Mercer International Inc (MERC) 2010 Q4 法說會逐字稿

Good morning. My name is Christy and I will be your conference operator today. At this time I would like to welcome everyone to the Mercer International fourth-quarter 2010 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 will now turn the conference over to Eric Boyriven of FD.

Thank you. Good morning and welcome to the Mercer International 2010 fourth-quarter earnings conference call. Management will begin with formal remarks, after which we will take your questions.

Please note that in this morning's conference call management will make forward-looking statements that were made in the press release. According to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks related to these statements which are 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, Eric. Welcome, everyone, to Mercer's fourth-quarter earnings conference call. I will 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 will 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 fourth quarter was very strong and we are pleased to report a near-record EBITDA quarter. The demand for pulp in all our markets was strong throughout the quarter. Our mills ran reasonably well, but our production was lower than expected due to two significant mechanical issues combined with production complications resulting from extreme cold in Germany.

As you will have in our press release, we reported net income of EUR35.3 million for the quarter or EUR0.84 since per share compared to net income of EUR2.7 million or EUR0.08 per share in the same quarter in 2009. The net income includes approximately EUR11 million of non-cash gains related to mark-to-market valuations of our US dollar-denominated debt and fixed interest rate swap and EUR1.6 million of non-cash losses included in the loss on the extinguishment of our old senior notes. Before these non-cash items EPS was EUR0.62 per share.

We recorded our second-highest quarterly EBITDA in the Company's history at EUR64.6 million or almost $88 million. This compares to EUR65.5 million or about $85 million in the third quarter which remains our best-ever EBITDA total.

The most significant differences in EBITDA compared to Q3 were the negative impact of a weaker US dollar along with slightly lower pulp prices in Europe and North American markets. These negative impacts were partially offset by significantly higher sales volumes, the positive affect of having no scheduled maintenance shuts in Q4, and the reversal of certain wastewater fee accruals in Germany.

Switching to cash flow, overall our cash position is EUR14 million higher than at the end of Q3 sitting at EUR99 million or approximately $130 million. Inflows in Q4 were dominated by almost EUR65 million from EBITDA. Overall the quarterly working capital increases drew on cash by about EUR18 million on a net basis, capital expenditures drew about EUR9 million, we also paid about EUR4 million in debt repayments, and EUR6 million of debt issuance costs.

When thinking about our cash build it's also worth noting that we have a receivable of about CAD11 million of Green Transformation Fund grants from 2010 capital spending that we expect to receive during the next several months.

Looking at the components of working capital in the quarter, finished goods were down approximately EUR11 million from Q3. While Q3 finished goods inventory were high at 93,000 tonnes, the year-end finished goods inventory ended at 63,000 tonnes closer to our target volume.

Receivables are up in the quarter by about EUR20 million to EUR122 million, primarily due to higher sales volumes. Accounts payables and accruals are down about EUR23 million quarter over quarter, primarily due to the timing of payments.

Summarizing our working capital movements relative to our cash build in the 12-month period ended December 31, our working capital, excluding cash and short-term debt, grew by about EUR108 million, up from EUR64 million at the end of 2009 to EUR172 million. We have EUR26 million of undrawn revolvers at Rosenthal and about EUR13 million available at Celgar. Our EUR99 million of cash at year-end is comprised of approximately EUR51 million for the Restricted Group and EUR48 million at Stendal.

As you are probably aware, we are very pleased to have completed a private offering for $300 million of 9.5% senior notes due 2017. We also completed a cash tender offer for approximately $289 million of our senior notes due in 2013. As a result of the tender offer, we recorded a EUR6.6 million loss on extinguishment of debt which was primarily comprised of the tender offer premium. The intended effect of these transactions was to extend the maturity of our restricted group senior debt.

Also in Q4, we announced that we intend to redeem the remaining $21 million of senior notes due 2013 at 100% of the principal plus accrued and unpaid interest. The redemption date for that has been set as today. Finally, during Q4 roughly [EUR3 million] of convertible notes were converted to almost 1 million shares, putting the total conversion of notes at almost [EUR22 million] for the year or about 6.5 million shares.

That ends my quick overview of the financial position and developments, 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 fourth-quarter results. I am also pleased to report that we achieved record productivity in 2010 and this was in spite of small curtailment in Q1 and some mechanical and weather-related issues in Q4.

Similar to Q3, the weakening of the US dollar and a European fiber market that remains tight were negative factors, along with lower productivity, in an otherwise positive fourth quarter. In the fourth quarter list prices in Europe came down about $10 per tonne in spite of strong fundamentals while the list price in China went up $10 per ton.

Overall, the NBSK market remains balanced. I will talk more about this in a moment, but first let me comment about the mills.

Our Rosenthal and Celgar mills ran quite well in the quarter with Rosenthal having one of its best production quarters ever and Celgar achieving the 500,000 tonnes productivity milestone for the first time this year. Unfortunately, we did have some downtime in Q4, most of which came at Stendal where mechanical issues caused several days of lost production followed by several more days of operating below capacity. Severe winter in Germany also played a contributing factor to our lower production levels.

Overall, we had a solid production year, though we continued to believe that there is more potential in our assets and we are looking forward to realizing those potentials in 2011.

In total we produced about 356,000 tonnes of pulp compared to 381,000 tonnes in the third quarter of this year and 357,000 tonnes in the fourth quarter of 2009. In addition, the mills sold 150 GW hours of electricity in the quarter compared to 119 GW hours in Q3. This increase was primarily due to Celgar's turbine running for a full quarter compared to Q3 when the turbine was commissioned late in that quarter.

If I could turn back to the pulp market for a moment, I would continue to characterize it as balanced but a still little uncertain. As you know, current NBSK pulp inventory statistics continue to be very positive with producers' global softwood inventories falling to 25 days at the end of December, which remains at historically low levels. We continue to believe that the market tightness will continue to put pressure on prices in the longer term.

As you know, we have implemented a $20 per tonne increase in China for February and we have also seen other producers recently announce additional $30 increases beginning in March for a number of markets. We believe that the continued growth of the Chinese paper and tissue producers is driving today's market tightness and we believe that growth trend will continue given the demographic shifts that we are seeing in China. Many are still predicting NBSK prices to come down in 2011, but we see the market fundamentals continuing to be favoring the producers.

While the inventory levels for NBSK are positive, the market uncertainty I noted earlier is coming from potential impact of a return to production of a small number of previously shut NBSK mills. The effect has not yet been felt in the market and some are now predicting that the impact will be minimal due to current demand.

In addition to the restart, there is some uncertainty as to the impact in the market of certain recently sold mills, mills that previously supplied the market and which may in the future be dedicated to their new owners, integrated paper production in China. Of course, in the background there is also the hardwood market which is addressing large amounts of new capacity. There doesn't seem to be a consensus on how the hardwood prices might fall and what, if any, impact it might have on the softwood pricing.

Overall, we believe that increasing demand from NBSK customers will allow any incremental capacity from restarts and market alignment changes to be absorbed without disruption in the market significantly.

As you know, the NBSK market appears to have settled on a $20 increase in China in February, so this will leave list prices in February at $970 per tonne in North America, $950 in Northern Europe, and $860 in China. We believe that some of the March price increases will be successfully implemented, and we remain optimistic that the market will continue to display this strength and resiliency beyond Q1.

Our sales volume was higher than Q3, primarily due to strong demand from China. Sales volume totaled 386,000 tonnes compared to 345,000 in the third quarter and almost 352,000 tonnes in Q4 of 2009.

Let me now take a moment to discuss developments in the wood markets. As we discussed last quarter, after rising for the last two quarters wood prices in Europe appear to have leveled off, albeit at relatively high levels.

However, we expect a marginal increase in Q1 as the fiber market addresses supply issues made worse by the extreme winter conditions being felt in Germany. Afterwards, we expect fiber prices in Germany to slip back to Q4 levels and remain relatively flat for the remainder of the year.

You will 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. As a result, we are satisfied with our current fiber inventories in Germany. We are monitoring them closely as supply remains tight.

In British Columbia our fiber costs continue to trend positively, although we have seen modest increases in sawmill activity in our area. The main reason for the positive trend remains our improved wood room. We continue to be confident that Celgar's fiber costs will remain flat in 2011, but we are also looking at other projects that will help us reduce those costs further. We also believe that if a weak lumber market that reduces sawmilling in our area should happen again that it will be only a slightly negative on our cost.

Turning to energy for a moment, we are satisfied with the early production of green energy from our new facility at Celgar. Celgar has identified a number of areas where processes can be optimized in the mill to maximize the amount of steam available for its turbine. The more steam that can be put through the turbine, the more energy that can be produced. Consequently, Celgar will be focusing resources to maximize their energy production.

In total, the project consumed about CAD48 million of our CAD58 million Green Transformation grant. We have recently submitted, and the Canadian government has accepted, a proposal for the use of the balance of the funds. We are currently in the process of negotiating a contribution agreement.

Like the Green Energy Project, this project is expected to be highly accretive. We are planning to install a second stage to our oxygen delignification process that has many benefits, including reducing chemical usage, improved fiber yield, and reduced levels of effluent-required treatment. We will have more to report next quarter on this project.

We regularly get questions about the timing of our annual maintenance shuts, so I would like to highlight that for 2011 shuts which lineup as follows. Celgar will have their annual shut in Q2, Rosenthal in Q3, and Stendal in Q4.

If I can close with a few observations, we continue to believe that the tight NBSK market will remain for at least the short term and are even more optimistic about 2011 given the recent price increase announcements, since it appears that the markets are adjusting well to the restarts and the realignment of producers and customers as a result of the recent acquisition of NBSK mills by a large paper producer. The wildcard continues to be hardwood supply and demand, and we expect that supply will begin to outstrip demand in 2011 as new capacity comes online.

The fundamentals for NBSK supply/demand remain favorable and we are optimistic given the continued global economic growth. We also believe that the supply/demand relationship for softwood pulp should remain favorable for the next several years.

I am also pleased with our current financial position. Today our old senior notes due 2013 will all have been redeemed and we also expect our convertible notes, some of which have already converted, will also be converted to equity before the notes mature in February 2012. We will continue to look at creative ways to delever in 2011.

We remain focused on increased 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. Currently our biggest challenge is the European fiber market, but we remain optimistic that the supply and demand will come back into balance.

So with that 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) Bill Hoffmann, RBC Capital Markets.

Good morning. David, I wonder if you could give us a little bit of help with the volume per site on the pulp side. And then I also just wanted to talk a little bit about the working capital cash versus uses sort of as we go forward.

Okay, Bill, sure. So you want both production and sales volume, I guess?

Yes.

Yes, okay. So fourth-quarter production volumes, Rosenthal was 84.8, Stendhal was 148.7, Celgar was 129.7. And then sales volumes -- Rosenthal 80.9, Stendhal 159.6, and Celgar was 145.5.

Okay. And then just as far as working capital cash goes, it looks like you came through the end of the year there with obviously a little bit lower inventory, but you said tonnage-wise you are okay. Just sort of talk about how that works going through the first quarter, given still that you are going to have some winter seasonality to it.

I think raw materials will be flat to declining. Finished goods will depend on what happens in March, it could be flat or up a little or possibly down a little bit. Actually year-end inventories were quite low, some more likely a small build.

So receivables will stem from what happens in March. I can't give you too much clarity on that. Generally, on the working capital investment side the peak is really December 31, apart from the variability of the sales volume.

Okay, thanks. And then, Jimmy, just a question for you on the softwood markets and you talked about some of the additional capacity restarts and saying that really hasn't started to impact the markets yet. But when do you expect it to start to hit the markets? And are these guys targeting all the Asian markets or do you expect some of it up in North America and Europe as well?

Yes, we haven't really seen any of the restart impact in Europe. I think most of the volume seems to be headed to Asia, primarily into China. We also haven't seen a lot in North America as well.

So the impact has been quite minimal to date. We don't expect that any real impact will be felt in terms of the NBSK component. Now we have, of course, [Arleco] in terms of their restart potential. It has been delayed, as you know, from several months. There is still the open question as to whether the recent earthquake will further delay that, so timing in terms of when that radiata mill comes back is still open.

With the continued expansion in China, especially in terms of the tissue side this year, we think that any restart as such will probably have minimal impact based on clearly the production increases we are seeing generally this year.

And do you sense that any of the customers over in Asia are doing more? I mean obviously they always do, but as far as substituting on the margin hardwoods for softwoods just because they see more softwood coming on?

You know, we haven't really seen a lot of the substitution issue really impact our market. A lot of that has occurred many years ago and of course a lot of that was related to more the basic printing and writing grades.

If you look at the tissue area, there is a consistency of quality that all of these guys try to maintain and therefore their recipes tend to remain fairly constant. I mean, of course, on the fringes you will have a little bit but that is not going to have a big impact in terms of our demand side.

Great, thank you.

Graham Meagher, TD Newcrest.

Good morning, guys. Great quarter. Just a couple of questions; first one, can you talk a little bit about chemical costs and if you are seeing any inflation in Q1 here?

David, you want to take a shot at that?

Well, nothing really significant, Graham, to be honest. A little bit of creep throughout the year and just continuing, but nothing significant.

Okay, great. Second question on the Celgar energy project. Is that now fully ramped up as we are into mid-February and is it meeting your expectations to this point?

Yes, it's meeting our expectations. In the last quarter it was really not -- of course winter conditions have an issue and also there is projects in terms of steam savings that we, of course, had to finish up and certain investments related to steam conservation that we finished. So I think moving forward into this quarter certainly the numbers are moving very close to the targets so we are very, very, positive that we will see the projected numbers coming through very shortly.

Great.

Just to add to that, I guess from an engineering point of view we can see all of the metrics that tell us it can meet its targets. It's a little challenging in a mill that has always been able to waste steam to now have to save every bit of steam it can. And that is really the challenge for us going forward is to watch every steam valve and every heat sink and maximize our energy production.

But it's -- operationally the turbine is a success and now it's up to us to get it to the maximum.

Great. Just last question; have you seen much interest in your NBSK from new customers yourselves that would be using it as a substitute for dissolving?

Yes, we have had some small quantities of shipments to new customers which clearly are not producing paper grade. And it looks like they are using it in terms of -- as a substitute for dissolving pulp in terms of rayon production. Now those volumes have been to date quite small.

It requires reprocessing where they also have to extract out additional lignan. It tends to be inefficient and it is pollutive. But there seems to be an attraction for the longer fiber of NBSK, because we asked if you are going to substitute to paper grade pulp why not substitute with hardwood, which of course is cheaper.

But our analysis seems to indicate that because of the fiber losses related to probably screening and other type of intermediary processing that is required that it seems that the material use of NBSK certainly reduces potential losses and so is a better preferred substitute material. And so we are seeing some of that.

There is, of course, potential I think in terms of that particular category. We certainly are focusing our attention on the non-traditional type of end users because clearly it could be an interesting component to our business.

Okay, great. Thanks, that is all I had.

Thank you.

Andrew Shapiro, Lawndale Capital Management.

Good morning. You have Stendal debt obligations, principal and interest, both near term and then back-in deferred amounts. And then some approximate excess bucket amount before Stendal could upstream money to the restricted group.

So while I don't anticipate it to be next quarter, can you help quantify the amount of buildup in cash and debt paydown capabilities inside of Stendal that have to be accumulated before there could then be some upstreaming in money from Stendal into the Restricted Group?

Yes, the way it works, Andy, is excess cash at Stendal goes first into a debt service reserve account. The target for that account is about EUR55 million. It's intended to cover one full year of principal plus interest and it's really to our benefit.

It sits on our balance sheet. It's available for operating costs and for debt service in a condition where you are at the bottom of cycle. So it's a sinking fund provision really.

Excess cash beyond that comes next to us. We charge Stendal a management fee of about EUR3.5 million per year. It's currently being deferred. It has been deferred for all of 2009 and 2010 and carrying on in 2011 until the debt service reserve account is fully filled. Then we will get the deferred amount back plus we will be receiving those currently on a quarterly basis.

Excess cash beyond that goes to the bank syndicate as prepayment or a debt reduction, up to the amount that has been deferred from the original amortization schedule. And so it will depend on when we reach that milestone how much of that debt deferral we will have paid back.

But the previous amortization schedule order of magnitude was around EUR40 million of debt reduction per year and for 2009 and 2010 we dropped that down to almost nothing. In 2011 it's about half and in 2012 it's about half, and then in 2013 it goes back to its regular. So depending on where we are in the span of time there will be some amount of early debt reduction.

And then as long as EBITDA fixed charge coverage ratios and so on are in line then distributions from Stendal to the shareholder would be possible.

And how much has already accumulated then at Stendal towards the first bucket which is the excess reserve, the one-year sinking fund?

Yes, we put EUR7 million in the end of the third quarter last year, and if things keep going the way they are right now we will have that full by the end of the year easily.

Okay. And then you can start working on your management fee and then the backend deferred amounts?

Exactly, yes.

Okay. In aggregate what do you estimate is the potential production capacity that could come into the market from existing I guess restarts or conversions that have yet to be producing into the industry supply? And what is your kind of aggregate estimate of demand growth from new paper and tissue production capacity that is planned, for example, in China and elsewhere?

Do you want to take a shot at it, David?

Sure, I can take the first kick at it. So on the production side for restarts, Andy, Terrace Bay and McKenzie both been in the market for several months now and that has just been absorbed. We don't see any other mills that are likely to come back on paper grade at this stage, not aware of any.

There is new capacity coming at [Illum] in the tail end of 2012, about 450,000 tonnes on a net basis I think it is, where they are upgrading. They are going to shut down one line and put in a new bigger line. But beyond that I don't see any new capacity coming, we don't.

On the demand side, we see North American and European markets are relatively flat on a balance basis I think and in Asia the growth is -- it's hard to measure. The tissue guys are growing at 25% or 30% a year.

In the last two years there has been an enormous amount of new free sheet capacity built in China, predominately hardwood with some softwood as a binder. And it just keeps going, pretty strong demand in all sides from China.

So with futures prices having come up and the downward slope of futures now flattening to basically the out-years looking at [$900] instead of down in the low [$800s] and you have just painted a picture of demand pretty much exceeding capacity availability here and a low current inventory level below equilibrium, at what price levels or ranges do you feel that the supply/demand picture starts turning over and flipping? Is it [$1,000]? It sounds as if you are setting the stage here for record new highs?

Well, it's very difficult to measure those because as you know the paper side, of course, certain different product categories that have different type of margin profiles and, even if they are losing cash, a lot of them will continue to run. So it's difficult to know when demand destruction for any particular grade of paper may occur because of the prices in the future. So that is clearly an unknown.

The other side in terms of capacity, we know that it takes at least a minimum of two years before you can plan and install. Also, you have to have the wood basket. Of course, the wood basket, to a large degree, is dependent on some mill activity and the forest resources. And we know that there is not really a lot of real area in terms of North America or Europe where NBSK production on any reasonable scale can be established.

So we don't see any real potential for new capacity coming on even if prices are fairly high, because, one, it takes over [$1 billion] of investment for a new facility. And it would have to mean that the prices have to remain at elevated levels for a reasonably long period of time before financing for those type of projects would likely be available on a reasonable basis to make it economic.

Okay. I have a few more questions. I will back out into the queue, but please come back to us.

Bruce Klein, Credit Suisse.

Just your best guess on the hardwood price decline with the new supply and when you sort of think you will see that coming, and whether you think it will have much impact, as your best guess, on the NBSK prices?

Well, the hardwood price is really -- it's more of a psychological issue, because typically we see that if the gap widens beyond 100 and then there is talk about every reason why softwood prices should start to weaken. But as you know, historically going back that gap between hardwood and softwood, if you take it on an average over an extended period, has continued to widen. There is really no reason why the gap should not continue to widen, because the end use for those two particular raw materials is different. The paper maker uses it for different reasons in terms of their qualities.

And so I don't think the hardwood, although this has been always touted as one of the factors in determining NBSK prices, really is a measure that should be taken into account in the future. We have always stated that the gap between the two is likely to widen and I think that will be the case. I wouldn't be surprised if the gap between hardwood and softwood actually extends beyond 100 and reaches 150 and stays at those levels for longer periods than we have seen in the past.

In terms of the capacity of hardwood coming on, of course there is talk every year in terms of additional projects that are being investigated so it's difficult to know the real numbers. We do know that certainly there is some big players which are interested in further expanse in Uruguay. Also there has been recent talk about even restarting some of the potential projects in Australia.

So not being really a hardwood producer I won't speculate as to what capacity increases will be. But as you know each increase is over 1 million tonnes so clearly one mill coming on in any given time will have a big impact in terms of that particular sector.

Thanks, guys.

Richard Kus, Jefferies.

Thanks, guys. All my questions have been answered, thank you.

Paul Quinn, RBC Capital Markets.

Good morning, thanks a lot for taking the call and good quarter. Just wanted to ask about your costs. It looks like costs were up significantly in the fourth quarter; it looks like 27% year-over-year. And you have cited Germany in terms of fiber costs.

What is the longer-term implications to that and are we expected to see prices come down over time?

Well, I think if you compare year-over-year clearly it was driven by the fiber calls. With the downturn in the global economy, of course, we saw a lot of closures of particle board and other board manufacturers which meant that the competition for the fiber, of course, dropped substantially. And, therefore, 2009 for most of the year and 2010 for part of the year was good.

But, of course, once that excess inventory cleaned up then, of course, you have to get wood out of the forest. With the downturn in the sawmilling activity the motivation of the forest owner to really go and harvest diminished and as a result it's really the fiber being harvested out of the forest which drove prices.

Since we are not the ones driving those markets, it's really the lumber grade which, of course, is the main attractive product for the forest owners. And, therefore, the reduced harvesting meant that we actually had to source from further distances.

It's really the freight costs, which is again the big component of our wood price increase, because, of course, we have to now go beyond what would have been the traditional sourcing radius and that is really the reason why you have elevated fiber costs. It isn't directly going to the forest owner. The forest owner itself is getting a little bit more but really it's the increase in freight and other logistics which is the big measure in terms of our fiber cost.

We expect that the winter conditions, which were very harsh at the end of December and starting to ease up now, meant that fiber availability, certainly the first part of the year, again is a little bit more restrictive. And that is why we are projecting that there might be slightly higher fiber costs. Not material, but slightly higher. Then as the winter issues resolve itself we think that it will come down again.

Unless the overall sawmilling activity around our area increases, it's not likely that we are going to get further, real and meaningful change in our fiber costs. Now if some milling activity improves then, of course, our fiber costs will start to trend downwards again to the levels that we have seen before this economic downturn.

I hope that answers your question, Paul.

No, that is very true. So essentially if I could distill that down, a pickup in the European housing market is going to bring back sawmills, is going to bring back more logs, it's going to lower your costs, even though we will see higher, I guess, demand from your competition on the panel side.

Right.

Okay. Can you tell me about pulp inventories as well as paper inventories, what your guys are telling you on the ground in China?

Well, our guys in China are basically saying that the inventory levels certainly in our customers seems to be quite good, so we are not really anticipating any weakness. As you know, in terms of the global inventory levels they are still very, very good. So in terms of NBSK certainly the inventory situation all around is very, very good and we don't expect that really fundamentally to change as long as the global economy stays reasonably healthy.

And then lastly, just curious around your comment that pulp markets are balanced. I think most other producers have said they were on the light side and still very tight. You described the markets going forward as a little bit [of certain].

Then I just wanted to ask about the comment you made that some of the March $30 price increase will be implemented. Do you expect producers not to get all of that?

Well, I think the biggest weakness is in the European sector. We think that the issue really fundamentally is there is still continued weakness in Europe. The euro, of course, is another big issue. Depending on where the euro is against the US dollar that also determines their margins and their pricing.

So there is a component of the European customer base for us, which is not as strong as the customers in China, Asia, and North America. And they are the ones which are likely to be the biggest resistance. I am not saying that we are not going to be able to successfully implement it. I mean there has been further announcements, as you know, in Europe as well recently, and of course we will piggyback on those.

You are going to get a little bit of a pushback I think by certain customer segments, so we will have to see. I am not questioning the inventory and demand and supply. I think it's going to be an issue of what resistance that some of the customers are going to put up, but I am very optimistic based on the inventory levels for the continued demand coming out of the stronger markets. And that is really the positive.

I think in terms of whether the balance issue may be disturbed is really dependent on some of these things like affordability by some of our customers. And the second issue is -- although it's not a direct competition for NBSK, but radiata of course is again an alternative -- depending on when [Arelco] is finally able to return to the market will have some kind of impact. The other guys who have started had no impact at also, so I think it was really the question in terms Arelco when I was talking about the uncertainty.

Okay, so just so I understand Europe. Even though the euro has sort of come up against the US dollar about 5% between Q3 and Q4 and still sits at around the $1.35 level, I mean that should help a price increase go through. But you are still seeing some weakness in certain areas of European paper markets?

The euro, of course, has been very volatile, as you know. I think at these levels it's good but prior to getting back to the $1.35, as you know, there was indication that it may even break through the $1.3 and that was only about a month ago. So it's very difficult to project the resistance and the resistance is going to be dependent on currency movements.

I think in terms of the competition, most of the segments that we are supplying certainly seems to be quite good. There is certain paper categories which remain in oversupply still, and so they are going to be more tougher, tougher off in accepting an increase.

Okay, great. Thanks. That is very helpful. Thanks, Jimmy.

Phillip Wirtz, Odeon Capital Group.

My questions have been answered. Great quarter, thank you.

Gary Madia, Gleacher & Company.

A couple questions. David, can you help us quantify the impact of the Stendal downtime and the weather disruptions last quarter?

We lost a couple of days like a complete outage and then it was a bumpy restart. Three days of sort of running on four cylinders, I guess, is the way to describe it. So it could be 6,000, 7,000 tonnes of production that we lost there.

Okay.

And also we did have productivity issues because of the extreme cold weather. So there was lot of inefficiencies related to the chipping because we had frozen wood, which of course increased the need for knife sharpening and that created a lot of inefficiencies in December.

Okay. Are those things continuing into the first quarter?

No, basically the winter conditions today in Germany are far more favorable so we don't have those conditions at all.

Okay, good. And just a couple cash flow questions. In the fourth quarter did you guys receive any of the Green Energy payments?

Yes, we -- a small amount.

Very small?

Yes, the main -- it's about CAD11 million that will be the getting in the next couple of months. It's the last spending from the fourth quarter plus the hold-back.

Okay. And then just a final thing, David, can you give me the CapEx for the quarter for the Restricted Group?

Yes, okay. For Celgar about EUR6 million for the quarter and for Rosenthal it was about EUR1.4 million for the quarter.

Got it. Thanks, that is all I have. Nice quarter.

(Operator Instructions) Andrew Shapiro, Lawndale Capital Management.

Thank you. Are there any transporter container issues in Canada or elsewhere going on? Or what is the status of that this past quarter and your prognosis for the current quarter?

Well, I mean there was some issues as to potential strikes both at the rail as well as the port, but it looks like those have been resolved. So we are not expecting any labor-related disruptions from our transporters so that is a positive.

We are, of course, continuing to focus on reducing our freight costs. And with the larger volumes into China certainly break bulk is an option. As you know, break bulk cost, because of the spare capacities recently, seems to be attractive so we have been shipping by charter some of our volume rather than using containers. And so we will be focusing more and more in terms of the optimization of the various routes available to us.

We are not expecting any fundamental change in terms of our transporter or freight costs on the container side. I mean it is very much dependent on global trade as to what container rate numbers are going to be more than the energy price, because the more containers that are being shipped over to North America and have to be sent back the more availability. So it is really more the trade flows rather than strictly the fossil fuel cost.

But we are very much monitoring those and we expect that optimization will continue to have an impact. We are not expecting any negative developments.

And was the Rosenthal energy back at normal run rates and profitability during the full December quarter or just part of the quarter? And also what do you estimate the Q4 energy cash flow from Celgar was so I can figure out how far off of kind of the optimal run rate you currently are?

So Rosenthal was down about a month in the quarter, so two-thirds of their normal production volumes of energy. And Celgar, this is a memory number, but I think we did about CAD3.4 million of electricity sales at Celgar for the month -- for the quarter rather, fourth quarter.

But now it's ramping up so clearly every month was better than the prior month.

Sure, sure. No, just trying to get a feel for what the ramp up was. And do you feel that -- I think someone might have asked this -- at the March quarter you would be running at the desired run rate or it's going to be more like a June quarter when you get everything optimized?

I think you will have to wait until Q2 before I would say that we are running to the levels that we would be target to. The Q1 we are still in winter, also there is still the steam optimization that is ongoing, but the direction certainly is trending very well.

So there is no reason why we don't expect that based on the forecast, pulp production, etc., that we will not generate the type of numbers that we have forecasted for this particular project and the returns as a result of that.

Okay. And on the new Celgar Canadian government grant project, what are the expected benefits and paybacks kind of horizon that you believe occur on this next project? And when would it start putting shovel into ground and being up and running?

Well, all the capital budget projects that we have focused on are at least shorter than three years, so you are looking at a payback of a longer three years type of horizon. So they are all very accretive.

For the second stage, O2 is really related to the chemical cost reduction and we are forecasting somewhere around [CAD11 million] worth investment at very, very fast payback type of returns.

And last question, with the buildup in cash, the flattening of the pulp pricing curve, and giving some maybe guidance towards a maintenance of decent levels of cash flow from high pulp prices, where they are rising or just even at current levels, you are going to be minting a bunch of cash even if it's Restricted Group without upstreaming even coming from Stendal. But Stendal's debt levels would be coming down.

You just did a senior financing. Surprisingly, it had to be done at 9.5%. What are the Company's options towards either prepayments or bringing its debt financing costs down further before the payoff of the new senior notes?

Well, if you look at the situation when we refinanced, of course we are not necessarily happy with the 9.5% rate that we had to pay, but if you remember back we had a lot of volatility in the debt markets as a result of the European debt questions. It's very difficult to know when the perfect window is available. It changes day by day so it's something that we certainly are not always happy about. But based on the situation, we felt that it was okay.

I think that the stabilization in terms of the maturity profile certainly helped the Company a lot. And also, as you know, we reduced the total amount outstanding by -- although it was a small amount, but we did extinguish [EUR10 million] of that debt.

I am not trying to be critical. The yield curve -- the futures curve was very steeply downward at the time and there is other reasons. But going forward obviously those bonds are at a nice premium already and yielding a whole lot less. What are the Company's options are alternatives available for you to lower your overall interest costs?

We have a lot of flexibility, Andy, as you know, and we are going to be looking at the cash generation this year based on the numbers that we see. And we will be looking at the different areas that we should use that excess cash.

And so whether that is to go into the market and repurchase debt certainly that is available to us. We will be examining closely the various alternatives for the use of the cash buildup and the best return to the Company as a result of those particular initiatives.

So yes, we have a lot of flexibility, Andy, especially based on today's type of pricing. The numbers look very, very good.

Right. And you are going to have -- all a sudden that convertible debt is going to be gone and you are going to have a boatload of additional common shares that are out there. It just seems that the financing costs ought to be less on the debt that you have that you are aggressively paying down.

We certainly are looking at the debt side. Of course, we have to measure that against also rate of return on other use of cash. But I think debt reduction is very high in our focus and we will continue to remain focused on that.

At what point might even a stock buyback be in the equation?

We are going to be looking at the different potential areas of use for the cash buildup. We are looking at all the various options, so I won't talk about whether it's a share buyback, debt buyback, or even a dividend. We will be looking at all the various options and what percent of the discretionary cash that is likely to build over the next coming years. We will be looking in terms of what is the best use of that cash buildup.

Great, thank you.

Bill Hoffmann, RBC Capital Markets.

Thanks. David, just a quick question on the bank facilities. Can you repeat what the balances were outstanding on the two revolvers and what the availability was?

Yes, the Celgar revolver has got a [CAD20 million] drawn and we are in the process of paying that back. It's a CAD40 million total. Rosenthal has got EUR26 million of availability nothing drawn on it.

Great, thank you.

So there being no further questions, I again would like to thank everyone for attending today's call. Again, as I said, we are very optimistic in terms of the market looking forward and again hoping to realize even a better year than the year that we had just finished. Thank you very much. Bye.

Thank you again for participating in today's conference call. You may now disconnect.