Mercer International Inc (MERC) 2011 Q3 法說會逐字稿

Good morning, and welcome to Mercer International's third quarter 2011 earnings conference call. On the call today is Jimmy Lee, President and Chief Executive Officer of Mercer International; and David Gandossi, Executive Vice President, Chief Financial Officer, and Secretary.

I'll now hand the call over to David Gandossi.

Thank you, Matthew. 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.

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 markets, our operating performance, and some of our strategic initiatives.

I'll be going over the financial results and liquidity in more detail in a few moments. But first, I want to highlight that in the past nine months, we have repaid approximately EUR57 million of debt, repurchased and canceled almost 1.3 million of our common shares, and cash has increased by almost EUR29 million. In addition, all of our convertible debentures have been either converted or redeemed, which amounted to approximately EUR32 million of long-term debt moving into equity.

Last quarter, we announced that our Board of Directors had approved repurchase plans for both our senior notes and our common shares. Both allow us for up to $25 million to be spent under each respective plan. We believe that our opportunistic debt and share buyback plans, combined with a commitment to continue delevering the balance sheet, sends a strong message of our continuing confidence in our business going forward.

In the quarter, we spent $10.6 million on share repurchases and we also spent $4.4 million on repurchases of our senior notes. Subsequently, in October, we repurchased an additional $9.3 million worth of our senior notes.

For the quarter, we're satisfied with our solid financial performance. Our results are down slightly due to the fact that pulp demand weakened compared to Q2, and although pricing continues to be at historical high levels, we were forced to move prices downward with the market.

What began as a seasonal summer [slowdown continued to] impact demand, as Europe struggles with its sovereign debt issues and China tries to constrain inflation by reducing credit availability on certain markets. Our mills ran well this quarter; however, Stendal lost 11 days of unplanned downtime due to an issue with its recovery boiler.

As you'll have seen in our press release, we reported net income of EUR8.4 million for the quarter, or EUR0.15 per share, compared to net income of EUR46.1 million or EUR1.17 per basic share in the same quarter in 2010.

Q3 2011 net income includes approximately EUR10.7 million of net non-cash losses related to the mark-to-market valuation of the fixed interest rates swap and foreign exchange related to our inter-Company US dollar-denominated debt. Before these non-cash items, basic earnings per share was almost EUR0.35 per basic share.

We recorded quarterly EBITDA of EUR49.2 million or approximately $69.5 million. This compares to EUR50.1 million or about $72 million in the second quarter this year. The negative influences in EBITDA when compared to Q2 were pulp price reductions, lower sales volumes, and lower energy sales volumes due to Stendal's unplanned downtime.

These negative impacts are almost completely offset by the positive movement in foreign exchange in the quarter, higher energy sales prices, and EUR2.6 million of insurance proceeds received for lost revenue related to Stendal's transformer failure that occurred in late 2009. And as I noted, production was down compared to Q2, and Jimmy will talk more about that in his remarks.

The lower pulp sales volume compared to Q2 requires a little more explanation. Our Q3 sales volumes were flat throughout the quarter, as the seasonal summer slowdown was prolonged by the European debt crisis and China's attempt to cool its economy. This was evident by producer inventories growing to 34 days in August; however, we saw significant buying activity in September, which had the effect of lowering producer inventories to 32 days. Jimmy will discuss the short-term outlook for pulp during his comments.

Switching to cash flow, overall, our cash position is almost EUR24 million lower than at the end of Q2, sitting at almost EUR128 million or approximately $172 million. Outflows in Q3 were dominated by over EUR12 million of debt repayments and EUR7.5 million for the repurchase of our common shares. Overall, the quarterly working capital movements decreased cash by about EUR34 million on a net basis, primarily due to increases in finished goods inventories and accounts receivable.

Capital expenditures grew about EUR10 million. In addition, we've become a -- began a program of purchasing government bonds -- German government bonds, which are low-risk, highly-liquid investments. Due to the classification of these investments as marketable securities, investing cash was reduced by EUR4 million. We expect to continue moving excess cash into these types of investments going forward.

During the quarter, we received [CAD4.3 million] of Green Transformation Fund grants from the Canadian government, with respect to the final payment for Celgar's Green Energy Project. We also received CAD1.6 million of federal government funding for Celgar's Generator Acid Purification Project under the Transformative Technologies Program.

Looking at the components of working capital in the quarter, finished goods are up approximately EUR18 million from Q2. Our Q3 finished good inventories were 124,000 tonnes, while Q2 finished goods inventories were 83,000 tonnes. Adding to this inventory increase is about a EUR4 million increase in our raw materials.

Finally, you may recall that we received EUR10 million in Q1 as part of an ongoing arbitration with Stendal's general construction contractor, and that it was initially recorded in accounts payable. However, we have incurred EUR1.4 million of qualifying remediation work to date. And as a result, only EUR8.6 million remains in accounts payable. These funds were initially recorded in accounts payable because Stendal is continuing to work through the arbitration process as our claims exceed the amount received.

At September 30, 2011, we had EUR26 million of undrawn revolvers available to Rosenthal and about CAD38 million available to Celgar. Our EUR128 million of cash at September 30, 2011 is comprised of approximately EUR61 million for the Restricted Group and EUR67 million at Stendal. As I noted earlier, effectively, all of the remaining convertible notes due 2012 were converted. As a result, Mercer has approximately 55.8 million shares outstanding.

In Q3, we repaid over EUR12 million of debt. When combined with the conversion of our convertible notes and our senior notes repurchases, we have reduced debt by over EUR57 million in 2011. During the same nine-month period, we have increased cash on hand by almost EUR29 million, or almost $39 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 September 30 is at two times; and for the Restricted Group, net debt is less than one times equity. The fixed charge coverage ratio for the current quarter on a consolidated basis is 2.5 times coverage and for the Restricted Group, we're over 3.3 times coverage.

As we highlighted last quarter, many of our competitors now report using International Financial Reporting Standards, also known IFRS. IFRS replaced Canadian GAAP on Jan 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 than Mercer.

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

As a result, financial performance measure comparisons to many of our competitors are no longer on an apples-to-apples basis. As a result, I wanted to note that we expensed approximately EUR2 million of major maintenance costs this quarter and EUR9.8 million year-to-date, 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 now turn the call over to Jimmy.

Thanks, David. Good morning, everyone. As David mentioned, we're very pleased with our third quarter results. Overall, our productivity was down about 17,000 tonnes from our Q2 output. However, this was almost entirely due to the 11 days of unplanned downtime at Stendal; otherwise, the mills ran very well.

Although pulp prices continued to be at historic high levels, prices did come down in Q3, which when combined with lower sales volume were the main negative factors compared to Q2. However, these negative factors were partially offset by European debt issues, which weakened the euro in the quarter and softened the impact of lower US list prices.

As I mentioned, demand was off in Q3, as global economic issues will have paper producers uncertain about demand for their products and were cautious regarding the volumes of raw material they purchase.

In the third quarter, average list prices in Europe fell $45 to $980 per tonne. In North America, they fell $35 to $993, while in China, the quarterly average list price fell $70 to $850 per tonne. I'll talk more about recent price developments in a moment, but first, let me comment about the mills.

Rosenthal continues to run very well, while Stendal ran at near-record levels, and Celgar also ran significantly better this quarter. However, as I noted, Stendal was forced to take 11 days of downtime, as a result of the leak in its recovery boiler. Although serious, we see this as an isolated issue, but we will be monitoring it closely going forward. After allowing for Rosenthal shut in Q3, production was down 17,000 tonnes compared to Q2.

Overall, we are pleased with our solid production this quarter and although Stendal has their annual maintenance shut coming up, we're looking forward to a strong production quarter in Q4.

In total, we produced 362,000 tonnes of pulp compared to 368,000 tonnes in the second quarter, and 381,000 tonnes in the third quarter of 2010. In addition, the mills sold almost 149 gigawatt hours of electricity in the quarter compared to 176 gigawatt hours in Q2. This decrease was primarily due to Stendal's unplanned downtime. However, because prices were up this quarter, we achieved our highest quarterly consolidated energy revenue in our history.

Turning back to the pulp markets for a moment, we're cautious with regard to the short-term deals. As you know, demand for NBSK pulp is closely tied to the economy in general and the sovereign debt issues in Europe and the Chinese government attempting to reduce inflationary pressures has had an effect and created significant uncertainty in the global markets.

That said, we're confident that the NBSK market fundamentals remain favorable and it is important to note that even with global economic uncertainty, producer inventories at 32 days is historical level where the markets are considered to be in balance.

Another factor we're monitoring is the price spreads of teak hardwood and softwood pulps. Currently, that spread is around $200, although we believe this spread to be justified in light of our view that substitution is effectively complete. Regardless, the markets are struggling with this spread and as a result is contributing to the downward pricing pressure.

Effective October 1, producers including Mercer have lowered their prices by $50 in China to $780, while Europe and North American prices are both down $20 to $930 and $950, respectively. We are hopeful that these recent price reductions will jumpstart sales volume; however, we're continuing to see pulp buyers purchasing very cautiously, as they look for pulp prices to reach the floor.

In the medium to long term, we continue to believe that the growth in the emerging economies will drive market tightness. For example, we anticipate that significant tissue and paper capacity will begin production in 2011 and 2012. Based on numbers compiled by TerraChoice Market Services, Inc., there are around 6.5 million tonnes of new printing and writing capacity announced in Asia for 2011 and 9.6 million tonnes including 2011 out through 2013.

For tissue expansion, there are about 1.3 million tonnes of new capacity announced for 2011 and over 1.9 million tonnes in 2012. As a result, we believe that the pricing will stabilize and this incremental demand will again create upward pricing pressure. Our sales volume totaled 321,000 tonnes in Q3 compared to 358,000 tonnes in the second quarter of 2011 and 345,000 tonnes in Q3 2010.

Let me now take a moment to discuss developments in the wood markets. European fiber prices remained at elevated levels, but we experienced a small price decrease in Q3 due to strong harvesting rates and limited demand from the board industry.

Looking forward, we expect strong sawmilling activity which will offset the expected seasonal increase in demand from the pellet producers. And as a result, we expect pricing to remain stable, with a possible downward trend in Q4. We continued to be able to source the fiber we need, and as a result, we're satisfied with our current fiber inventories in Germany. We will monitor them closely as we begin our winter inventory build.

In British Columbia, our fiber cost rose slightly in Q3, due to increased demand for fiber from coastal pulp and paper producers in our traditional fiber basket, combined with reduced sawmilling activity. However, we're beginning to see increased pulp logger availability, which will allow us to ramp up production from our wood room late Q4.

Consequently, we expect Celgar's fiber prices to increase slightly early in the fourth quarter; then level off once the wood room is ramped up. We're satisfied with Celgar's fiber inventories and we've started building them to ensure we have solid inventories for the winter months.

Turning to energy for a moment, we're continuing our focus on maximizing our revenues from this byproduct. Q3 was a good example for why these energy investments are so valuable to us. Although our electricity production was down in Q3, due to Stendal 11 days of unscheduled downtime, we managed to achieve our highest-ever quarterly electricity revenue.

To put this into perspective, for the nine months ended September 30, 2011, we have generated revenues of almost EUR42 million from what is an environmentally-friendly byproduct of our production process, while over the same period, we incurred interest expense of almost EUR45 million. That is the sale of our byproduct is essentially covering the carrying cost of our debt on a consolidated basis.

I'm pleased to share with you that our second-stage Oxygen Delignification Project at Celgar is now complete and came in well under budget. We are already seeing its many benefits, including reduced chemical costs and improved excellent parameters. I will remind everyone that this project was fully funded by the Canadian government's Green Transformation Program.

As a result of our Oxygen Delignification Project being under budget, we have now approximately CAD2.5 million of the Green Transformation Program funding remaining. We fully expect to have spent these funds on qualifying highly-accretive projects before the program expires on March 31, 2012. In fact, we are very excited about these projects since we expect to be deploying some of our industry's latest technologies.

Additionally, in Q1, I noted that Celgar qualified for a CAD1.6 million grant under the Canadian government's Transformative Technologies Program, which was received in Q3. This project is also progressing and it is now expected to be completed in Q1 of 2012. We are excited about this project because it will be the implementation of new technology that defines a waste stream into two chemicals that can be reused in our process and as a result, it is expected to be highly accretive due to the reduction of purchased chemicals.

We're regularly getting questions about the timing of our annual maintenance shuts. So I'd like to highlight that our remaining 2011 shut was at Stendal in Q4. The shut was completed on time and on budget, and the mill is running well. If I can close with a few observations, we continue to watch the NBSK market very closely. As recessionary conditions gloom, buyers are purchasing minimum volumes as they look for pricing to stabilize at lower levels.

We remain strong believers in the medium to long-term NBSK supply/demand fundamentals. We also believe that the changing economic standards of the emerging markets will drive fiber demand well into the future.

As David mentioned, we intend to continue to make opportunistic open-market purchases of our securities, which reflects our confidence as well as our Board of Directors' confidence in our growth prospects and our desire to create value for our shareholders. Based on our current market prices, we believe that the repurchase programs are in the best interest of the Company as well as our shareholders.

That is the conclusion of my prepared remarks and I'd like to turn the call back to the operators, so we can open the call up for questions. Thank you.

(Operator Instructions) Bill Hoffman, RBC Capital Markets.

Yes, good morning. Hey, Jimmy, can you just talk a little bit more about the sort of Chinese buying patterns right now, what's going on? It seems like the prices keep coming down, but it doesn't seem like much of the volumes is -- there's much volume pickup. And then, the sort of second part of that is, like with this capacity that's supposedly coming on over there, shouldn't you guys be reloading or loading up their pipelines on the pulp side at this point?

Okay. Maybe I can touch on the pulp pricing and volume in China. Well, I mean we were expecting and I think a lot of other producers were expecting that after the Golden Holiday Weekend, of course, demand would start to come back to regular type of buying patterns. Unfortunately, after this big chunk of buying in September, the buying essentially dried up very quickly after the Golden Week holidays.

Now, I think this is driven primarily by the fact that there is, of course, continued credit constraints because of the Chinese government's desire to, of course, reduce inflationary pressures, and we do know that there is also some -- in some product categories, a significant inventory build of finished products, mainly on the coated as well as the wood-free grades, because of the significant capacity growth in those product areas in China in the recent past.

Of course, the tissue manufacturers are still doing quite well still. They're continuing to expand. They have all their ambitious capacity programs, as you know, for next year. So certainly, next year, there could be a similar type of situation in terms of significant capacity versus maybe adequate demand.

So I think the problem in China is a combination of [relatively] finished product buildup in certain products as well as the liquidity constraints as a result of a lot of money being, of course, tied up in inventories as well as lack of availability in terms of credit. In the some of the more profitable groups, of course, liquidity is adequate, and so, of course, they continue to buy regularly.

So it's impacted I guess those customers, which of course are facing more pressures in terms of selling their finished goods. And as you know, we're also coming into what traditionally is a period where liquidity is important. Coming with the Chinese New Year, as you know, they need to, of course, make adequate liquidity provisions for holidays as well as bonuses, et cetera, et cetera.

So I think that it will depend heavily in terms of the Chinese government's position in terms of this credit. So it's very difficult to predict what the buying patterns will be in the short term, because that could change very quickly depending on what the Chinese government does in the coming months. Hopefully, that explains the situations for you.

Yes, it helps. Just to sort of follow on that though, like when you think about pricing strategy here like over the next -- like through the Chinese New Year right -- it's sort of late February, do you think the industry is going to just continue to walk down prices by whatever EUR20 to EUR40 a month kind of thing at this point, because it doesn't seem to be sort of changing the demand patterns, which it typically never does, [as for the] pricing strategy at this point?

Well, I think certainly, in terms of the spot prices in China, as you know, they're reaching levels where, I'd say, many of the marginal producers probably would be losing cash. So I think we are close to the bottom. How long we stay at these type of bottom conditions, as I said, will be difficult to predict.

But we also believe that already, certain of the producers are experiencing some technical issues. So in the last few weeks, certainly we've seen certain production constraints because of technical problems, and I think there will be additional profitable capacity reductions as a result of the fact that pricing is such that the marginal producers certainly will be under enormous cash pressure.

So I think that there will be an adjustment, which takes care of the supply/demand imbalance in the short term. So I don't think this is a long-term issue. In fact, the faster it goes to the bottom, the faster the recovery is likely to be. And as you know, the prices have adjusted quite rapidly in China. So we are, let's say, reasonably optimistic that once we hit this kind of bottom condition and there is the supply readjustment that then, we'll start to see prices probably go back, of course, not necessarily rapidly, but it will be now a recovery in terms of the pricing.

Okay, thanks. And then, just final question on the -- in the Restricted Group, energy sales in the quarter, what was the -- it was just pretty much a steady-state quarter, or do you think as we get ahead into the year-end, you get some better pricing in Q4?

We're thinking the fourth quarter will be slightly stronger than the third quarter as the program just continues to improve.

Okay. And did any of the -- that oxygen delig projects or anything like that is adding anymore to the energy side of the equation or --?

Not really. I think what is more important is the production stability. I wouldn't say that [sales were rather] the most stable in Q3, but certainly we're seeing production in (inaudible) stabilizing much better, and hopefully will remain at these kind of very nice production levels. And that certainly has a big influence in terms of power generation at that mill.

Okay, thanks. And sorry, one more, Dave, can you just give us the tonnages out of the mills?

Yes, sure, Bill. Okay. Third quarter production volumes; Rosenthal, 80,800 tonnes; Stendal, 155,400 tonnes; Celgar, 126,100 tonnes; for a total of 362,300 tonnes. Sales volumes; Rosenthal 80,500 tonnes; Stendal, 131,300 tonnes; Celgar, 109,500 tonnes; for a total of 321,300 tonnes.

Great. Thank you.

Thank you.

Eric Seeve, GoldenTree.

Hi, guys. I was hoping you could spend a little more time talking about the philosophy in terms of potential incremental securities, repurchases, both on the debt and the equity side. If you could just refresh kind of where you stand within the existing programs, how much room is left and thoughts when and if you finish up [your same] program, if it makes sense to do more, and also remind us of your liquidity?

Yes. Sure. Well, there is a number of thoughts that I need to sort of try to articulate as we formulate our approach. First and foremost is maintaining adequate liquidity, so that our shareholders and ourselves as management don't feel any risk or concern from global economic problems. So we have minimum target cash balances and working capital balances, and all those sorts of things forecasted. So that's sort of a foundation that we have to operate from.

When we do have excess liquidity, then we'd have to look at the price of our securities and decide what we think is the right thing to do. Currently, we're able to buy our senior notes below par. These are call-protected notes. So they're quite attractive to us. We see ourselves as -- we need to delever to create shareholder value and we've done a good job of that and we expect to continue to do that.

As far as share repurchases are concerned, I mean, I think we took a good shot at that in the third quarter. We wanted to make sure everybody understood how we think about our securities. We think they're undervalued and therefore, we took the opportunity to buy some of those back opportunistically and we'll always keep our securities or our equity securities in our gun-sights, and we'll see how we trade and make our decisions from there.

And how much is remaining in terms of the authorized repurchase programs for both securities?

Yes, the Board approved $25 million for both. And so we've got about $10 million more to go on the debt side and the same on the equity --

(inaudible).

I'm sorry. $10 million to go on the bond side. Now, how much on the equity side?

About $13 million, $14 million on the equity side.

All right. Okay. And is it too early for me to talk about, once you -- if you get to the full $25 million, about potentially increasing that, is that something you'll just evaluate in the future?

Yes, we can't really forecast future too far out, Eric. But I think debt reduction is definitely a very serious goal to companies. We've been demonstrating that and assuming excess liquidity going into the future, again, based on -- depending on the price of the various securities, I think we'd be continuing for sure on the debt side. And the equity side is always something we consider depending on the conditions.

With respect to determining what an adequate liquidity level is to maintain any rules you can share with your investors and how you think about that?

Yes. Well, we know that -- well, there's a couple things here. So we know what our working capital requirements are seasonally, our typical raw material inventories and so on. So we can look at where we are today. We look at where we've been in trough conditions. We know what our requirements would be. We would -- we have defined minimum cash balances in each unit, and those are fairly conservative.

We want to have lots of liquidity, so that everybody is happy. The worst thing could happen for us is to have any lack of confidence, just regardless of how difficult operating conditions could be globally. And so it's just a very conservative approach. The fact of the matter is, this Company should be producing a lot of excess cash and we need to just quarterly monitor that and make the right decisions.

Okay. Thank you. And I know you saw a big working capital build this quarter. Is that just a function of in a weak pulp market, you can't sell everything you produce or is there a seasonal element to it? And what should we expect in the next couple of quarters?

Well, I think clearly, if you look at the third quarter, we were impacted primarily by the seasonal weakness in the summer, which was expected. And then, what was unexpected was the sudden drop-off after the holidays in China, after the Golden Week, and I think that was a combination of the credit issues circling in China, starting to fight, and also the uncertainty in Europe having an impact also on the Chinese market, because, of course, as you know, China is a big exporter to Europe, and so this uncertainty within the European market also has this impact in terms of the buyers being cautious.

So all in all, that part of it was very unseasonal. We're expecting that moving forward, yes, China is continuing to be, let's say, more difficult, but I would say that we will grow volumes. Europe, slight weakness; North America, probably cautious, but nothing significant. So our expectation is the fourth quarter volumes will be normalized in the sense that we'll be trying to catch up on the lost volumes in the prior quarters.

Okay. Thank you. Last question is just can you talk a little bit about how much of your volumes are -- it seems like there is a pretty big disconnect today in-between spot market pulp pricing and benchmark pricing. And can you talk a little bit about how much of your volumes tend to be in each and is that part of kind of what we saw in the third quarters? You just didn't want to sell out of the spot market?

No, I mean, most of our volume essentially is contracted, as you know. We don't have a lot of loose tonnage. But of course, it is up to the buyers in terms of their programs. So if there is loose tonnage in the sense that they are not fully able to purchase all of that committed volume, then of course we have to look for alternatives and which tends to be the more spot market. So I can't tell you a figure.

All I can tell you is that depending on what our contract buyers are doing, there may be more spot volumes which are available that we need to move. So that's basically what we will do and, of course, as a result of lack of buying in the prior period, if we do have inventory build, then of course we need to move those inventories as well to markets which are not our normal contractual type of arrangement.

Great. Thanks a lot, guys.

Thanks.

Graham Meagher, TD Securities.

Good morning, guys. It's Graham Meagher, TD Securities. First question on Chinese pricing, you noted $780 per tonne in October. There was a report on Forestweb talking about $700 per tonne in November. Are you able to confirm that number at all?

Yes. We're basically about the $700 number, as you know, for November.

Okay.

We're hoping that, that type of price levels certainly would stabilize it. There is no assurance that, that will occur, but there is no point trying to put up pricing that's not at levels where you're going to get any buying interest. So, we have announced [this level] to see if that level of pricing will be the level where you get some more normalized volume. So, we will have to see.

And I know it's still pretty early days on that, but are you getting much reception or are you starting to move tonnes at that level?

I'll say that we made adequate provisions in terms of our sales for the quarter that it's not likely that we will have significant inventory build from our targeted type of levels for year-end. So, we made adequate provisions in terms of the fourth-quarter sales in all markets that we will not be building up inventory; and in fact, we will be reaching the targeted amounts that we traditionally have done in the fourth quarter.

Okay.

Because our concern clearly is that we are moving into weaker periods. And so, we need to be aggressive in terms of our sales campaign to address that.

Okay. And so it's fair to say that that's across regions that you're taking that approach?

Yes, all through our sales. So, as I said, we do believe that the fourth-quarter sales activity will be much bigger than what we've had in Q3 clearly, because of course we had some inventory build. And our target is to move out the inventory so that we will be reaching levels which would be normal for any year.

Okay. Great.

Okay.

Thanks. Thanks, Jimmy. That's helpful. And then, just on the Celgar Energy Projects, is that meeting expectations at this point? I know it was ramping up through earlier in the year.

Yes, I think now, it's at levels where it certainly is demonstrating that when the mill is running very steady, the energy production is at the levels that we've committed to BC Hydro. There is additional steam savings that we can do through some minor capital projects, but we are very satisfied. Now, the key of course is to get Celgar to continue to run at very steady, reliable type of production levels and I think we've made significant progress there.

The mill has had in the past, of course, a history of issues in terms of equipment failures and unexpected problems, but I would say that the mill has made significant headway in that regard. So, it's now running very nicely and hopefully will remain at these kind of steady levels for the balance and we will then get good electricity production.

Great. Thanks. And maybe just one for Dave, thinking about the downtime at Stendal and at Rosenthal in Q3, are you able to quantify what was expensed there?

Geez, I don't think I have those numbers at my fingertips, Graham. I'm sorry.

Okay. That's fine. That's all had. Thanks.

Okay.

Bruce Klein, Credit Suisse.

Hi. Good morning.

Good morning.

Just maybe more on just global cash cost, I know spot pricing has declined in NBSK [but] it still seems there is a decent distance between what the average global cash costs are. Maybe your thoughts on where they are. And secondly, just on acquisitions, is that on hold for now or is that -- where do you stand on whether you would look at something, I guess?

Yes, hi, Bruce. Well, our cash costs, we've still got some pretty good margin in our business. And, in October, we had a nice sales month and a lot of tonnes in our core markets and prices helped for the month. So there's still, for Mercer, lots of room, particularly with our energy sales.

But as Jimmy mentioned, I think the issue is for some of these weaker players who don't have contract business, that are having to resort to hitting the bid in China on a spot basis, it's got to be pretty brutal business for them. So there is a segment of the industry that's really, really struggling. And then, there is guys like us who so far still we're not happy with China, but we've got a huge presence in the [end of] market. So maybe that addresses the cost -- manufacturing cost part of your question.

As far as consolidation is concerned, we've always said we are the world's largest market NBSK pulp producer. So we're not shy to do that, but we're not going to destroy our DNA by buying up weak sisters. So, it would have to be the right situation for us to consider that.

Thank you, guys.

Richard Kus, Jefferies.

Hey, guys. Good morning.

Hey.

Can you talk a little bit, or at least remind us of what percentage of your sales go into China and kind of where you service those largely from? I assume it's Celgar at this point?

Yes. About half of the production roughly of Celgar goes into the China market. China -- I mean, Celgar is about a third of our overall production and sales. So that kind of gives you an idea. China is around 20% of our overall -- 20% something of our overall sales activity. And of course, a significant portion of that is regular contract type of business.

Right.

[Expensed it]. We've got committed volumes. So even though in China, typically, these would be volumes that we have pretty known volume knowledge throughout the period. Now, of course, during difficult periods like we are now, even the contract buyers in many cases are hesitating because of their present market conditions. So that means that we have to move volume outside of that.

Right, I see. So, given that you guys built inventory levels in the third quarter, I guess that means that you're probably selling a little bit more into spot markets here over there in the fourth quarter then?

Yes. I mean, clearly, we have to move volume into the spot. If we don't get that volume, move to the regular contract arrangements.

Okay. Thanks, guys.

Thank you.

DeForest Hinman, Walthausen & Company.

Hi. Could you just give us the numbers on the balance sheet side in terms of the inventories, a breakdown between raw materials and finished goods?

Okay. Why don't I just ask you to refer to the Q when it comes out in the next day or so?

Okay. Just in general, can you kind of talk about the inventory mix within the Restricted Group? It's up sequentially and also it's probably related to some of the build with the winter, but from a finished good perspective, are we having more inventory building up at Celgar with the slowdown in Chinese buying or is there inventory build in Europe at Rosenthal?

Yes. Well, pulp inventories I would say are up at both Stendal and Celgar, higher than we'd normally like them. So for example, Stendal ended the quarter at about 60,000 tonnes and Celgar at about 54,000. As Jimmy mentioned, we would have been happier with Stendal at around the 40,000 tonnes level and Celgar at the 40,000 tonnes or below. So that's our target for year-end.

On the raw materials side, let me just try to give you some color. The end of Q2 is typically our lowest period for raw material inventories and we are in the period -- process now of building our volume for the winter. And so the investment, as I mentioned in my earlier remarks, in working capital is -- it's gone up roughly about EUR4 million in the quarter relative to where we were at the end of the second quarter.

Okay. That's helpful. And I still have trouble understanding this with the -- I forgot what you call it, it's almost like the sinking fund provision with the Stendal debt. And I think in the last 10-Q, you said it was EUR28.3 million servicing reserve account balance, something along those lines. Where does that balance stand now, and how high does that need to go to?

Yes, so we've -- just subsequent to the quarter-end added -- let's think about EUR3.5 million to that roughly. It's intended to be one full year's debt service on the Stendal, and Stendal's debt is an amortizing debt, as you probably know. So the whole concept of this debt service reserve account is a function of something that Jimmy and I wanted in this feature.

We negotiated it in during the amendment we did in 2009 and it's -- what it says is that during positive times like we're in right now, excess cash goes into this account as opposed to -- it goes into this account and it's there for a rainy day; if the world gets sick and like really sick, then we've got a big banker cash on our balance sheet that allows us just to maintain the amortization, normal debt service of the facility. If we top it up, and today, that number would be -- I think we can get it up to about EUR60 million, it's -- this is a formula sort of a thing we have with our facility. Cash above -- liquidity available above that EUR60 million then sweeps to the banks for accelerated debt reduction.

So that will be -- is that EUR60 million, not $60 million?

Yes, EUR60 million. So that's a lot of cash, a lot of safety room, plus we have -- we're always allowed a minimum of EUR15 million of cash and we're also allowed to manage working capital, however we feel necessary to manage the business. So basically, we've got a huge liquidity reserve sitting in front of this amortizing debt and that's what makes us feel so comfortable with it. We're in very good shape today considering the amount of electricity revenue on that side, basically covers the interest cost or very close to it on an annual basis. So just it's going to delever fairly in a nice structured way without a lot of risk.

Okay. Thank you.

Okay. Thank you.

Paul Quinn, RBC Capital Markets.

Yes, thanks. And good morning, good afternoon, I guess, you guys are in Europe. Just couple of questions, one on European fiber cost, it seems from talking to some of the other companies, they cover that bioenergy and biomass energy production plants are accelerating in Europe with UK and Germany. I'm just wondering your fiber cost, if you look at medium and long term, I know they're at sort of historically high levels now, but do you see those getting higher going forward two to five-year time frame?

Well, I think the situation certainly in UK is different than the situation in Germany. I think you have that initial kind of euphoric type of demand for some [individual] to supply pellet plants. But what has happened is that the combination of, I guess, this pressure in terms of the CO2 credits as well as the lower energy prices in terms of the oil has meant that really there has been a lot of pellet producers which have had financial difficulty.

And so you've seen probably in the range about half of those pulp -- installed pellet manufacturing capacity in Germany shut down and they're not likely to come back, because really there is no margin in their product versus the raw material price today. So what we're seeing is really the pricing levels are such that it's very unattractive for most of the pellet manufacturers to continue to rise.

So I think from the energy side, from pellet side, I think we'll probably reach levels unless, of course, the CO2 credits increase and energy, fossil fuel prices are at much higher levels that we're going to see any real pressure from that side. Of course, you will still get the issue of domestic firewood type of consumption, which is very difficult to measure. There's still a lot of people who of course go to their forests and take advantage of the waste wood and use it for heating.

And so, this has continued to grow, which I think is having a small peripheral impact in terms of overall wood availability. But I would say what is really different in Germany today versus the prior periods is that the furniture and the housing industry, of course, is not strong and therefore the board industry is no longer competitive at these price levels for the raw material and therefore many closures of board manufacturing.

And so there is really a lack of pulp buyers with any purchasing power. So fortunate for the pulp industry to date, of course, pulp prices have been at levels which -- where we still can continue to be able to afford it. And so the sawmilling industry, I think, is of course attractive to us as a reliable buyer of their waste stream. So we're seeing additional supply being offered to us at longer terms, in terms of volume commitments. So I think this pressure certainly is probably not like what we had in the past. In fact, we are quite optimistic that with gradual efforts, we may be able to temper the prices over time.

Okay, great. And it looks like you built about 41,000 tonnes in inventory in Q3 and you described the inventory levels have been high at Stendal and Celgar, just wondering -- I guess David described October being a decent month. Did those inventory levels come down in October?

Yes, they did. We are serious about pushing them down to our normal or more normal operating levels by the year-end and we can see far enough into the future, we're comfortable, we will do that.

Yes.

Okay. And then, just on -- Jimmy, you made the comment that prices are sort of nearing their bottom. We saw a number of -- from the Q3 results, a number of pulp producers, well, Canadians, the public guys that they are making still very high EBITDA per tonne levels, $175, $200 would suggest the bottom is out. Just wondering who you see as the marginal producer in this market. Is it a Canadian, is it a European, and where is that globally right now?

I think there is a few in Canada maybe.

I think if you look at the list of the closures that occurred '08-'09 and you could see a whole list of both Canadian as well the European producers which were forced to close because of the significant price correction. So, I think those clearly on the list which have restarted because of the better pricing certainly are the most vulnerable. So, I think you can almost go in reverse order on when they restarted as the [likely] wants to go down this time around as well.

Okay. And then, just, I guess, lastly if you could just outline your 2012 maintenance program?

Yes. So what we say is, yes, Rosenthal is going down in the second quarter, Celgar will be in the third quarter, and Stendal will be in the fourth quarter.

Great. That's all I had. Thanks, guys.

Okay, Paul.

[Michael Marczak], UBS.

Hey, guys. Thanks for taking my question. If you guys get the sense that your customers are trying to take advantage of much cheaper hardwood. I know there are various opinions out there on how much flexibility mills have.

Well, I mean, they will always try to take advantage of the price difference between hard and softwood. I mean, yes, especially now, I mean, with the $200 type of difference and as you know, there is still significant overcapacity in the hardwood, at least in the short to medium term.

So, yes, they will try to do everything possible, but we know that it isn't so easy for many of the product categories in terms of their productivity as well as their quality spectrum. So, all I can say is that yes, it's probably having some impact, but it's not going to be that big that all of a sudden, we're going to see demand disruptions to the level where it's going to impact, I think the supply/demand balance.

I think the supply/demand balance really is going to be impacted by general economic activity as well as in a weaker market, closure of marginal capacity. When you shut down one mill, which is 300,000 tonnes, it takes a lot of substitution by many of the producers to essentially replace that. So we're optimistic that the substitution issues is not a big issue, at least at this time.

Great. That's helpful. And then, maybe it's a little too early for that, but could you update us on your expectations for CapEx for next year?

Yes, it is a little bit early. So generally, I'll just remind listeners that capital spending at Mercer is primarily discretionary. We don't have big lists of maintenance of business, environmental, or safety capital. These mills are very well invested. So the projects that we review with our Board as part of our 2012 plan will be very accretive. We'll have two to three-year paybacks on average. Under these operating conditions, we're not going to be letting the club out too far. Again, it's our part of managing the balance sheet and the risk. So we'll play it cautious as we see how the global macro conditions unfold.

Great. Thanks a lot.

(Operator Instructions) Sven Karlen, Wells Fargo.

Hi, Jimmy. I saw your energy revenue number was a very nice number, given that your kilowatts produced were down significantly. It looks -- I know when you did the debt deal, you talked about potentially $60 million of revenues from energy up here, and it looks like you're going to fall short of that. But it looks like if you run all three plants flat out and hadn't had the Stendal shut in the third quarter, your energy revenues would have been up around 16.8 million -- 16.7 million, 16.8 million for the quarter. Would you like to hazard an estimate as to what you think your revenue potential is in 2012?

No. I mean, Celgar clearly is running at a level where it's running in terms of the electricity generation today at the levels that we would have hoped that would reach earlier on, but I think it's very dependent on how well the production levels are. So I think if it continues to run at these very steady type of conditions, then I think the electricity revenue will be something in the order of CAD15 million to CAD18 million.

Now, there is other incremental type of investments that we need to make to really increase that same production. I think that when we anticipated that steam will be available, I think there was some shortfalls because of, let's say, issues around the waste wood boiler which essentially is not running up to the levels that we would have expected, and certain efficiency gains we thought that we could get in modification of the [sits slower]. Although it does help, it also creates some operating issues, and therefore, we are trying to now figure out how to increase the steam availability.

So I think in terms of turbine capacity, serving us more than sufficient production capacity to reach to 20 million, 25 million, I think we need to further get steam savings to get to the 20 million initially in terms of power generation, but in the medium to long term, I would say that our goal of reaching that 25 million still is doable. It's just a question of making sure that we optimize steam usage.

Great. Thanks for that.

Thanks.

There are no further questions at this time. I will turn the call back over to Mr. Jimmy Lee for closing remarks.

Well, I thank everyone for coming to today's earnings conference call. As I said, I think in the short term, it's very difficult to monitor what the market conditions will be. But in terms of the medium to long term, we do have strong confidence in terms of the supply and demand balance for NBSK. So, all in all, we're looking to have this, let's say, short weak period over with and get back to what we believe would be more normal type of operations. And on that, thank you very much.

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