the impact of the major shuts.

And these -- the next -- after the Rosenthal shut, do we -- are we one, two, three quarters away from the next shut, because you do a shut every year?

Stendal is on a rotating 18-month cycle.

Okay, so it won't be for a while for Stendal.

Yes, and also, ultimately, we're trying to get all of the mills into more of an extended period of running before the maintenance. So we're moving less from an annual to more like an 18 type of schedule in the long term.

Right. And lastly, did you make -- I know that it doesn't look like you made any draws, but you didn't make any paydowns on the Restricted Group debt side, but did Stendal's debt get paid down a little bit during the period?

Yes. We make payments twice a year on Stendal.

So the principal payments that were due on that one got paid down.

Yes, that's right.

Okay. When are you able to call or force conversion of the new January 2012 notes? I can't recall if it's (multiple speakers)

Mid 2011.

And when you make that call and force conversion, what happens to the accrued interest up to the conversion date? Does that go along with it or does that -- it gets lost?

No, I think it goes along with it.

Rick Sherman, Oppenheimer & Co..

Hi, guys. Most of my questions have been answered. Just curious, going back on based on the current pricing model, what are the cash costs of the mills at this time?

We don't disclose that on a quarterly basis, Rick, so it would be difficult for me to give you that over the phone here.

Okay. Is it fair to say that at the current level of pricing, if you could -- based on what the gentleman, previous gentleman mentioned, if you could freeze everything where it is right now, everything from pricing realizations, costs, where the dollar or euro is, etc., it's amazing what a difference a year or so has made, and this is probably some of the best pricing levels in almost a decade.

Would you be able to say yes or no to a simple thing that you would be making at least $100 a ton pretax as a general premise? If you annualized it going forward (multiple speakers) if everything froze?

I think you have to look at the numbers, and you know we would be making more than $100.

I'm talking $100 where it drops to the bottom line where you actually go (multiple speakers)

Based on the existing -- the quarter numbers, you can see that easily will -- if things don't radically change, we'll be making upwards of $100-plus, yes.

In the years past, I don't know if you were disclosing it on the call. I think so, but most of your cash costs were generally in the $300 range. Is it fair to say, though, that -- and you were always driving that cost lower as time went on. I think it seemed there were a lot of other things that were bouncing around all the time, but has anything really significantly changed because of the wood fiber costs or anything, that at least is it in that range or does it (technical difficulty) way off?

I think the days when we had EUR300 per ton of pulp costs, that was several years ago, and the differences today are the value of wood. Globally, wood costs have gone up.

Since those days, our conversion costs, our efficiencies, and our utilization has improved in every mill. There's been some cost creep in chemicals and a few things like that. They go up and down, as you say, quite variable.

Today, our Celgar mill's costs would be in the low 300s. The European mills would be slightly higher, obviously, because of wood, but they're a lot closer to the customer. So a European mill is EUR23, EUR24 of freight away from the customer, whereas the Canadian mill is more like EUR70 or EUR75 away from a customer.

Okay.

Does that help a little bit, Rick?

Yes, it did. Thanks a lot. Okay, that's all I've got. Thanks very much. Good luck.

DeForest Hinman, Walthausen & Co..

I had a couple of questions and I apologize if I missed this one. Did you go through the sales numbers for tons for each one of the mills?

I can do that for you. So sales for Rosenthal were 83.3, Stendal were 125.4, and Celgar was 124.1.

My other question was on the balance sheet, and you can correct me if I'm wrong, I think the revised credit facility for the Stendal loan requires us to replenish the restricted cash pool. Based on your commentary, it sounds like over the course of 2010 Stendal will perform better, hopefully generate some cash flow. How much cash are we required to put into the restricted capital pool at this time?

The way that works is, and it actually to the Company's benefit, the facility itself has a cash sweep that allows the bank to sweep what principal payments have been deferred under our amended agreement. But before they can sweep anything to the bank, we have the ability to fill up a debt service reserve account on our balance sheet.

So, we have an excess cash calculation, and that cash will stay on our balance sheet in a restricted account, which will become available to pay principal and interest when the next downturn comes. And the theory is we would have a year's worth of principal and interest sitting in a reserve account on our balance sheet to help us weather the storm when the next downturn in the economy happens. So, it's a protective measure for the banks and for the Company, and that's really all I can say about it.

All right. And then, can you talk about the inventory levels from raw materials and a finished good perspective?

I think the raw material inventories in Canada are at the level we'd like to see them. The German inventory levels for raw materials are building a bit right now, coming from very, very low levels.

From a raw -- from a pulp point of view, I think the German inventories are rock-bottom, couldn't go any lower. It's actually difficult to service all of our customers properly with inventories that low. Celgar, because of the timing of some shipments, is a little bit above average volume of pulp on hand, but it's all gone again in April.

So, nothing to spare to sell and certainly nothing for the spot markets.

And when you're thinking of the -- speaking of the Celgar, are we having any issues getting those shipments out of the port? I think in the past we talked about having some issues with (multiple speakers) shipping.

No, we don't have any labor issues at the port at this time. So we're not expecting any.

I think what we're seeing, though, is the global container lines, of course, implementing cost increases, and of course, we're working around that. So generally, freight, although the economic activity is still not robust, is trending upwards because of their control over their capacity. So I think that is something that you guys should factor in, that the extremely low freight costs that we had in product last year is not indicative of the freight cost moving forward.

Okay, thank you.

Andrew Shapiro, Lawndale Capital Management.

A follow-up question or two. I think it is currency, but I want to confirm most of this. And the other one, I'd like to better understand if it's a seasonality issue.

PP&E went up from last quarter. Long-term liabilities went up from last quarter, your total equity went up from last quarter despite the announced loss. All currency or some other factors?

Currency, primarily.

Okay, and the accounts payable and accrued expenses did jump a bit. Is that all solely currency or were there certain working capital or other (multiple speakers)

It's mostly timing related and it is -- you see variability when you've got a capital project the size of the Green Energy Project going on.

Okay, and you guys were on the road, I think it was January, with road shows and all. Do you have visits to investors or investor conferences planned in the near term or what's the strategic -- we'll call it price multiple focus that you have in the coming months?

Yes, we're just sorting out our calendars, Andy, but our plan is to come and see investors late May and early June.

And both coasts? Or which way are you going?

Yes, yes. We'll come and see you.

I would now like to turn the conference back over to management for any closing remarks.

I think we covered a lot of issues on the call and I would like to thank everyone for attending today's conference call.

And as we said earlier, we are optimistic. I think we're finally out of the worst, and certainly what a difference a year makes. So, on that, I would like to thank everyone again and close the conference. Thank you.

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