Mercer International Inc (MERC) 2012 Q1 法說會逐字稿

Good morning and welcome to Mercer international first quarter 2012 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 will now hand the call over to David Gandossi.

Thank you, Stephanie. Good morning, everyone.

As usual, we'll begin with formal remarks after which we'll take your questions.

Please note that in this morning's conference call, we'll 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 would like to call your attention to the risks related to these statements which are more fully described in the press release and with the company's filings with the Securities and Exchange Commission.

I'll begin with some prepared remarks on the key financial aspects of the quarter and then I'll pass the call to Jimmy.

As you've seen from our press release, our first quarter results were encouraging. Relative to the fourth quarter of 2011, NBSK pricing was down, however all of our mills ran at near record levels. In addition, the costs of many of our key inputs were down this quarter, including our fiber costs. Despite the lower pulp prices in Q1, we're generally pleased with our overall operating results.

We're also encouraged that we have been able to implement a number of price increases so far this year and we believe the market fundamentals also improve as China and Europe work through their adjustments.

I'll be going over our financial results in more detail in a few moments but first I want to highlight that in the 3 months ended March 31, 2012, we've repaid approximately EUR10 million of stand alone long-term debt. In addition, cash has been increased by approximately EUR19 million during the quarter, assisted partly by a short-term revolver of approximately EUR 4 million for short-term working capital needs.

Operationally, our mills ran very well in the quarter. Pulp sales volumes were down approximately 15,000 tons. However, I need to put that into perspective by reminding reader this is our Q4 sales volumes were at record levels as Chinese buyers and traders took advantage of low prices to refill inventories. Pulp prices dropped in the quarter, primarily driven by Europe's weakness, as they continue to struggle with a slow economy and weak paper demand. The average European list price fell to $837 per ton. The China price fell to $687. We estimate that these price reductions reduced our EBITDA by about EUR11 million comparing to Q4. Jimmy will discuss the short term outlook for pulp in more detail, but we continue to believe that pulp prices have bottomed out, and although there has been a large shift of inventory from producers to customers in China, ongoing strong demand from the Chinese market will provide further increases as we move through the year.

As you will have seen in our press release, we reported net income of EUR1.2million for the quarter, or EUR0.02 per basic share, compared to a net loss of EUR1.8 million or a loss of EUR0.03 per basic share in Q4. Our Q1 2012 net income includes approximately EUR0.9 million of a non-cash gain related to the mark to market valuation of our fixed interest rate swap. Before this non-cash item, basic EPS was EUR0.01 per basic share.

We recorded quarterly EBITDA of EUR30.6 million, or approximately or $40.1 million dollars. This compares to EUR17 million euros or about $22.9 million in the fourth quarter last year.

As I alluded to earlier, there were a number of positive influences on EBITDA when compared to Q4 after allowing for the negative impact of lower prices. The most notable of lower fiber costs, energy costs were also down as were our freight costs. Stendal had a large maintenance shut in Q4, while there were no maintenance shuts in Q1 which creates a positive variance when comparing the two periods. We also experienced a small foreign exchange variance due to the weakening of the euro in the quarter.

Switching to cash flow, overall our cash position is about EUR19 million higher than at the end of Q4 sitting at EUR136 million or approximately $182 million. Overall, the quarterly working capital movements increased cash by about EUR18.5 million on a net basis, primarily due to the decrease in inventories and accounts receivable.

Capital expenditures drew EUR8.5 million which was lower than Q4 by approximately EUR3 million. Summarizing our working capital movements relative to our cash build in the 12-month period ended March 31, our working capital excluding cash and short term debt increased by about EUR27 million euros up from EUR111 million euros at the end of Q1 2011.

At March 31, 2012 we had approximately EUR26.4 million of undrawn revolvers available at Rosenthal, and approximately CAD31.1 million available at Celgar.

Our EUR136.4 million of cash at March 31 is comprised of approximately EUR65.8 million euros for Restricted Group and EUR70.6 million at Stendal.

Net debt to equity on a consolidated basis at March 31 is a little over two times. The Restricted Group net debt is about 0.5 times equity at March 31, 2012.

As a reminder,many of our competitors now reporting using IFRS, International Financial Reporting Standards, which 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 than us. Currently in accordance with US GAAP, we expense all non-capital major maintenance costs in the period they are incurred, while for those reporting IFRS, non-capital major maintenance costs are capitalized as property, plant, and equipment, and then amortized to the next major maintenance through 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, however in this particular quarter we did not have any major maintenance expense so our results are fairly comparable.

That ends my review of the financial position and development. So let me turn the call over to Jimmy now to talk about operational market and strategic developments.

Thanks, David. Good morning, everyone.

As David mentioned, we're encouraged with our first quarter results. We increased our cash balance this quarter despite making our scheduled debt repayments. I'm also pleased that our focus on reliability has resulted in another strong production quarter. We still have some work to do in this area but we're continuing to move in the right direction.

We also achieved our highest quarterly electricity revenues this quarter surpassing the previous record set last quarter. Another way of looking at our energy revenues is that in this first quarter, they exceeded our interest expense by EUR2 million,a very positive result considering the pulp markets are still relatively weak.

In the first quarter, we watched average NBSK list prices continue to decline, with the European Q1 average list price falling $31 to $837 per ton. In North America, the average price fell $50 to $870, while in China, the quarterly average list price fell $26 to $687 US dollars per ton. All three mills ran very well in the quarter.

It is not surprising that on top of the record-setting energy revenues this quarter, we also achieved record energy production. And that is in spite of nearly three days of lost energy production due to repairs on one of our turbines.

In total, we produced 380,000 tons of pulp this quarter compared to 365,000 tons in the fourth quarter and 359,000 tons in the first quarter of 2011. In addition, the mills produced 436 gigawatt hours of electricity in the quarter compared to 410 gigawatt house in Q4.

Turning back to the pulp markets for a moment, we believe that the NBSK pulp markets have bottomed since we have seen a number of recent price increases. Also as market statistics are suggesting a balanced pulp market and as we head into the spring maintenance season, we believe that markets will continue to tighten. And as a result, we should see support for additional price increases.

Producer inventories were at 29 days at the end of March and we believe that number will come down slightly when April numbers are released. In addition, hardwood pulp inventories were down a day to 34 days.

The price spread between hardwood and softwood has also narrowed which we believe is very positive for NBSK price indicators. However, Europe continues to struggle with sovereign debt issues which are slowing economic growth, and European paper demand continues to be weak.

As I noted last quarter, the current dynamic in Europe has resulted in previously integrated pulp being sold as market pulp. Consequently we believe that a supply-side reduction is required in the short term to bring this market better in balance. While in North America, the high cost mills that are down need to stay down or risk further damage to a still fragile global market. Currently, China's absorbing the majority of the world's excess tons and although we don't believe their current volumes are sustainable, we do think this market is continuing to grow. We're also expect Chinese demand to stay strong through Q2.

In the immediate to long term, we continue to believe that the growth in China and similarly growing economies will increase market tightness as consumers increase their use of tissue-based products. We have seen a number of reports that support this belief. Indeed when I visit our customers in China, I'm always surprised at the economic activity. In addition, there's a significant paper and tissue capacity scheduled to come online in the next few years to support the expected increased demand.

Our sales volumes totalled 385,000 tons in Q1 compared to 400,000 tons in Q4 of 2011, and 309,000 tons in Q1 of 2011.

Let me now take a moment to discuss developments in the wood markets. European fiber prices remained at elevated levels. But we're experiencing a price decline in Q1, primarily due to reduced demand from the board and pellet industry. We anticipate that strong sawmilling activity and minimal competition for fiber from board producers also maintain downward pricing pressures through Q2. We continue to be able to source the fiber we need and as a result we're satisfied with our current fiber inventories in Germany as they work through the winter stockpiles. We will continue to monitor them closely.

In British Columbia, our fiber costs decreased slightly in Q1 relative to Q4 due to running a second shift in Celgar's wood room throughout that quarter. We continue to build our ground wood inventory to allow us to continue to run a second shift. We currently expect Celgar's fiber cost to remain stable through Q2 with some downward price pressure late in that quarter. We're currently satisfied with Celgar's fiber inventories but will continue to monitor them closely.

In January we announced our Blue Mill Project in Stendal. We are very excited about this project because it will create an additional 30,000 tons of pulp production capacity, and includes the installation of a 40 megawatt turbine. We expect to invest approximately EUR40 million in this project with, EUR12 million of that coming in the form of non-refundable government grants. Overall we anticipating this project will pay for itself in about two years. We also expect the benefit from excess generating capacity going forward as each incremental investment in pulp production will also increase our energy output. We will provide regular updates on the status of the Blue Mill Project over the course of its construction.

We have spent the majority of the grants allocated to us by the Canadian government under the Green Transformation Programme. At March 31, 2012, we have about CAD 2.4 million left that we expect to receive in Q2, as a result of small investments qualifying yet highly accretive projects.

We regularly get questions about the timing of our annual maintenance shuts, so I would like to highlight what our 2012 shuts will look like. Rosenthal will have their annual shut in Q2 and it's scheduled to be longer than usual, at 21 days, due to work being done to enhance their recovery boiler. And we believe this capital investment will qualify for the waste water fee offset program. Celgar's shut will be in Q3 and Stendal's in Q4 and both are scheduled to be approximately ten days long.

I would like to take a moment to briefly comment on our Fibrek takeover bid. As we had disclosed previously, our bid was made with the full support of the Fibrek's board. We continue to believe our bid was of superior value and are very disappointed in the Quebec regulatory process that has frustrated us at every turn. Consequently, we let our offer expires in February, April 27. We have recovered CAD2.4 million of expenses in keeping with our support agreement negotiated with Fibrek's board.

Switching now to our NAFTA claim -- on Tuesday, May 1 we filed a request for arbitration to the government of Canada for breaches of its obligation under NAFTA regarding the treatment of energy generation facility at our Celgar mill. I would like also to mention that Celgar's labor agreement expired on April 30. It is our current understanding that Canfor Pulp has been suggested as the target for negotiating a pattern agreement in British Columbia. At this point, we're not anticipating any significant labor disruptions as a result of this negotiation process.

If I can close with a few observations. We continue to watch the NBSK market very closely. We believe NBSK prices have bottomed out and that we'll see prices continue a slow climb. We remain strong believers in the medium to long term NBSK demand supply fundamentals as we foresee as being driven by the increasing economic standards of the emerging markets.

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

(Operator Instructions).

Your first question comes from the line of Graham Meagher with TD Securities. Your line is open.

Good morning.

First question, Jimmy, maybe you can just talk a little bit about what you're seeing in China and Europe in May and specifically on the volumes and the pricing.

Well, you know, we are of course in discussions in regards to the recently announced price increases both in China as well as in Europe. Certainly because of the economic activities in Europe being rather weak, there's a lot of pushback. Those discussions of course are ongoing.

In terms of China market, I think, you know, there has been significant amount of tonnage in the first quarter which were shipped in from areas which traditionally have not really shipped that amount of tons. And as a result, we know that the buy pattern was such that there's probably been excess buying on part of some of the purchasers, and therefore it probably will result in some difficulty in pushing prices in China upwards. But we believe that this is more of a short-term issue because as you know the hardwood producers are also pushing extremely hard for similar type price increase and therefore, you know, the price of hardwood and softwood of course would be such that it would be preferable to actually run with more softwood. So I think this is going to rebalance itself in a shorter period than a lot of people think.

There's been significant amount of capacity in China that will come online. And therefore we do believe that this demand is going to be continuing to grow and the volume increase is not speculative-type of inventory. So I think there will be an initial bump -- a little bit of a rough patch in the short term in China but overall, we think it will progress, you know, for the balance of the year quite well.

Europe, you know, it's kind of holding up with these kind of lower levels so we're not seeing any real pickup but we're not really seeing any real weakness either. It's going along at this kind of lower kind of level of activity.

Great. Thank you.

Next question, you noted the German fiber costs declines in Q1. Can you give us a sense of the magnitude of that decline just maybe upon a percentage basis or so?

Yes. Probably the best way I can do it for you, Graham is for Rosenthal, they dropped about EUR4 per ton pulp and in Stendal about EUR15,Quarter over quarter, fourth quarter to first quarter, and in Celgar it was about EUR10.

Okay, great, thank you.

And next question, on the Blue Mill Project. Is there any downtime associated with that in 2012 or 2013 beyond the normal maintenance shut in Q4?

No, we're not expecting any significant downtime for connecting up all of the necessary new equipment.

Great. And maybe Dave, just the last one. Can you provide the shipments by mill?

Okay. So sales volumes for Rosenthal for the first quarter were 84.9. Stendal was 171.4. Celgar was 128.6. For a total of 384.8. [sic]

Great.

Thousand tons.

All right. Thanks very much.

Your next question comes from the line of Gary Madia with Gleacher and Company. Please go ahead.

Thank you. Good morning. It was a good quarter in a difficult environment.

I just have a quick question. Sequentially on the energy revenues, I know you were flat sequentially on a reported revenue basis, despite the actual energy sales going up about 13,000 megawatts. Can you speak to that a little bit? Is there anything in there? I would have expected a little bit of more contribution.

Don't really have a lot to say about that, Gary. I mean, all the mills ran well and generation was up and prices stable.

Okay. All right.

And second question is as you look to the Rosenthal shut in the second quarter being longer than expected, I would have thought maybe that there would have been an inventory investment in the first quarter in terms of building up in front of that shut, but I didn't really see it. How should we be thinking of that as relates to shipments, and do you feel comfortable that your inventory levels going into the shut are fine?

I think what hides it maybe is the reduction in raw materials inventories in Germany. Coming out of the winter, the guys really worked hard to get the log yards down and then with the shut in Rosenthal, they pushed really hard particularly to move the roundwood out. But there is a heavier load of finished goods at Rosenthal to look after customers during that shut. So net-net I guess they balance out.

Good. I appreciate the color.

By the way, we will be having to rub very, very hard after the shut to rebalance our inventory a bit to levels that are more sustainable.

Okay.

We will be extremely low coming out of this based on forecasts.

So as we think about shipment levels versus what your guys produced -- I'm sorry, actually shipped in first quarter, looking into 2Q, are you hopeful or confident that shipment levels are going to be consistent, or how should we be thinking about that on a trend basis?

It's pretty flat.

Flat, okay.

That's all I have. Thank you very much.

Your next question comes from the line of Bill Hoffmann with RBC Capital Markets. Your line is open.

Yes, thanks. Good morning. Just talking about the Rosenthal downtime in the second quarter. What are you specifically doing for the extended downtime? Can you remind us?

Basically we're adding certain additional parts to the recovery boiler. So in effect we're increasing the capacity slightly at the recovery boiler end.

And this is also to help for future expansion on the energy side, is that correct?

Yes and also it offsets -- it reduces the amount of discharge into the waste water system as well. So it is going to have a beneficial impact in terms of the environmental side and also produces a little bit more pulp and therefore of course it will allow us to produce a little bit more electricity as well.

And just to remind for those that don't know, there's a waste water fee program in Germany where you're charged an amount based on effluent flow and if you can identify a project that allows you to reduce those emissions effectively, you have those waived. The way to think about this recovery boiler upgrade is EUR7 million, roughly half of the expenditure is paid for as an offset of these waste water fees. So it's very accretive to us. As Jimmy says, it adds capacity, it reduces cost, it gives us more steam output.

How does that roll through the financial statement?

Well, I guess -- I'm not sure what you mean but it's just a capital expenditure that reduces costs and we'll have the slight lift on energy revenues.

But you will get of course a portion of that capital cost which is being offset by the accrued waste water fee. So you're not going to see the full amount of the actual expenditure because of course that will be credited against on the balance sheet against the waste water liability. So it's only that portion that we will fund which is roughly what, EUR3.4 million.

Sorry, Bill, I misunderstood your question. So it's grant accounting.

Yes, okay. What will be CapEx in the second quarter effectively? That's part of it then, right?

Yes, it's a heavy quarter. It's about EUR17.8 million in total, and at Rosenthal it's EUR10 million of that. EUR10.4 million.

Okay. Thanks.

There will be -- there's some lag there is but there's EUR6.5 million of grants being offset throughout the remainder of the year.

So that EUR10.4 millionis the gross number?

Yes.

Okay. So your Restricted Group should be in whatever EUR6 million to EUR7 million kind of range total?

EUR5 million. If you're looking at the impact that has to be funded from our side. Roughly around the EUR5 million-type of range.

Okay. That's helpful. And then Jimmy, could you just talk about the power sales dispute under NAFTA, sort of what the response has been from BC Hydro and the government and everybody else at this point?

Well, I think, the government of Canada certainly has been very responsive in the sense that, you know, I think they thoroughly understand the issues. And of course under the NAFTA agreement, there is a requirement that the parties try to make some preliminary or at least try it resolve it without having to go through the arbitration process. Clearly we have gone through that.

Unfortunately, you know, the meetings did not come to let's say any real or clear-type of process because we felt actually we don't think of the province actually was well prepared. So I think the province clearly are not taking it as seriously as the federal government. Hopefully through this arbitration claim now being filed, the province as well as the Crown Agency also take it a lot more seriously.

I think that's where we stand.

And then any risk to you guys on your current power sales out of Celgar and the prices?

This is completely different.

The issue basically is one of the base load. What we're saying is that unlike every other pulp mill which essentially doesn't have to sell supply all of its power needs and still sells power to BC Hydro, we are the only mill which is essentially forced to because of what BC Hydro did to basically supply all of our power before we can actually sell any excess. So really, this is quite a contentious issue because prior to BC Hydro stepping in, and changing what used to be a situation where we could, under the former agreements that existed between us and Fortis which is our utility, essentially we could sell pretty much all of our power as long as we could get it to that client, you know, through the transmission, as long as transmission availability was there and pricing was agreed to, we could spin that power and buy Industrial Heritage power from Fortis.

And that was the original understanding. And we had entered into a contract with Fortis and unfortunately, BC Hydro intervened because of course Fortis is very much dependent on a big chunk of their power from BC Hydro and that's how we ended up in the BC UC process

And we continue to have course hope for resolution within that arena. But we still have not been able to reach satisfactory conclusion and also of course because of the time statute limitations in terms of NAFTA, we were forced to file a formal claim so that we protect our overall interests in the event things do not progress in all of these various processes from a regulatory perspective.

Great. Thanks helpful.

Next question comes from the line of Richard Kus from Jefferies. Your line is open.

Good morning. Can you guys tell me a little bit about what the expected cost on the maintenance is that going to run through the income statement in the second quarter?.

That's awkward because we doesn't typically disclose those costs, Richard.

Okay.

I'm not prepared to answer that directly.

Okay. And then from a more strategic perspective, any thoughts now that the Fibrek offer is off the table, any thoughts what you might do with cash generated, specially at the Restricted Group going forward?

Clearly with the deal essentially having expired, we have to look now at what will be the best return for our cash presently on the balance sheet. So, you know, the board and management of course will be discussing I guess those issues in the coming weeks. And depending on what we believe is the best use for any excess cash, I'm sure we'll be dealing with that in the coming quarters.

Okay. So nothing to report right now then?

No. I mean we're just off the Fibrek potential acquisition, as you know, and of course we are reviewing all of the long-term capital investment requirements or planning and there's various things that are occurring. And all of that is of course being discussed and we will then have a better and clearer picture as to the comfort zone in terms of really a lot of the cash and where we should be deploying those cash reserves in the coming quarters.

Okay. Thank you.

And we still do have board authority for bond buy-backs, you know, if we see securities trading at interesting levels.

Right, okay. Thanks, guys.

Next Question comes from the line of Andrew Shapiro with Lawndale Capital Management. Your line is open.

Hi, thank you.

David, despite Stendal's debt entirely fenced off from holding company Restricted Group, why do you think that most of the few analysts that cover Mercer formally choose to apply a valuation multiple only across the entire consolidated results, rather than just valuing the Restricted Group and view Stendal as the one-way call option to enterprise value that it is? And what might you guy does better to communicate this way of thinking?.

That's a difficult question because I mean of course we clearly laid out in terms of both the press release in terms of our earning statement. Of course we have the requirement under the bond indenture to clearly lay out all of those figures. It's very clear, we have made it very well and very clearly separated in terms of the recourse and non-recourse nature of the Stendal debt. But, we don't control what the analyst chooses to write -- and so on that note you should really ask them rather than ask us why they view it that way because that's clearly beyond our control.

All we can do is essentially try to communicate to the best of our ability, and certainly we would appreciate if you have any inputs in terms of if we're not really communicating correctly and of course whatever we put out there has to be within the bounds of the regulatory requirements. But as long as it's within those bounds, we'll be more than happy to hear any suggestions from anybody as to how we may be able to better improve that fact.

So you don't disagree then with that type of analysis that in fact Stendal's a call option which has upside optionality, but should that necessarily if one was putting a load of valuation multiple --

Well, I wouldn't call it a call option. What I would look at is you should not look at it going blow zero value. You shouldn't take away from value because clearly if there's no valley because of the cycle, then of course because of the debt being quite high, then you should attribute a zero value and not take a negative evaluation because of the debt. On the upside of course, because of the leverage, you should attribute the positive value going forward. I look at it only as really positive and then you have and got either zero or a positive number.

Jimmy, you just communicated as I was hoping you might on that.

Let's go forward on the Stendal cash flows. What are your thoughts on the completion date and ramp-up time for Blue Mill?

I think Blue Mill is scheduled to be up and running next year.

Third quarter next year.

Q3 next year. Is the project still EUR40 million total costs, EUR12 million of that is grants and how much of Mercer's EUR28 million has been and still remains to be funded from the Restricted Group down into Stendal, if any?

It's all been done other than EUR1.5 million guarantee for cost overrun which we're not expecting to have to deal with.

So the March balance sheet and income statements etc. and cash flows reflect any downstreaming up to that point already?

That's correct, Andy, yes.

Okay, great and since your energy rates are fairly stable, where you can't obviously project out the pulp prices, what's the range of incremental cash flow from the incremental energy production you currently feel this project is going to generate that would come up?

That was in the EUR7 million to EUR9 million range.

EUR7 million to EUR9 million would be on the energy incremental cash flow a year?

Yes.

And then of course pulp is just an estimated production increase that you can't slap an assumption on it. Although you do say that you made the investment and thought of this investment as a two-year payback?

Yes.

If one was to reverse engineer this, that means you made some assumptions on pulp cash flow for that?

Yes, we considered our view of trend pricing and trend conditions in that statement.

All right. And then the NAFTA claim and the arbitration steps you're at now, what are the next steps and milestones in this process?

Well, I mean I think there will be meetings will be scheduled and our expectation is that Canada will drag BC to the table and ask them -- why aren't you taking this as seriously as we are?

But there is a clear schedule in terms of, you know, what both sides are supposed to do.

Of course we have to one, choose the venue as to where the process will occur. We have to choose arbitrators of course and then choose the chairman of the arbitration process, etc, etc. So this is not going -- if we go through the formal process, this is a multi-year type of procedure.

We're hoping we won't have to go through the full length of it. If we do, it's of course a multi-year type of process and fairly expensive. Not a major expense but still a significant expense. We're hoping that before we go through all of that process, that the parties will understand the potential ramifications as well as the issues at hand and that an overall settlement will occur way before then.

Do you have any signs already that the government of Canada is taking this seriously?

Well, I mean the government of Canada certainly is taking it very seriously but at the same time as you know the province is the one which has actually created this problem for the federal government. So of courses it on their part a focus I'm sure because of course the liability is the federals and I'm sure they're not exactly too happy with what's happening.

Okay. On the Fibrek white knight expenses, with the reimbursement that's already taken place, I guess -- what are the net expenses Mercer will have spent on the attempted acquisition? And also what are the amounts and timing of these dollars as they flow through either Q1 or are going to be in the Q2 income statement?

The best way to answer that, Andy is are they're not material on the net basis. As you know we had a CAD2.4 million expense recovery. We booked CAD2 million of that in the first quarter and CAD$0.4 in the second quarter due to the timing of the renegotiation of the support agreement. So on a net basis in both quarters, the expenses are not material.

Got it, great.

And lastly, you guys talked about or you mentioned, David, that the bond buy-back authorization is still in effect. I just wanted to clarify, is also the stock buy-back authorization in effect and how much on that authorization is left? Is it a dollar amount, a share amount?

Yes, we had CAD25 million on both. We have CAD10 million left on the bonds and CAD15 million on stock. Our interest is more on debt reduction at this stage.

Okay. Thank you much. I'll go back in the queue.

Thank you, Andy.

Operator: Your next question comes from the line of Paul Quinn with RBC Capital Markets. Your line is open.

Yes, thanks. Taking a lot of questions. I just had one last one.

China's taken in a lot of pulp in the last three or four months. What's your comfort level of current inventories over there?

Well, you know, I think the problem with the situation right now is I think the buy-in happened a lot earlier and bigger than what should have happened in the first quarter. So there's going to be a probably a short period of adjustment. But let's say through the rest of the year, I think that certainly the demand side in China is continuing to grow because of the new capacity as well as the fact that old capacity is being taken off.

I think the problem what we're seeing in China is one where you having non-traditional sellers increasing the amount of volume that they are shipping which probably was volume that they couldn't place as paper in Europe going and diverted to the China market. So I think there's probably a possibility of some overhang in terms of inventory in China. But I don't think it's going to be a significant one where we're going to be faced with weak prices moving forward because the hardwood side of course has come up significantly. The gap in China between hard and soft is very narrow, it's not going to close. And therefore my guesstimate is that we should after May start to see significant improvement.

Of course we're headed now to the summer months too but we also have a lot of maintenance downtime including Rosenthal and everybody else. So, you know, I think it's not so bad as a lot of people are worried about.

Okay. And just I guess lastly, incremental, what's your estimate of incremental market pulp from the integrated mills in Europe?

Well, I'm sure that you saw the numbers in terms of shipments into China from Finland, right?

Yes.

And of course already they're about half of what the total shipments were last year of about 250,000 tons. All of last year was only 500,000 tons. So within the first four months, we're already half of what the full year amount was. So clearly increase from even last year and last year's number was an increase from the year of probably another 200,000 tons. So the incremental amount seems to be about another additional, say, 200,000 tons. It's a significant amount but it's not a huge number if you know what I mean. It seems to be increasing annually kind of at that type of rate.

Okay, great. Thanks. Thanks for the color. Good luck.

(Operator Instructions).

And your next question comes from the name of Phil Gresh with JPMorgan. Your line is open.

Hey, good morning. Thanks for taking my question.

I just wanted to ask about the additional capacity that's going to be coming on line later this year, early next year by Ilim. Obviously that's all going to be targeted at the China market and there can be some volatility there at times. I just curious how you're thinking about that in the context of the longer term commentary that you gave us?

Yes, I think towards the end of this year, we're going to start to see of course Ilim's production now starting to ramp up. The incremental increase when they're at full capacity we believe is about an additional 0.5 million tons,clearly targeted pretty much all for China. We believe that based on the growth of tissue as well as coated and other grades of paper in China, that this incremental increase will be absorbed.

Now whether you're going to have some disruptions initially, it really depends on how the Ilim approaches the market. My feeling is that net-net as long as we transition right, the impact should not be that adverse into 2013. Mainly because I think there's going to be continued tightness overall in terms of overall raw material, and I think the hardwood guys are doing a fairly good job hopefully and as long as both parties are controlling their overall supply, I think increase in supply out of Ilim will be not as adverse as one would expect.

Okay. That's helpful.

I guess just in terms in that same vein in terms of China demand, with the machines that are coming online, how would you think about the long-term growth rate over there over the next two to three years?

Well if you look at the plan for China in terms of overall hygiene grade, of course their plans in the next several years is enormous. Now whether it actually goes like that, we'll have to see. But certainly this year we know that the capacity increases as well as capacity shut-downs of the old machines are such that there's going to be an increase in demand for virgin fiber as well as waste paper. And so if you just look at a 9 million ton number that the government of China has announced of closure of old capacity, clearly a lot of that is going to be packaging grade. But there's going to be a lot of which is going to be again in very poor quality tissue and printing and writing. And even if it was the packaging grade, it will suck up a lot of the waste paper.

So if waste is going to be sucked up to meet the demand coming out of China, then of course it also means there's going to be a lack of waste and that will drive all of the raw material price,because clearly the alternative is virgin material.

So this transitioning from old production which was more agricultural-type of raw material as well as non-wood-based raw material to more of a wood-based-type of raw material is going to be what is going to continue to support this demand. And we said the region that China is doing this is a combination of environmental issues as well as the fact that clearly the living standards are improving. But I think what's clearly driving it is really the environment because of course these old paper mills are not just highly polluting from an energy perspective but also extensive water pollution and of course water issues are very serious over there.

Right. I guess just the follow-up would be do you think the China market over the next let's say two years is going to grow enough to offset some of the declines seeing in the developed markets?

Yes. I mean, net-net, statistics clearly indicate that the decline in developed countries have been more than offset by the growth in the China market. So it's clear even to today that the growth in China has essentially supported the overall demand in growth for paper as well as pulp.

And I don't see any particular reason why you have a sudden decline in consumption in the developed countries that could not be offset by the continued growth in the China market. Certain categories, yes -- but I think overall, I don't see that occurring. So yes, we believe there's going to be a positive growth rate on a global basis in fiber because of the emergence of China.

Okay. Thanks a lot. I appreciate you taking the questions.

Okay.

There are no further questions at this time. Mr. Lee and Mr. Gandossi, I turn the call back over to you.

Well, I appreciate everyone for attending today's call. And thank you.

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