Mercer International Inc (MERC) 2011 Q2 法說會逐字稿

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 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) Thank you.

Mr. David Gandossi, you may begin your conference.

Thank you, and good morning, and welcome to the Mercer International 2011 second quarter earnings conference call. My name is David Gandossi, and I'm Mercer's Executive Vice President, Chief Financial Officer, and Secretary. Joining me on today's call is Jimmy Lee, Mercer's President, Chief Executive Officer, and Chairman.

As usual, we will begin with formal remarks, after which we will take your questions. Please note that in this morning's conference call, we will make forward-looking statements similar to those 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.

Yesterday, after the close of markets, we issued two press releases. One was our regular second quarter earnings release and the second was an announcement of a share repurchase program. Our Board of Directors has approved the share repurchase program for up to $25 million of the Company's outstanding common stock over the next 12 months. Additionally, the program calls for an equivalent long -- equivalent reduction in long term indebtedness over the same period.

I'll be going over our financial results and liquidity in more detail in a few moments, but first I wanted to highlight in the past six months, we've repaid about EUR45 million of debt, and cash has increased by EUR52.8 million. This does not include the conversion of EUR25 million of convertible debentures into equity.

We believe that the share buyback combined with the commitment to continue delevering the balance sheet sends a strong message of our continuing confidence in our business going forward. The supply demand fundamentals for NBSK continues to look promising, and our significantly improved financial conditions sets ourself well to deliver improving shareholder returns.

Now turning to our second quarter results, we are satisfied with our solid financial performance in the second quarter. Pulp demand was strong throughout the quarter, that was started to weaken late in June in keeping with the typical seasonal summer weakness. Our mills ran well with Rosenthal setting another quarterly production record besting its Q1 production record by 1,700 tonnes, while Stendal and Celgar also had strong production after allowing for Celgar's 11 days of downtime for its annual maintenance shut.

As you would have seen in our press release, we reported net income of EUR14.4 million for the quarter or EUR0.32 per share compared to a net income of EUR12.4 million or EUR0.34 per basic share in the same quarter in 2010. Q2 2011 net income includes approximately EUR2 million of net non-cash losses related to mark-to-market valuation, the fixed interest rate swap and foreign exchange related to our intercompany US dollar denominated debt. Before these non-cash items, basic EPS was EUR0.36 per share.

We recorded quarterly EBITDA of EUR50.1 million or approximately $72 million. This compares to EUR50.8 million or about $70 million in the first quarter this year. The main differences in EBITDA compared to Q1 were the negative movement of foreign exchange rates, the impact of having nine more maintenance days in Q2 compared to Q1, slightly higher fiber prices and higher freight costs. These negative impacts were almost completely offset by higher sales prices in all of our markets, higher pulp and energy sales volumes, higher productivity and lower energy costs.

As I noted, production was up slightly compared to Q1, and Jimmy will talk about that a bit later. The higher pulp sales volume compared to Q1 requires some explanation. Our Q2 sales volumes were strong throughout the quarter though we saw the markets soften late in Q2. While in comparison, our Q1 sales were negatively impacted by high Q4 sales volumes and some shipping delays in Canada. The seasonal softness in the market is not unusual though the summer slowdown traditionally begins in late July or early August. Despite the summer slowdown, we are confident that NBSK fundamentals remain strong. For example, the June producer inventory has remained low at 28 days of inventory.

Switching to cash flow, overall, our cash forecast is almost EUR29 million higher than at the end of Q1 sitting at EUR152 million or approximately $220 million. Inflows in Q2 were dominated by over EUR50 million in EBITDA. Overall, the quarterly working capital movements decreased cash by about EUR3 million on a net basis, primarily due to an increase in finished goods inventory, which was partially offset by a decrease in accounts receivable.

Capital expenditures drew about EUR8 million. We also received CAD6.6 million of Green Transformation Fund grants from the Canadian Government with respect to our Oxygen Delignification Project.

When thinking about our cash build, it's worth noting that we have received about 47 -- we have receivable of about CAD4.7 million of Green Transformation Fund grants from 2010 and 2011 capital spending that we expect to receive during the next several months. At the end of Q2, we also had a receivable of CAD1.6 million from another Canadian Government program called the Transformative Technologies Program that Jimmy will also speak more about.

Looking at the components of working capital in the quarter, finished goods are up approximately EUR6 million from Q1. Our Q1 finished goods inventory were 73,000 tonnes while Q2 finished inventories were 83,000 tonnes. Adding to this inventory increase is about a EUR1 million increase in our raw materials.

Receivables are down in the quarter by about EUR9 million to EUR104 million, primarily due to lower sales volumes late in the quarter. Accounts payable and accruals are up about EUR4 million quarter-over-quarter, primarily due to the timing of payments specifically costs associated with the Celgar shut. In addition, the EUR10 million recorded in Q1 as part of our ongoing arbitration was Stendal's general construction contractor remains in accounts payable and will stay there until the arbitration process is finalized. Stendal continues to work through the arbitration process as our claims exceed the amount received.

Summarizing our working capital movements relative to our cash build in the 12-month period ending June 30, 2011, our working capital excluding cash and short-term debt grew by about EUR15 million, up from EUR116 million at the end of Q2 2010 to EUR131 million.

At June 30, 2011, we had EUR26 million of undrawn revolvers available at Rosenthal and about CAD20 million available at Celgar. Our EUR152 million of cash at June 30 is comprised of approximately EUR87 million for the Restricted Group and EUR65 million of Stendal.

During the quarter, we announced that effective July 15, 2011, the remaining $37 million of convertible notes due 2011 would be redeemed. As expected almost all of the convertible notes were converted prior to July 15. As a result, in July, we issued approximately 11.2 million new shares and we also paid approximately $1.5 million in accrued interest.

After the conversions, Mercer has approximately 57 million shares outstanding. We see this is an important step in the continuing -- continued delevering of our balance sheet, and we believe that removing the overhang of the convertible debentures should be a positive factor for investors moving forward.

In Q1, we repaid almost EUR45 million of debt when combined with the July conversion of our convertible notes. We have reduced debt by almost EUR70 million in 2011. During the same six-month period, we have increased cash on hand by EUR52.8 million or about $76 million. We continue to believe that delevering is an important part of adding shareholder value, and we will remain focused on this objective going forward.

Net debt-to-equity on a consolidated basis at June 30, 2011 is at 2.2 times and for the Restricted Group, net debt is now less than one times equity. If our convertible notes had been converted on June 30, our net debt-to-equity on a consolidated basis would have been closer to 1.9 times. The fixed charge coverage ratio for the current quarter on a consolidated basis is almost 3.4 times coverage and for the Restricted Group is at almost 4 times coverage.

This next item is something investors in our sector need to be aware of. Many of our competitors now report using International Financial Reporting Standards, also known as IFRS. IFRS replaced Canadian GAAP on January 1, 2011, and one of the implications of this change is that many of our competitors that we benchmark ourselves against now account for major maintenance using a different method to Mercer.

Currently, we expense all non-capital major maintenance costs in the period they are incurred. While for those reporting under IFRS, non-capital major maintenance costs are capitalized as property, plant, and equipment and then amortized to the next major maintenance shut through depreciation and amortization expense, which in our industry is usually about one year.

As a result, financial performance measures comparisons to many of our competitors are no longer on an apples-to-apples basis. So as a result, I wanted to highlight that we expensed approximately EUR7.7 million of major maintenance costs in the second quarter. The majority of which would have been eligible for capital treatment under IFRS.

That ends my 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 pleased with our second quarter results. Overall, our productivity was up significantly over our Q1 output. Rosenthal once again set a quarterly production record and the other mills also ran very well.

In addition, NBSK prices maintained their historic high levels. The weak US dollar and a tight European fiber market continue to be a negative factor in Q2. In addition, we saw demand for NBSK begin to slow near the end of the quarter, especially in China, as buyers try to take advantage of the seasonally slower summer period. But we continue to believe that the NBSK market is in balance, so any price reductions are expected to be temporary.

In the second quarter, list prices in Europe rose $45 to $1,025 per tonne. In North America, they rose $50 to $1,040, while in China, the list price rose $30 to $920 per tonne. I'll talk more about recent price developments in a moment, but first, let me comment about the mills.

As I noted previously, the Rosenthal continues to run very well, setting another quarterly production record in Q2, while Stendal ran at near record levels. And Celgar also ran significantly better this quarter. After allowing for Celgar's shut in Q2, production was up over 26,000 tonnes compared to Q1. Overall, we had a solid production quarter and even though Rosenthal has their annual maintenance shut in Q3, we are looking forward to strong production numbers again next quarter.

In total, we produced 368,000 tonnes of pulp compared to 359,000 tonnes in the first quarter and 360,000 tonnes in the second quarter of 2010. In addition, the mills sold almost 176 gigawatt hours of electricity in the quarter compared to 158 gigawatt hours in Q1. This increase was due to higher energy production at all mills in Q2 compared to Q1.

Turning back to the pulp market for a moment, I continue to view the NBSK market as being in balance. As you know, current NBSK pulp inventory statistics continue to be very positive with producers' global softwood inventories at 28 days at the end of June, which historically is a level where the markets are considered to be in balance.

In spite of low producer inventories, we have seen an early start to the seasonal summer slowdown. Similar to last summer, Chinese traders are leaving the market in anticipation of lower prices. As a result, effective August 1, producers including Mercer have lowered their prices by $30 in both China to $830 and North America to $990. This reduction comes in spite of the strong fundamentals, and although we don't believe this reduction will increase sales volume significantly, we recognize that we operate in a very competitive market, and we need to react accordingly.

I also wanted to point out that despite the recent price reductions, NBSK prices remain at historic high levels. Early in 2011, we saw increased demand for NBSK from users of dissolving pulp. As expected, the demand for dissolving pulp has come off significantly and so has that market's demand for NBSK.

Lower NBSK demand from users of dissolving pulp may have helped create the pulp traders' view that demand was coming off, and as a result pushed the usual summer slowdown up a month or so. However, we continue to believe that the growth of the Chinese paper and tissue producers will continue to drive market tightness regardless of pulp trader behavior.

For example, we expect several large paper machines to start in the second half of 2011. In fact, based on numbers compiled by TerraChoice Market Services Inc., there are about 6.5 million tonnes of new printing and writing capacity announced in Asia for 2011 and 9.6 million tonnes, including 2011 out to 2013. For tissue expansion, there are about 1.3 million tonnes of new capacity announced for 2011 and about 1.9 million tonnes in 2012.

As a result, we believe that pricing will stabilize in the short term and are optimistic there will be upward pressure. We also believe that there will be pressure up on pricing cost by producers taking their annual maintenance shuts during the summer months because the shuts are expected to be heavier than usual in the Canadian pulp industry, as Canadian producers are taking extended downtime to complete projects funded by the Canadian Government's Green Transformation Fund.

As David noted, our sales volume was higher than Q1. Sales volume totaled 358,000 tonnes compared to 349,000 tonnes in the first quarter of 2011, and 365,000 tonnes in Q2 2010.

Let me now take a moment to discuss developments in the wood markets. As we discussed last quarter after rising through 2010, wood prices in Europe have leveled off at elevated levels. We are encouraged by the strong sawmilling activity, which is starting to put a positive -- which is starting to make a positive impact on chip prices.

In addition, the board and pellet producers are expected to take seasonal downtime, so demand for sawmill residuals should come off in Q3. And as a result, we are expecting prices to remain stable with a downward trend in Q3. We continue to be able to source the fiber we need, and as a result, we are satisfied with the current fiber inventories in Germany, but we continue to monitor them closely.

In British Columbia, our fiber costs continue to trend positively. However, beginning late in Q2, we saw increased demand for fiber from coastal pulp and paper producers in our traditional fiber basket. In addition, we expect many sawmills to take maintenance and market-related downtime in the third quarter. Consequently, we expect Celgar's fiber prices to increase slightly in the third quarter. We are satisfied with Celgar's fiber inventories and expect them to come down slightly in Q3 before building them up again in the fall.

Turning to energy for a moment. Celgar continues to optimize the steam flow to the turbine, and if it wasn't for their annual maintenance shut, their energy production would have been significantly surpassed Q1 output. In addition, the German mills both had record energy production quarters. Overall, we continue to be satisfied with our strategic decision to invest in our energy producing assets, and we are continuing to look for additional accretive energy projects.

Last quarter, I noted that we have finalized a contribution agreement with the Canadian Government under the Green Transformation Program for a second-stage Oxygen Delignification Project at Celgar. This project continues to progress. As David noted, we have already received almost CAD6.6 million in government funding for this project, and we expect their project to be completed in late Q3. This project is expected to be highly accretive due to its many benefits, including reduced chemical usage, improved fiber yield and reduced level of effluent requiring treatment.

As well last quarter, I noted that Celgar qualified for CAD1.6 million grant under the Canadian Government Transformative Technologies Program. This project is also progressing well and is expected to be completed in Q4. We are excited about this project because it will be the implementation of a new technology for an acid wash process that is expected to be very accretive due to the benefits it will bring including reduced chemical usage and reduced effluent levels.

Last quarter, we told you we are in the process of preparing two dissolving pulp feasibility studies. Those feasibility studies envision converting Celgar and Stendal to be swing mills wherever they could alternate between NBSK dissolving pulp production. After completing our feasibility and engineering studies, we have concluded that both of these projects are potentially highly accretive opportunities for us. We identified numerous synergies including increased pulp and energy capacity. However, subsequent to the announcement of our feasibility studies, we have seen numerous dissolving pulp capacity or conversion to dissolving pulp announcements, which we feel have the potential risk of creating overcapacity in the short term.

The timing of our entry into this market is critical and a short-term delay has the potential to make these projects even more accretive, as we expect to see significant technology advancements with respect to manufacturing of dissolving pulp and the use of paper grade pulp as a substitute for dissolving pulp. Consequently, we are not committing to either project at this time, we'll continue to monitor the dissolving pulp market and the technological developments.

We regularly get questions about the timing of our annual maintenance shuts. So I'd like to highlight that our remaining 2011 shuts line up as follows. Rosenthal will have their annual shut in Q3 and Stendal in Q4.

If I can close with the following observations, we continue to believe that the NBSK market [matrix] reflect a balanced market and expect NBSK pricings to remain at historically high levels. We believe that our recently announced price reductions will be short lived and expect demand to pick up later in the summer. Further, we believe that the supply/demand relationship for softwood pulp should remain favorable for the next several years, given the demand growth that is forecast for the Chinese paper and tissue producers.

As David mentioned, our intention to make open market purchases of our outstanding shares of common stock and our long-term debt reflects our improved liquidity position, our Board of Directors continued confidence in our growth prospects and our desire to create value for our shareholders.

Based on the current market prices, we believe that the repurchase program is in the best interest of the company and our shareholders. We're pleased that the convertible notes were converted in July, and we'll remain focused on deleveraging of balance sheet. In addition, we will of course continue our efforts on increasing margins by reducing cost, as well as increasing the mill availability at all operations and improving the return on our byproducts such as excess power.

That is the conclusion of my prepared remarks. And I will turn the call back to the operator, so we can open the call up for questions. Thank you.

(Operator Instructions) Bill Hoffman, RBC Capital Markets.

Good morning, guys. Jimmy, can you talk a little bit about this dissolving market softness and what you're seeing there and how much sort of NBSK, you think had been pulled into that market and maybe when it rebounces again?

Well, I think, the indications were that somewhere around the 40,000 tonne per month, in the last few months, we're going of course to this dissolving pulp producers. These were primarily the cotton linter-based and of course as a result of the weakness in the dissolving pulp market, which was created by, I think, of course the softening of the cotton prices, as well as of course the seasonality in terms of the garment industry. And I think the expectation is certainly Indian and Chinese cotton harvest this year may be reasonably good and therefore, cotton linter production certainly should not experience shortages like they saw in the prior year.

So our expectation is that these substitute end users will not likely come back in this year. Of course, that's highly dependent on cotton harvesting, so it's very difficult to forecast. But, expectation is the market is such that they were no longer there, so impacting somewhere around the 40,000 tonne per month, but this is not significant if you look at clearly the increase in paper capacity coming towards the end of this year.

If you look at just the tissue side, which is forecast to be over 1.3 million tonnes, if you take a typical 30% type of consumption of softwood, which is a very low for that particular grade, you can see the magnitude of the potential increase that we're talking about.

So we are optimistic clearly based on the numbers that we're seeing that the dissolving pulp issues is really not going to impact long-term or the medium-term type of demand outlook for NBSK. (multiple speakers)

And just with the NBSK market, I mean, do you have a sense right now of what the inventory situation is in China?

Well, as far as we know, although the inventory levels for overall pulp is up, it's really related to hardwood. And in terms of the softwood inventory levels, indications that the ports as well as the end customer level numbers, as well as producers indicate they are all at, while wood deemed to be historic low level. So, we're not coming into this kind of summer doldrum period with any excess inventory in any of the channel.

So we are very optimistic that whatever correction that we're going through will be very short lived. This is not really typical of prior kind of cyclical weakness, which we experienced a lot overcapacity. If you look at the capacity numbers, there's really been no capacity come on. So any that could come on has come on, and therefore, this is not a capacity-driven downturn, which has typically happened in this industry. So we are very positive about all of the indicators.

Great. Thanks. And then just with regards to some of this new capacity coming on, are these guys reaching out trying to lock up supply of NBSK for both the paper and the tissue?

Well, I think this probably indicates the behavior of certain large paper and tissue producers in China. If you look at the affiliate of APP, which of course is significant coding as well as tissue production in China. They've been aggressive, very aggressive as you know recently in terms of acquiring what we deemed to be high cost producers of NBSK. So clearly indicating their concern, I think in the medium to longer term about fiber availability.

Right. And then just -- last question for David. You mentioned the maintenance costs in the second quarter were EUR7.7 million, is that just the Celgar maintenance costs?

Yes. That's right, Bill.

Okay. And then so as we go into -- for the third quarter with Rosenthal, will it be similar shut for them or smaller?

It's smaller, I mean, I think Rosenthal would be more around the EUR4 million mark.

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

Graham Meagher, TD Securities.

Hi, Dave. Hi, Jimmy. It's Graham Meagher at TD. Just a couple of questions. One of you, if maybe, Jimmy, if you could expand just a little bit on the China market and are you seeing pulp starting to move again yet and if so what prices are those moving at, and what customers are taking them, is it more the printing and writing side or the tissue side?

Well, I mean, last month, clearly the orders were fine. The August numbers are still difficult to guesstimate although there has been a price decrease. We know that the significant price reduction on the part of the Russians certainly have moved their products. So they're kind of out of the way, and I think that was acquired probably by the traders.

So, we know that overhang has gone, and certainly there is volume, but let's say on the contract side, we had the contract volumes move fine in July. And looking forward into August, it's a little bit early to see what the impact of the price reduction. Our expectation is that we are probably at the bottom type of levels. And I can't really guesstimate as to what the August volume will look like.

Okay. And, just moving to Europe, do you have any visibility on paper demand? What are the paper demand order books looking like into the fall and if sort of macro conditions deteriorate in Europe, can you comment on your ability to move that product elsewhere, would it go to China, that sort of thing?

Well, I think, there has been certain capacity reductions in the coated grade in Europe. And I think this is an ongoing process because of course that particular area had overcapacity. And so there is going to be a little bit of slack on the European side, but the normal kind of incremental demand growth with the improvement in living standards, et cetera. Our expectation is that the weakness barring a major European crisis would indicate the paper sector and certainly the tissue sector is very positive. And the paper side is marginally weaker, but we don't expect that there will be any real significant reduction in demand for us.

Any kind of demand reduction, we've been able to sell into our non-core markets, which traditionally of course is the Asian as well as the Middle East Indian type of markets. But one has to reflect on the fact that there is significant potential demand coming out of the Eastern European market. This is an area which of course is very low paper consumption to date. And we are seeing really demand pick up from there.

So I think our German operations are ideally located in regards to the European demand growth. So the markets like Poland and Russia, et cetera are quite healthy. So we are not really expecting any significant issue in terms of the European side.

Great. Thanks for that context there. And you also -- you alluded to enhanced power generation in the press release in the dissolving pulp project discussion there. Are you able to elaborate on that at all?

Yes, I mean, you're going to get incremental power increase production at the Celgar mill clearly, as it improves its overall efficiency. We do have excess steam because of the increase in production of pulp in both Rosenthal as well as Stendal.

So of course -- of course the major increase in pulp production is coming out of the Stendal area, as you know, because of course the design capacity versus where we are today is significantly different. And there is opportunity for us to really benefit significantly in terms of additional power at that mill. And of course, as you know, German power rates especially for power generated from renewable sources is very attractive for us. And so clearly Stendal is an opportunity because of the excess steam that it's presently generating. And we also believe that there is opportunities at Rosenthal and also additional type of projects that we're looking at Celgar, which may be a little bit longer term, but I think significant potential.

And, I think, in that coming months, hopefully, we'll be able to announce, I think the type of projects certainly at Celgar and Stendal.

Okay, great. Thank you. And then just couple of quick ones for Dave. CapEx 2011, is that still in the $35 million -- EUR35 million range?

Yes, it is, but remember, it will be about EUR15 million of that's covered in grants.

Okay. So net EUR20 million to Mercer.

Yes.

Okay. And then can you just remind us on sensitivity to the euro. Is it every penny change of $1.41 to $1.42, is that in the EUR6 million to EUR8 million range?

You're thinking EBITDA.

Yes, on EBITDA basis.

Yes -- no, it's lower than that, a bit more like half of that.

So, EUR3 million to EUR4 million then.

Yes.

Okay. And just -- I know the 10-Q will come in the next day or two. Can you give us just sales volumes by mill?

Sure. For Rosenthal, second quarter was 87.7 million, Stendal was 150.4 million and Celgar was 119.5 million.

Great. Thanks very much, everybody.

Okay.

Gary Madia, Gleacher & Company.

You did a nice job.

I'm not hearing you, Gary.

I'm sorry about that, bad connection. You did a nice job earlier in the call speaking to the capacity additions in Asia with regard to tissue and paper. Can you remind us again what's coming online with that worldwide late 2012 and 2013 as well?

Well, I've got Asia here in front of me, TerraChoice. So on the printing and writing paper side, first half of this year was about 2.5 million tonnes, second half of this year is about 4 million tonnes. Then in '12, there is another million and '13 another million. So that's what's announced so far. They don't usually go out more than a couple of years on paper because there is about much lead time on those projects. For tissue, and I think this is just -- so this is Asia again. So 1.3 million tonnes for '11 and 1.9 million tonnes announced for '12.

Okay. And how about -- new softwood pulp capacity coming online. I know most people are expecting no real greenfield startups until later next year, but just as a --?

Well, [Helen] has a project, they're taking out a line and replacing it. So there's the net 400,000 tonnes to 450,000 tonnes expected late 2012 or early 2013.

Okay.

Other than creep capacity that's the only new NBSK capacity that we're aware of.

Okay. 400,000 tonnes to 450,000 tonnes in late '12, early '13?

Yes.

And as you know certain softwood capacity in China of course they're not NBSK, but nation-based type of pine, like a Tiger mill is undergoing conversion to dissolving. So there is of course certain softwood not necessarily NBSK pulp mills, which have converted to swing. So this will have also capacity issue moving forward.

Now is there a chance with the dissolving pulp markets as you spoke about earlier, perhaps weakening a little bit with cotton fibers dropping, and so forth that mills come back to actually start producing straight forward softwood?

Yes, well, the converted softwood mills are not up and running. So they have really no impact, yet. They only start to probably run sometime next year. So their issue is not this year at all. Certainly dissolving pulp market has come off significantly. The cotton futures market clearly is down significantly. So those ones, which have converted and they all will be starting up towards the end of this year and throughout next year. We'll have to see what the actual production volumes will be, but right now, they have no impact in terms of the capacity [aside].

Okay, good. And then just a final question. I know in the press release you mentioned that some good energy sale -- energy revenue in the first half of the year, but you also commented that you thought it would be even higher in the second half of the year. I think, what first half is EUR27.6 million of revenue, can you give us a sense as to kind of where you are thinking on energy revenue for the second half of the year?

Well, the event that happened in the second quarter is while we were doing our maintenance shut at Celgar. They looked into -- looked at turbine and determined that they wanted to do, it's major revision this year as opposed to next year. So it was down, [Jennifer], much longer than we had expected, maybe three weeks. So that's good for another seven years, it was unexpected, but it's good that they found and that they did what they did, I guess.

For how much is coming next year, we're getting pretty close to a run rate of about EUR10 million in the -- for the next half year on Celgar, I would say on energy.

Okay.

And the German mills should do 20ish, I would say, million euros together. They've both got a maintenance shut, but I think EUR20 million is in the cards for the two combined.

That's half year, David.

Pardon me.

That's half-year or full-year.

No, it's half-year.

So, EUR20 million combined half-year, so that's EUR40 million annualized and then a --

Well, --

EUR10 million potentially at Celgar half-year, am I thinking right?

Remember last year, we did about EUR44 million in the German mills alone.

Correct.

And we signaled that we expected to get CAD20 million to CAD25 million out of Celgar. Celgar second half should meet those targets, and the German mills should be roughly half of the EUR44 million, but you have to strip off a little bit, because they both have the maintenance shut.

Okay. Thank you. I appreciate it.

Okay, Gary.

(Operator Instructions) Andrew Shapiro, Lawndale Capital Management.

Hi. Thank you. A few questions. The first is, David, can you help with the cash flows and reserves that have been built up at Stendal relative to the debt covenant requirements and the ability or your expectation of the ability to upstream capital to the Restricted Group?

Sure. So, the situation at the close of the second quarter would be that the debt service reserve account has close to EUR30 million in it. Our target is EUR55 million. And I don't think we'll get there clearly in the third quarter this year, but probably sometime early next year. The relevance of that is that once that account is fully funded, then Mercer gets paid deferred management fee that we had established at the time that we renegotiated the principal payments back in 2009, when the world was is crisis.

So that is about EUR10 million of deferral up to the end of 2010. There's another EUR3.5 million for this year. So I think that's the flush of liquidity we're looking forward to next year sometime, and then excess cash flow beyond that is going to sweep to the banks as early debt reduction.

Okay. And then, can you say how much total grant money at present through June 30 is -- that is coming from Canada that is not reflected as a result of your accounting process in Celgar's balance sheet PP&E?

No, I don't have a cumulative number in my head, but we had CAD50 million -- well, I guess, I could do it. Yes, we've got CAD50 million, we were entitled to CAD58 million and we were then CAD7 million of collecting all of that. So we'd have CAD50 million that we've booked as a deduction against property, plant and equipment so far.

Okay. So there's about CAD50 million and that's euro or Canadian?

That's Canadian.

So about CAD50 million is not reflected in the balance sheets for Celgar. And then in general, what do you estimate the -- I guess it's now the undepreciated amounts of government grants that are not reflected in the balance sheet with respect to Stendal and Rosenthal?

Yes, so I'm going by foggy memory here, but it's somewhere in the 280 range, that's euros, EUR280 million.

Okay, EUR280 million and that would be kind of net of the depreciation over the last few years?`

That's right, Andy, yes.

Okay. And in terms of the maintenance cost that you put through the income statement that appears capitalized, where does that run through? Is it all through COGS or some of them go through G&A?

Well, yes, so for us it all goes through cost of goods sold.

Okay.

And manufacturing costs and for our peers it goes through depreciation and amortization expense. So their EBITDA is always going to be boosted compared to ours.

Right. So, that's -- they run it through there even though it's a cash expense because they amortize it over a single year?

Yes, it's this -- IFRS has this major maintenance method. So basically they take all of the maintenance costs at the maintenance shut that other than something that might be a capital addition that was done during the shut. So generally -- virtually all of it is considered major maintenance, and they capitalize it on the balance sheet and they amortize it through depreciation and amortization expense over the course of time to their next maintenance shut, which is typically a one-year cycle.

So their EBITDA is always overstated relative to ours by that amount. And their net income will vary because they pull it all out initially, but then they would amortize it over four quarters typically.

Right. Instead of a one quarter hit depending on their multiple plans.

Yes, right.

Okay. And then does Mercer have any net operating loss tax carryforward tax shield available any more or have your recent earnings basically used that all up?

No, there is still lots there. In fact other than these minimum levels of tax you have to pay in any jurisdiction regardless of losses, you are good out through at least 2013, if we continue at these current earning levels.

In fact, we haven't -- because we've been coming from a period where there is -- we don't have a demonstrated track record of using losses, I'm thinking 2007, 2008 or 2009. We haven't recognized the deferred tax asset fully on our balance sheet of those losses.

So just remind listeners that the US GAAP has a very strict test on how you utilize loss carryforwards and one of them is that you have to have a three-year -- a solid three-year record of using losses before you can recognize the benefit looking forward.

So, and then there's also you can't recognize all of them. You kind of look forward a year and a half or something as far as you can see reasonably. So there's quite a strong test there. So our balance -- the story end -- I mean, long story short is our balance sheet does not reflect the value of these deferred tax assets and they are quite significant.

Okay. And without doing the valuation method, what is as to the end of the June quarter generally the approximate tax NOL cumulated balance that you have still?

I'll be throwing a number in the -- I'd rather refer you back to the 10-K.

Okay. So it's in the 10-K.

Yes.

And it's certainly not been used up it sounds like.

Well, that's for sure, yes.

Okay. Thank you very much.

Thank you, Andy.

Michal Marczak, UBS.

Hi, guys. Thanks for taking my question. Just a clarification, on the press release, when you talked about the share repurchase program, you mentioned buying an equivalent amount of indebtedness in the next 12 months. Is that mean you're going to buy back bonds in the open market or when you mentioned that you meant more in terms of reducing the term loan?

Well, we don't have any -- we don't have term debt. We've got the Stendal syndicated situation. It's amortizing and then we've got the senior notes. And so you're correct, our intention is to opportunistically pick those off in the market if we see attractive pricing.

Got it. Thank you. And then I might have misheard, but I think you mentioned capacity creep in the NBSK market. Could you talk a little bit about that, what your expectations for that is?

Well, go ahead, Jimmy.

Well, that's normal efficiency gains. Every producer, of course, looks to slightly better capacity and improvement in running their mills. So it's very difficult to give you a number, but generally people think somewhere around the 1% maximum type of thing of installed capacity is probably a good number to use, because each mill has a different kind of ability to really improve their overall debottlenecking and production efficiency gains.

Great. Thank you. I appreciate that.

Okay.

(Operator Instructions) Paul Quinn, RBC Capital Markets.

Good morning, guys, and thanks for taking the question. Just two easy ones. One to Jimmy, first, just your thoughts on August prices at $830 whether this is actually the bottom or do you see further weakness?

Well, I think it's too early to say because of course we're not seeing yet really the buying, but I think that based on the inventory levels certainly at our customers, et cetera, I think that we'll get the movement at those type of prices. There may be some discounting, but let's say we're not that far from where we think really -- the corrections bottom is.

All right. That's fair enough. And just over to David, Dave, you brought up the IFRS accounting difference. If Mercer was using IFRS accounting, what would be the annual impact to your EBITDA?

Well, we had EUR7.7 million in the second quarter, that was a big shut for Celgar that included their annual revision, their once every seven-year revision on the turbine. Rosenthal, I think, is going to be above EUR4 million and Stendal would be probably 5ish, so EUR9 million plus EUR8 million.

EUR16 million, so EUR17 million and that is a direct add to EBITDA.

Well, that's what, yes, we would have higher EBITDA and more depreciation expense going forward.

Okay. Great. Thanks very much, guys.

Yes, thanks, Paul.

Bruce Klein, Credit Suisse.

I'm just wondering on the -- you mentioned the dissolving pulp was on whole, what was the plan I guess, in terms of how that would be funded or what were you thinking if that were to come back to a [new line]?

Well, I mean, a lot of the capital investments that we were envisioning for the dissolving was essentially part of the overall continued efficiency program and debottlenecking at all of the mills. So there was an incremental amount of roughly, our estimate was around that $40 million range, which was in addition to what we normally would be investing. That, we would certainly look at -- looking for different potential opportunities in terms of financing or whatever, but certainly we had the liquidity at the time, still do. So, it really depends on the availability and the cost of those funds as to what would be the best kind of source.

Thanks, guys.

I have no further questions in queue. I'll hand the call back over to the presenters for closing remarks.

Well, we thank everyone for attending today's conference call. And if anyone has additional questions, certainly feel free to either contact David or myself. And again, thank you. Goodbye.

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