Mercer International Inc (MERC) 2010 Q3 法說會逐字稿

Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mercer International Third Quarter 2010 Conference Call. (Operator instructions).

Ms. [Alex Tremont] of FD, you may begin your conference.

Thank you. Good morning, and welcome to the Mercer International 2010 third 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'd 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 and Chief Financial Officer and Secretary.

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

Thanks, Alex, and welcome, everyone, to Mercer's third quarter earnings conference call. I'll begin with some prepared comments 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. 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, our third quarter was very strong, and we're pleased to report another record EBITDA quarter.

The pulp market sustained its relative strength, and we achieved new production records at two of our three mills. And the mill that did not achieve a record, Rosenthal, completed a very extensive and complicated maintenance shutdown that was completed on time and as planned.

We experienced some strengthening of the euro during the past two months. And our German fiber costs, while still higher than in recent years, have leveled off, as we had expected.

As you'll have seen in our press release, we have reported net income of EUR46.1 million for the quarter, or EUR1.17 per share, compared to a net loss of EUR14.1 million, or EUR0.39 per share, in the same quarter in 2009. The net income includes EUR10.4 million of noncash gains related to mark-to-market valuations of our US dollar-denominated debt and fixed-interest-rate swap. Before these noncash items, EPS was EUR0.91 per share.

We recorded our highest quarterly EBITDA in the Company's history, at EUR65.5 million, or about $85 million. This compares to the previous record of EUR62.1 million, or $79 million, in the second quarter. The most significant contributors to the increase in EBITDA compared to Q2 were the improvement in average pulp pricing, along with lower energy and chemical costs. These improvements were partially offset by the impact of the weaker US dollar, the maintenance shut at Rosenthal, and lower sales volume as the market sorted out the uncertainty of pricing.

Switching to cash flow, overall, our cash position is EUR23 million higher than it was at the end of Q2. Inflows were dominated by EUR65 million from EBITDA and receipt of about EUR7 million from the Canadian government's green transformation fund grants.

I know there is interest in working capital movements related to our cash build, so I'll summarize these for you. In the nine-month period ended September 30, our working capital, excluding cash and short-term debt, grew by about EUR54 million, up from EUR64 million to EUR118 million. Looking at the components of the working capital in the quarter, finished goods are up approximately EUR14 million from Q2, and raw materials are up about EUR9 million. Receivables are down about EUR23 million to EUR102 million, primarily due to lower sales volumes. Accounts payable and accruals are relatively flat quarter over quarter. Quarter-end finished goods inventories were high, at 93,000 tons, due to the heavy shipment volume scheduled in October. In the quarter, noncash working capital increases drew on cash by about EUR10 million on a net basis. Capital expenditures drew about EUR9 million. And we paid about EUR30 million towards debt service.

When thinking about our cash build, it's also worth noting that we have a holdback receivable of about CAD4 million of green transformation fund work that we expect to receive from the green transformation fund during the next several months.

We have EUR26 million of undrawn revolvers available at Rosenthal and about EUR7 million available at Celgar. We currently have cash of about EUR85 million, which is comprised of approximately EUR48 million for the restricted group and EUR37 million at Stendal.

Finally, as you're probably aware, we announced today a tender offer to purchase our senior notes due 2013 and an offer to sell a new issue of senior notes. The purpose of the transaction is simply to extend the maturity of our restricted group's senior debt. More information regarding our offer will be available shortly when we file our preliminary offering memorandum. Offers to purchase the 2013 notes will also be mailed shortly.

So that ends my quick overview of the financial position and development, so let me turn the call over to Jimmy now to talk about our operational market and strategic developments.

Thanks, David. Good morning, everyone.

As David mentioned, we are very pleased with our third quarter results. We're particularly satisfied with the mills' productivity this quarter after consideration of our extensive annual maintenance program at Rosenthal.

The weakening US dollar and a fiber market that has remained quite tight were the only negative factors in an otherwise very positive quarter.

In addition, our energy project was commissioned, as expected, in the final few days of the quarter, and we're now selling green energy to the B.C. Hydro under the renewable electricity rate.

The upward trend of NBSK pricing stalled during the quarter as the market digested new hardwood and, to some extent, softwood capacity. But the MBSK market remains relatively balanced. I'll talk more about this in a moment, but let me first comment about the mills.

Our Stendal and Celgar mills ran extremely well in the quarter, with both mills posting their highest production quarters ever. Even more impressive is the fact that the records that were broken were themselves only one quarter old for Stendal and two quarters old for Celgar. I continue to be pleased to see our vision and investments resulting in our people raising the bar in terms of what we are capable of producing; though we continue to believe there is more untapped potential.

Although it is not immediately obvious in the numbers due to its recent maintenance shut, Rosenthal also performed well. We not only completed the annual maintenance shut on our pulp facilities at Rosenthal; we also performed a full rebuild of our electric turbine and generator. While the Rosenthal shut took our pulp production down for nine days, our power production was down for almost two months. There is no scheduled maintenance downtime in the fourth quarter.

In total, we produced 381,000 tons of pulp, compared to 360,000 tons in the second quarter of this year and 346,000 tons in the third quarter of 2009. In addition, the mills' strong productivity allowed us to sell 119 gigawatt-hours of electricity in the quarter, compared to 144 gigawatt-hours in Q2.

If I could turn back to the pulp markets for a moment, I would characterize it as balanced but a little uncertain. As you know, current NBSK pulp inventory statistics are relatively positive, with producers' global softwood inventories sitting at around 27 days today, which remains historically low. But, as you know, the momentum we have experienced in the past year has stalled at the moment, with markets resisting further price increases and suppliers lowering prices to accommodate.

There remains no shortage of conflicting market variables to consider. While the inventory levels for NBSK are positive, the market is also considering the impact of return to production of a small number of previously shut NBSK mills. In addition to the restarts, there is some uncertainty as to the impact on the market of certain recently sold mills - mills that previously supplied the markets and which may in the future be dedicated to their new owners' integrated paper production in China. And, of course, in the background, there is the hardwood market, which is addressing large amounts of new capacity.

There does not seem to be a consensus in what degree this will weaken the hardwood prices and what, if any, impact it may have on the softwood price. As you know, the NBSK market appears to have settled on a $20 reduction for North America in October, so this will leave list prices in October at around $270 per ton in North America, $960 in northern Europe, and $820 in China. So, while we are optimistic that the market will continue to display the resiliency that it has in the past two months, we're also prepared for the possibility of a slower period as the market absorbs production from recent restart of NBSK capacity.

Our sales volume was slightly lower than normal levels as the market worked through the pricing uncertainty. Sales volume totaled about 345,000 tons, compared to 365,000 tons in the second quarter and 362,000 tons in Q3 2009. Most of this stock will be picked up in the next quarter's shipments.

Let me now take a moment to discuss developments in the wood markets. As we discussed last quarter, after rising for most of the first two quarters, wood prices in Europe seem to have leveled off, albeit at relatively higher levels. We expect, on average, that our wood costs should remain at these levels for the remainder of this year. In Germany, we have seen modest improvements in operating rates of the sawmills; however, we do not expect the impact of this to be significant in regards to our costs.

You will also recall that, in Q1, we eased production in Germany due to our tight fiber inventories. But, as David noted, we have invested a significant amount of working capital to limit the risk of having to slow production again. We're currently satisfied with our fiber inventories in Germany, after building our inventories in anticipation of the seasonally slow harvesting winter months.

In British Columbia, our fiber cost trend remains encouraging. The new supply chain for whole-log pulpwood that we have developed has significantly addressed our delivery cost issues. As well, we have begun to see a modest increase in sawmill activity in our area. This, combined with continued productivity improvements from our wood room, has us confident that Celgar's wood costs will stay flat in the fourth quarter. However, even if weak lumber markets reduces sawmilling in our area again, we believe the impact on our costs will only be slightly negative.

If I can spend a moment talking about energy, we're pleased with the early production of green energy from our new facility at Celgar. We received confirmation of our commercial operating status from the B.C. power utility, and we're now turning our focus to fine-tuning the equipment to realize the EBITDA improvement impact on this important project.

We're in the final stages of preparing our submission for the use of the balance of the funds. Like the green energy project, these final few projects will be highly accretive with quick paybacks of three years or less. We'll report more on these initiatives at our next quarter's conference calls.

So, to make a few closing observations, we continue to believe that the tight market that was interrupted by some restarts of old NBSK capacity will return shortly. While there remains some uncertainty about pricing in the next few months, we believe that the upward pricing pressure will return in the near future due to the continued expansion of tissue and other higher consuming softwood products in China next year and beyond. While there is much speculation about prices softening as capacity restarts and new capacity enters the market, our view is that this will be move evident on the hardwood side.

The fundamentals for NBSK supply and demand remain very favorable. And we are optimistic with the continued global economic growth. The supply/demand relationship for softwood pulp should remain favorable for the next several years. We remained focused on increasing margins by reducing costs, as well as increasing the mill availability at all operations and improving the returns on our byproducts, such as excess power.

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

(Operator instructions). Bruce Klein, Credit Suisse.

Just on the Celgar energy program, do you expect the fourth quarter to get the full benefit or most of the benefit? And when, sort of, does the run rate kick in where you get the full amount of power sales, I guess?

Well, we're optimistic, by the end of this year, that we should be able to get all of the optimizations completed so that we will have what we projected to be the normalized run rates. Of course, there is a seasonality to this because, unfortunately, we're entering into the colder period of the year. And, of course, steam consumption tends to be much higher during this period. So don't regard, let's say, the smaller type of power generation in the winter months as indicative of anything other than the seasonality. So I think the mill, certainly in terms of the power generation, is starting to show the optimization, as we are expecting. There is, of course, continued focus in terms of reducing the steam, as well as optimization of the controls, so that we are able to maximize the power production.

Thanks. And a second question was just-- We've talked in the past just about some of the hardwood capacity, I think, is longer term. But, when it does come on in terms of the ability for printing and writing producers or tissue producers to switch to use more hardwood vis-a-vis soft-- Where do you think we are on that curve? Is that a big concern? Or, if not, why not?

Well, we recently had a trip to China. And, clearly, our customers in the hygiene area-- almost all of them are looking to double their capacity in the next couple of years. We discussed substitution issues. We feel very comfortable that this is not something that's easily substitutable because they really do rely on quality issues. They are trying to differentiate their product versus their competitors. They're very quality conscious. They also reinforced our belief that the recycle-based tissue is not really a competitor. They are focusing on virgin fiber because they believe the market has a very negative opinion of recycled-based type of hygiene products.

At the same time, we also discussed with the basic printing and writing grades the proportion of hard and softwood and the substitution ability, and there seems to be, really, not that level of flexibility. There is a minimum, and they all acknowledged that, in terms of the quality, that minimum is pretty much the floor.

But I don't think the substitution issue is the big question. It's really, if softwood prices are significantly higher than hardwood, then, of course, there is a psychological influence rather than strictly a supply/demand type of relationship. So we are very optimistic that the expansions going on in China, especially in the area of more premium grades, which they admit are going to take more and more softwood in the coming years, certainly bides well in terms of the supply and demand balance. In fact, if you look at even the recent restarts-- if you just look at the hygiene area, there is really a lack of production if you actually project out the paper expansion that has already been announced for next year and beyond.

All right. Great. Thank you, guys.

Bill Hoffman, RBC Capital.

Dave, I wonder if you could just give us a couple of details; one, the sales volumes from the different mills. And then, two, I just wanted to get restricted group CapEx. And then, finally, if you could, just talk about the SG&A at restricted group in this quarter versus the prior quarters.

Yes, sure. So, let's do the sales volumes first. Third quarter, Rosenthal [76.4]; Stendal [152.9]; and Celgar [115.5].

Restricted group CapEx-- So, we're going to let the [club out] a little bit for the restricted group. For Rosenthal-- I don't want to get too complicated here, but we have this thing in Germany called wastewater fees and the opportunity to offset those. So, these are fees for (inaudible) that are accrued through wastewater usage. And, if we can come up with a capital project that allows us to reduce our permit levels for emissions, then we can avoid paying the wastewater in lieu of the capital spending that we're going to do.

So we've got a project at Rosenthal that's about a EUR15.8-million project that will happen over a couple of years. We'll avoid paying wastewater fees of about EUR6.6 million. We get a grant of about EUR1.5 million. So our investment is somewhere around EUR7.5 million, and the payback through the cost reduction of this exercise is less than two years. So it's a real winner for us. So our Board has approved that.

At Celgar, we've got about [9 million], call it, left to spend of green transformation program money. So a big chunk of that is going to go into a two-stage oxygen delignification tower, which is something that will help us lower our chemical costs on an aggregate basis. So it's a very high-return project. It also creates some features in our pulp that make it highly sought after by the hygiene guys, particularly on the east coast of North America. So that's something we're quite excited about. And that's all covered by federal funding.

In addition to that, we're going to spend about CAD12 million on a variety of high-return projects at Celgar. The mill, as you see in its last two production records, has got room to grow, and we've highlighted some of those areas. And this is the year for us to put that stuff into place. So, all highly accretive, creating shareholder value through that activity.

And what was the other thing, Bill?

Just on the CapEx. What was the spend in the third quarter?

The spend in the third quarter was EUR1.5 million on Rosenthal and a very-- less than EUR1 million on Celgar and less than EUR0.5 million at Stendal. And Celgar I give you on a net basis because it's too complicated. Everything we're spending this year at Celgar is coming back to us in grants.

Right. And you said there's another EUR4 million holdback on that grant?

Yes, that's right.

Okay. And then the other question was just in the SG&A line.

Oh, yes. In SG&A, it's just a little bit complicated because we have three functional currencies in our Company - one functional for reporting. And then we have Celgar in Canadian dollars, we have Mercer Inc. in US dollars, and we have euros at the German operations.

So our cash spending on SG&A has gone down a little bit and continues to go down a little bit quarter over quarter. But we always get this foreign exchange bump that rolls through there. So the changes are all related just to timing and these mark-to-market type of valuation adjustments that go through there on the SG&A side.

What would you expect going forward for the restricted group part of it?

Well, over the course of the year, it's just a consistent flat line compared to last year, and I just don't have the number off the top of my head, Bill. But it's just declining slightly over time, other than the foreign exchange bumps that take it up and down.

Okay. I'll circle back with you on that. Then just one final question. The power sales in the quarter - 119 megawatts. I'm just sort of curious if you could talk a little bit about that, since you had Rosenthal off for, effectively, two months.

The record productions-- you have record electricity production at Stendal and, of course, also, at Celgar, it was not buying outside power. So it's really those combination which allowed it to have higher electricity revenue than we would have expected.

Okay. Thank you.

[Gary Madia, Gleacher & Company].

A couple of my questions have been answered. But, David, can you help us quantify potentially or, at least, remind us in Celgar kind of what you guys are thinking in terms of the normal run rate impact once that green energy project is fully up and running?

Yes. Gary, it's between CAD20 million and CAD25 million; err on the high side. And then there's growth potential in that going forward in the future years. And, in the first--

Any sense--? Can you give us any color as to--? I mean, there's language in the press release which speaks to the impact 3Q versus 4Q now that that project is selling as of the end of September. Can you help us quantify what the potential impact might look like in 4Q?

Well, we don't really forecast, so I'm reluctant to do that on the call here. But it's ramping up. So it will be, in the first months, perhaps, 50% of expectations. And then, second month, it will be closer to optimal. And, by the end of the quarter, we should have it fully optimized, subject to further growth and further-- I mean, there's always things you can do to improve. And the team at the mill will continue to learn to optimize. So there's always upside. But it will take them a quarter to get it to a level where we're projecting.

A couple questions kind of looking back at the historical numbers. Can you help us quantify both on the power side and on the pulp side-- it appears to be probably more of an issue on the power side-- what the economic impact was with the Rosenthal downtime during 3Q?

It was down for two out of the three months on the power side. And it was buying power while it was producing pulp for all but nine days. So I think we've calculated that to be somewhere between [EUR7 million to EUR8 million] on the power side. And a typical maintenance shut at a mill like our mills is somewhere around EUR3.5 million to EUR4 million of maintenance dollars that gets spent in the quarter. And then, of course, you lose the margin on the pulp that didn't get produced, but there's an inventory change calculation in there. So I think maybe I'll just leave it there for you.

Very good. Thank you. I appreciate the color.

Phillip Wirtz, Odeon Capital.

I'm wondering about your chemical costs. I think you mentioned that they were actually down. And I'm wondering if that has more to do with-- you're able to use chemicals more efficiently with higher rates of production or you're just not seeing per-unit costs increase. Can you add anything to that?

It's really the efficiencies. When mills run really well, you don't have that slippage on an upset or having to boost things when you're restarting and that kind of thing. So, when the mills run really well, you get good chemical usage out of it.

I think it's to do with efficiencies right now rather than the cost of the chemicals. The cost of the chemicals would be reasonably flat.

Okay. And moving forward-- I mean, I have seen a lot of chemical increase announcements just on various forest products chemicals-- that you don't expect that to be a major headwind moving forward?

No. And, also, there's further improvements in terms of our production efficiencies to address chemical consumption moving forward. So, in fact, I think chemical issues certainly is an area that we're not really too concerned about.

Okay. And then, secondly, on Celgar production, it looks like, after having several record months, you're kind of getting to the point where we can expect a go-forward run rate that may be 10% higher than what we've seen in the past. So is that going to also--? Could that raise your expectations for green power revenues at this higher rate?

Yes; exactly. We're seeing the capabilities of this mill, which far exceeds what we originally expected. We had record-breaking days which, on an annualized run rate, would bring this mill's production volume more in excess of 600,000 tons. So, clearly, the mill has the capability once we've stabilized and optimized different areas and debottleneck certain other areas. So, clearly, the Celgar mill has got a lot of potential, and that means that power generation also would increase as a result of that.

Okay. And then the last, final question is on the orders that did slip into Q4. Was that mostly due to the buyers' strike you had mentioned in Q2?

We had that period in August which, of course, was a little bit weak because of the uncertainty. And then we saw the orders started to really pick up towards the end of August and into September. And then it's a question of aligning the shipments. You can't just book the vessels quickly enough. So the result and flood of orders into September meant that there was a heavy volume of shipments in October and the balance of this year - significant shipments in October.

So you would expect to catch up mostly in Q4? Is container availability in Vancouver still an issue?

No. We basically are using a lot of bulk carrier shipments. Container issue is still some concern in Vancouver. But we basically are addressing the limitations on that side by having charter vessels available to us. So we're not constrained in that regard. And, also, the costs are quite good. And so our expectation is the inventory issues will certainly be dealt with in this quarter.

Okay. Very good. Thank you so much.

Claire Huxtable, RBC Capital Markets.

Could you just review with us your downtime expectations for next year?

We'll have-- We've got three maintenance shuts next year. I think Celgar's in the second quarter. I believe it's Rosenthal in the third quarter and Stendal in the fourth quarter.

Okay. Great.

Andrew Shapiro, Lawndale Capital.

Two questions; first off, on the market overall. Is the process of shaking out due to the end of the Chinese buyers' strike? In other words, what's the status of the closure of inefficient, polluting plants in China? And do you feel the market's now balanced sufficiently that the likelihood of an up or a down move is about the same?

We haven't quite seen the impact of the closures of the polluting, Chinese mills yet. And, also, it's difficult to know the full impact that we'll have. But we do know that, based on our discussions with our customers, we know that the inventory levels that they had certainly were lower than what would be normal. They weren't desperate, but they were not running with high levels. That's clear.

A lot of the papermakers in the sense of the hygiene grades, et cetera, were having very good orders. Only a few paper grades were having inventory issues. We also know that all of the various papermakers have been running both hard and softwood inventories towards the lower end because, clearly, they had this buyers' strike in August to try to force prices. And, at the same time, there is this standoff between the Brazilian hardwood producers and the end users in China.

So it is clear that we're not having inventory buildup in any of the channels. If you look at the ports, the producers, the end users, there hasn't been this traditional kind of inventory build which would indicate a peak market type of condition.

So what we had in August certainly is unusual. We're going to have some impact, clearly, with the restarts, but they're starting up during a quarter where there's a lot of maintenance. So we haven't seen the impact as yet. And yet, at the same time, the demand growth next year should take care of, really, any of these little restarts. So we are optimistic in terms of the near-future balance because we know that capacity increases certainly will mean significant demand increase.

So I think that, overall, certainly on the NBSK side, we think there's a very good balance. In terms of hardwood, there's a lot of new capacity, and that's really where the pressure clearly is arising from.

On the Rosenthal-- A prior questioner asked about the estimate on the energy costs. I just wanted to know-- Was that net of the energy the Company actually had to purchase to run Rosenthal, or was that just the lost energy revenue side?

No. That's the net impact in terms of lost sales and purchase of electricity.

Okay. Great. And year over year, you're operating costs were higher due to-- I think your press release talked about EUR26 million of higher fiber and energy costs. Can you break out between the two as to increased costs? Was it mostly the fiber side? Or, I guess you've just provided us the increased energy costs we could reverse into that.

It's predominantly the wood fiber costs in Germany.

Okay. And you gave the prognosis for those fiber costs in the current quarter, Q4. Do you feel that you're going to experience leveling, or it's thereafter, starting in Q1?

No. We believe that, in the fourth quarter, we should essentially have leveling of the costs overall.

Okay. And, then, you had about 16,000 ADMT in orders slipping into Q4. I think you mentioned now that they moved out in October. And that would certainly have contributed to your inventory build. But are these orders now supplemental to your ordinary Q4? Ought we expect a decent-sized reduction in inventory and a buildup of cash? Or is cash a Q1 event from Q4 receivables?

No. What you're going to have is, clearly, very good sales in the fourth quarter because a lot of the third quarter has slipped into fourth, with the normal type of sales in the fourth quarter. So the fourth quarter sales will be higher. There should be an inventory reduction. In terms of whether there's cash, it's subject to the receivable issues because, of course, it's a timing as to when the shipment is done and when we collect the money. So I can't promise you that we'll have a lot of cash, but you'll see it in cash and receivables.

On the debt side, have you had discussions with your current senior note holders, just to have a handle on whether you think the tender offer will be pretty fairly received; and, thus, the likelihood, then, of the covenants being changed would pretty much bring the rest of the senior notes with it?

I'm sorry. We've been advised that we really can't talk about this process at all on this call.

Okay. Are you able to talk a little bit about the new, planned debt in terms of the-- I guess we'll call it the term and duration you're--

Andrew, if we discuss it at all, the free-riding prospectus rules will bring this whole conference call into prospectus-grade. And we just-- We can't talk about this at all. There will be an offering memorandum coming out shortly, and that should answer most of your questions.

All right. Then the last question here is - How do you make the fact that the restricted group is non-recourse from the Stendal debt more transparent? What is the structure that properly addresses the strength of both sides yet obtains a more appropriate equity valuation and lower cost of capital financing for Mercer and the restricted group than what the market continues to undervalue the Company for?

You're asking us for an alternative capital structure? Or what can we do just to communicate better what we are? I'm not sure--

I mean-- What is the structure? What's the structures? What are the alternatives you and the Board have been talking about as a means of obtaining an appropriate equity valuation and, thus, a lower cost of capital financing than what we've been and continue to experience on a consolidated basis? It's still spoken of on a consolidated basis that the Company has a substantial amount of leverage. And we've talked--

What we've done to try to address it is we've created a supplemental investor presentation that talks about Mercer's capital structure. Jimmy and I have been on the road at least three times this year, meeting with investors, both existing investors and potential new ones, to highlight our structure. We point out the non-recourse nature of the Stendal debt. It's a big chunk of leverage, but it's non-recourse. It's low interest rate. It's guaranteed by the German government. It's amortizing, but it has a safety net and a debt services (inaudible) account and all those features.

And then we-- On the restricted group side, we explain to investors that the steps we took on our convertible debentures means they will move into equity without us making cash payments, we believe. And so we'll have our senior notes, which are the senior capital on the restricted group, and that's not bad leverage, considering the quality of the assets and the electricity-generating capabilities, even at bottom of cycle. If you've got $40 million of electricity revenue coming in in the restricted group and you've got two low-cost mills that-- As we've demonstrated bottom of cycle before, Rosenthal was a breakeven mill. And so, with its wood costs under control now, if it's the same, that's a pretty nice piece of paper.

So we just keep communicating, Andrew. We're not going to blend the two together, or we don't have any ideas that we're discussing to radically change our capital structure. In fact, you've seen our announcement today that we're intending to issue a new set of senior notes for the restricted group. So I hope that helps answer your question.

Yes. You know we feel similarly. But it has been a frustration for everyone in terms of the market's understanding of that.

And the last question, then, is - What are your-- Mercer's next events or presentations in terms of conferences and road shows where you're going to communicate these things? Or are you kind of frozen down because of the tender offer and offering?

No. We'll be going to the RBC conference on November 30. We're really looking forward to that. They do a great job. They have both equity and high yield and debt side there. We also have been invited to the Sidoti conference in January, and Sidoti is picking up coverage on us, which I'm hoping is in the market in December. So that should create quite a bit of interest. And then we typically do a Company-sponsored, general road show early in the spring, after the annual report is released. And CIBC at Whistler in the early part of the new year as well. So we'll be quite busy on our marketing side.

All right. Great. Thanks, guys.

[George Burmann], J.P. Turner.

Congratulations for a great quarter. I have just a couple of questions. Your convertible debt-- In the presentation, which apparently is very nice, that you made at the Credit Suisse First Boston show, you said that $18 million of the converts had already been converted. Can you give us some color on how much more, if any, has been converted to date and what that would do for your capital structure?

Well, George, the $18 million that came in is really all of it. So there's $48 million outstanding of our convertible debentures. We don't have any color on whether any of those particular holders are interested to convert or not.

And, if they were converted, it would reduce your interest costs by how much?

Well, they're 8.5% bonds. And 8.5% times whatever comes in, I guess.

And you would add on 14 million shares to the share count then.

That's right. Yes.

Okay. So that would alleviate any-- a lot of the debt concerns, as well, then for you. Right?

Well, yes. It's not really a big deal for us anymore. When you look at the cash flow over the last two quarters and you look at the liquidity reserves that the Company has built-- I mentioned, in the restricted group, we had EUR48 million of cash. We've got over EUR30 million of revolvers available. We've built up our receivables, finished goods, and raw material inventories to a level where-- If I compare where we are today, George, to where we were at bottom of cycle and where we would take it to bottom of cycle, there's another EUR35 million of liquidity in our working capital that's available to the Company. So we're quite flush and quite comfortable with our capital structure at the moment.

Right. And the only other thing one could look at is the float and the available shares in the marketplace might be increased to a decent amount.

Well, through the conversion of the converts, I assume, you're speaking.

Yes.

That would be-- We would see that additional liquidity, or float, as a positive.

Your competitors in the pulp market-- any of them have your setup, where you actually produce excess electricity? Or are all of them having to buy in electricity?

Well, the Canadians all are-- None of them are in a position where they fully supply their own needs. But there are opportunities in British Columbia, for example, where you can sell some power while you're still buying. It all depends on the history of your equipment and the deal you struck with the local utility.

How about the rest of the world?

Well, it's different everywhere in the world. In Scandinavia, there's a number of different schemes. They tend to be very focused on it, the way we are here in Germany. And there's programs that they benefit from. The small amount of production-- The market craft production in the States has, often, feed-in tariffs. It's different in every state. But there's opportunities for them as well.

The world is recognizing that what craft pulp mills is a very good thing, both in terms of environmental and in terms of its combined heat, power, and co-gen systems. We're recyclers of waste from the sawmillers. All these things are-- Jurisdictions are starting to realize how valuable these assets are, and programs are being put in place globally to support. But, having said that, we've got three of the most modern mills in the world. So we're leaders in that area.

Great. And then one last point. Have you considered presenting your numbers in US currency, as well, to sort of flesh out your tremendous earnings power that you have?

Yes. It's clearly something we have to think about, and we have been. We don't have an answer yet, George. But it's an obvious question, so we've been thinking about it.

Okay. Great. Good luck to you in the future.

Chris Dechiario, ISI Capital.

Most of my questions have been asked, but I just have a couple of items. Could you give us--? You gave the sales per mill. Could you give us production per mill?

Production at Rosenthal was [74.9]. Stendal was [173.2]. And Celgar was [132.8].

Great. Thanks. And then you spoke about, I think, a $20 reduction in list price on October 1. I was wondering if there were any pricing changes on November 1.

No. We basically remain flat for November.

Okay. Thank you.

And there are no further questions. Management, do you have any closing remarks?

No. Thank you again for attending today's conference call.

Actually, my trip to China was very enlightening. That really gave me a good idea as to why some of our customers are actually buying junky pulp mills. So we are very optimistic in terms of the outlook moving forward. And, certainly, the discussions there made it very clear that their consumption of softwood in the coming years will grow and continue to grow. As a result, they're focused on particular paper grades. So I think we may have a little bit of uncertainty in the short term, but the long term looks very positive.

So, on that note, I would like to, again, thank you and finish the conference call. Thank you.

Thank you. This does conclude today's conference call. You may disconnect at this time.