Mercer International Inc (MERC) 2012 Q3 法說會逐字稿

Good morning and welcome to Mercer International's third-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 turn the call over to David Gandossi.

Thank you, Amanda, and good morning, everyone. 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 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.

So I will speak to some of the key financial aspects of the quarter and then I will pass the call to Jimmy who will speak about the particulars of the markets, our operating performance and some of our strategic initiatives.

Considering our view that this quarter likely marks the bottom of the cycle, we are reasonably satisfied with our quarterly results. Relative to the second quarter of 2012, average NBSK pricing was down in all markets and was the main factor in the drop in our quarter-over-quarter results. After a very slow July, demand in August picked up sharply, particularly in China.

Operationally our mills ran well in the quarter with our consolidated production tonnes at near record levels, strong demand from China allowed us to set a new quarterly pulp sales volume record. Sales were up approximately 55,000 tonnes relative to the second quarter and as a result we have seen our finished goods inventory fall relative to Q2.

Pulp prices bottomed out in the quarter, but increased demand from Chinese paper producers and traders reentering the market in August on pricing was in the low $600 range allowed producers to secure a $20 price increase taking the Chinese list price to $640 in September. Since then we have seen some modest upward pricing pressure with the November Chinese list price at $690.

European pricing also weakened this quarter as they continue to struggle with weak paper demand and sluggish economic growth. But there has been some upward -- some recent upward pricing pressure in this market as well.

Although it is only a small position, our fixed-price pulp swap contract that we entered into Q2 generated gains of approximately EUR0.3 million in the quarter. As you will have seen in our press release, we reported a net loss of EUR9.7 million for the quarter or a loss of EUR0.17 per basic share compared to net income of EUR1.1 million or EUR0.03 per basic share in Q2.

Our Q3 2012 net loss includes approximately EUR1.2 million of a non-cash loss primarily related to the mark-to-market valuation of our fixed interest rate swap. Before these non-cash items basic EPS was a loss of EUR0.15 per share.

We recorded quarterly EBITDA of EUR22.3 million or approximately $27.9 million. This compares to EUR32.9 million or about $42.2 million in the second quarter this year. The most significant impact on our EBITDA this quarter was lower NBSK prices across all markets which reduced our EBITDA by approximately EUR15 million relative to Q2. Offsetting the impact of lower prices were lower fiber costs, higher pulp sales volumes and higher energy prices.

Switching to cash flow -- overall our cash position is about EUR15 million lower than at the end of Q2, sitting at EUR126 million or approximately $162 million. Quarterly working capital movements decreased cash by approximately EUR0.8 million on a net basis, primarily due to a significant increase in receivables, partially offset by a decrease in finished goods inventory and an increase in accounts payable.

Capital expenditures drew nearly EUR9 million during the quarter; of this total EUR2.3 million spent -- was spent on Stendal Blue Mill project while the remainder was spent on high return capital projects at Rosenthal and Celgar.

Our working capital movements in the 12-month period ended September 30, excluding cash and short-term debt, decreased cash by approximately EUR27 million, down from EUR163 billion at the end of Q3 2011. The reduction was primarily due to significantly lower inventory levels and during the quarter cash decreased by about EUR15 million primarily due to the scheduled EUR15 million principal repayment on the Stendal facility.

At September 30, 2012 we had approximately EUR26.4 million of undrawn revolvers available at Rosenthal and approximately CAD36.3 million available at Celgar. Our EUR126 million of cash at September 30 is comprised of approximately EUR55 million for the restricted group and EUR71 million at Stendal.

Net debt to equity on a consolidated basis at September 30 is essentially unchanged from Q2 at approximately two times equity while the restricted group net debt is also unchanged at about 25 times equity.

As I have noted in the past, many of our competitors report using IFRS. The implication of this is that many of our competitors account for major maintenance using a different method than we do.

In accordance with US GAAP we expense all noncapital major maintenance costs in the period that they are incurred. While for those reporting under IFRS noncapital major maintenance costs are capitalized as property, plant and equipment and then amortized to the next major maintenance through depreciation and amortization expense. So it typically comes out in one year.

I want to remind everyone that financial performance comparisons to many of our competitors using certain metrics such as EBITDA are no longer on an apples-to-apples basis. And as a result I would like to highlight that we expensed approximately EUR3.3 million of major maintenance costs in Q3 or EUR7.5 million year to date, the majority of which would have been eligible for capital treatment under IFRS.

So that ends my overview of the financial results. And I will turn the call now over to Jimmy.

Thanks, David; good morning, everyone. As David mentioned, we are satisfied with our third-quarter results given the challenging state of the third-quarter market. We believe pricing reached bottom this quarter, but I am pleased to note that before factoring in Stendhal's scheduled debt repayment that we're essentially flat from a cash perspective, even after spending over EUR9 million on high return capital projects.

I am also pleased that our continuing focus on reliability has resulted in another solid production quarter. We achieved our third highest production total this quarter despite a slow start-up at Celgar after their annual maintenance shut.

We also began to realize the benefits from Rosenthal 2Q route recovery boiler upgrade project this quarter as Rosenthal experienced both increased pulp and energy production. Q3's strong production levels allowed us to maintain solid energy sales as we are only slightly behind last quarter's record volume.

Another way of looking at our energy and chemical revenue is that in Q3 it exceeded our interest payments by nearly EUR4 million which is significant given the current pulp prices. In other words, our byproduct sales [pressed] our debt carrying charges by almost 30% while in the same period last year our byproduct sales exceeded our debt carrying charges by nearly 18%.

This is a simple measure, but it highlights the value of our strategy of increasing our byproduct sales. In the third-quarter average NBSK list prices fell approximately $60 per ton in all markets with the European Q3 average list price falling to $777 and the quarterly average list price in China which fell to $630 per tonne. I will talk more about recent price developments in a moment, but first let me comment on the mills.

All three mills ran very well after adjusting for Celgar's annual maintenance shut this quarter. Unfortunately during Celgar's post start-up repeated lightning strikes took down the mill at multiple times resulting in some lost production. But overall we are pleased with our mill's performance as our consolidated production was at near record levels.

In total we produced 372,000 tonnes of pulp this quarter compared to 365,000 tonnes in the second quarter and 362,000 tonnes in the third quarter of 2011. In addition, the mills produced almost 437 gigawatt hours of electricity in the quarter compared to 425 in Q2.

Turning back to the pulp markets for a moment, we believe that the NBSK pulp market bottomed out in Q3. Despite the fact there is a significant amount of global economic uncertainty, the September pulp statistics had NBSK inventories falling three days to 27 days. At these inventory levels the NBSK market is considered to be below balance and that's historically led to price increases.

Although lower than historical increases in similar statistical environments, we have seen price increase announcements recently, including a $20 a tonne increase effective October 1 to the Chinese list price and effective November 1 we have seen $30 a tonne increase in both the Chinese and European list prices, taking them to $690 and $820 respectively.

As I noted, producer inventories were at 27 days at the end of September and we believe that the number will decrease slightly when the October numbers are released, putting further upward pressure on pricing. In addition, hardwood pulp inventories are down four days to 40 days. The price spread between hardwood and softwood has narrowed to a point we are seeing reverse substitution as paper makers increase the amount of softwood in their recipes to take advantage of low NBSK prices and therefore reduce their cost.

Europe's ongoing sovereign debt issues continue to severely limit European economic growth and, as a result, European paper demand remains weak. The current economic dynamic in Europe has resulted in previously integrated pulp being sold as market pulp. Consequently we continue to believe that a supply-side reduction would generate upward pricing momentum.

While in North America a previously curtailed high cost mill is in the process of restarting and new production in Russia is scheduled to come online early next year. We believe this incremental production will be offset by increasing incremental demand.

Last quarter we noted our belief that inventories in China were low and as such we felt that traders and customers would need to reenter the market. We saw this begin to happen in August. In fact, demand from China was significant enough that we sold a record number of tonnes this quarter and it's continuing to put upward pressure on pricing in all markets.

Although demand today is high, we do not believe strong Chinese demand will be short lived. Rather we expect that the Chinese market will continue to grow as the industry adjusts to the almost 9 million tonnes of polluting annual pulp and paper capacity that was scheduled to be shut down by the end of September 2012.

Many of these older machines use recovered or non-wood fiber and when this capacity is replaced with modern facilities the demand for high-quality pulp will grow. Even after those closures are complete there remains significant additional pulp and paper capacity in China that is outdated and polluting. However, it is unclear if and when the Chinese government will target additional capacities for closure.

We also believe that growth in China and similar growing economies will increase market tightness as consumers increase their use of tissue-based products in the medium- to long-term. We are not alone in this belief as many of our customers are investing heavily in new paper and tissue capacity in anticipation of this expected demand. Our pulp sales volume totaled a record 404,000 tonnes in Q3 compared to 349,000 tonnes in the second quarter of 2012 and 321,000 tonnes in Q3 2011.

Let me now take a moment to discuss developments in the wood markets. European fiber prices remain at historic high levels, but they continued their downward trend in Q3. Demand for fiber remains low from the board and pallet industries and some milling activity was stronger than expected. We anticipate that we will see a slight increase in fiber costs in Q4 as seasonal demand puts pressure on fiber prices.

We continue to be able to source the fiber we need and as a result we are satisfied with our current fiber inventories in Germany, but we'll continue to monitor them closely.

In British Columbia our fiber costs were down slightly in Q3 relative to Q2 primarily due to reduced wood room costs and the effectively stronger Canadian dollar on our US dollar denominated fiber purchases. We currently expect Celgar's fiber costs to trend down slightly in Q4 as our strong inventory levels will allow us to drop certain high cost suppliers. We are currently satisfied with Celgar's fiber inventories, but we'll continue to monitor them closely.

Last quarter I mentioned that we are currently working with the provincial government and our suppliers to develop greater efficiencies in processing residual fiber harvest waste, otherwise known as burn piles.

We remain hopeful that we will be able to both find technical and procedural solutions that will allow us to be more efficient -- that will give us more efficient and reliable assets to this resource. I hope to have more to share on this topic in the near future.

In January we announced our Blue Mill project at Stendal. We are very excited about this project because it will create an additional 30,000 tonnes of pulp production capacity and includes installation of a new 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 are anticipating this project will pay for itself in approximately two years. We also in expect to benefit from excess generating capacity going forward as each incremental future investment in pulp production will also increase our energy capacity.

In October we received the last CAD200,000 portion of the grant allocated to us by the Canadian government under the Green Transformation program. This program has been extremely helpful to our Celgar mill, by far the biggest project was the installation of the new 48 megawatt turbine which has made Celgar much more competitive. But we have also been able to reduce our (inaudible) levels and the chemical cost through other smaller but higher highly accretive projects.

Ultimately we feel all of our mills are well positioned to deal with the market downturns as these types of investments have allowed our mills to continue to be among the most modern and efficient in the industry. Our modern equipment will also allow us to take advantage of the emerging opportunities in the developing [bioeconomy].

We regularly get questions about the timing of our annual maintenance shuts. So I would like to highlight that our remaining 2012 shut will be at Stendal. This 10 date shut took place in October and was completed as planned. However, they lost about 10,000 tonnes of production during start-up due to a heat exchange failure.

I would also like to mention that Celgar's labor agreement expired on April 30. (inaudible) pulp was selected by the unions as the target for negotiating a pattern labor agreement in British Columbia and in Q3 they settled on a new contract. With the (inaudible) agreement as the starting point we are currently negotiating with our union locals.

Our locals have taken a strike vote and now are in a position to strike after giving us formal notice. However, we continue to work towards a negotiated settlement.

We are often asked about Celgar's NAFTA claim, so I will take a moment to address it today. When we began this process we knew that it would take a long -- be a long drawn out one. However, we were compelled to pursue it as we feel strongly about our claim that we have been significantly discriminated against in terms of our requirements to self supply energy relative to our competitors in British Columbia.

We have been working with our advisors to continue to move this process forward. Based on the current schedule we expect our case to be heard in the mid to late 2014 with a decision several months after that. We will continue to provide updates as we move through the process.

If I can come to a close with a few observations. We continue to watch the NBSK market closely. We are encouraged by the strong demand in the later half of Q3. Statistically speaking the market is below balance based on producer inventory levels, but in addition customer inventory levels are low. So we are optimistic that the pulp market will continue to strengthen despite the incremental production that is coming online.

We believe that NBSK prices have bottomed out and they will continue to a close slow climb through Q4 and into 2013. We remain strong believers in the medium- to long-term NBSK supply/demand fundamentals which 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 the call for questions. Thank you.

(Operator Instructions). Richard Kus, Jefferies.

So, on the pulp price increases, how sustainable do you see these increases? I know you had mentioned about the favorable pulp statistics, but are you worried about the new marginal capacity coming online and any capacity restarts that we have seen lately?

Well, you know, the only restart that we have seen of course is the Terrace Bay one. And the maintenance shuts have had fairly, in Canada as well as our experience at Celgar and some of the technical problems we have had at Stendal.

Many of these maintenance shuts have been longer than originally forecast and lost production of course has been even greater. Therefore I think that there is certainly an inventory level both at the producers, which are at historic levels, and we know that based on the European consumer level inventories they had historic low levels as well.

So I think the price increases of course would be much more gradual than the historic type of pattern and that is really reflecting I think the uncertainties both from the European crisis as well as the general global economic weakness that we are seeing.

What we really need is more of a catalyst and I think the catalyst isn't quite yet there because people of course feel that there is sufficient pulp around considering that there is going to be the Terrace Bay restart, which of course did start up in October, as well as the new capacity that will come online early part of next year.

So, there seems to be a general complacency in the market which of course is influencing the strength of the increase. But I think in general if you look at the new machines that have been installed in China, especially in regards to the tissue sector, they have been very significant for this year as well as additional capacity that will start up early next year.

And therefore we think that a lot of that -- let's say the incremental growth in supply will easily be picked up by the new demand growth coming up. And I don't see the demand side certainly in Europe falling significantly and therefore I think we have a case for a gradual increase with the possibility that it may actually be much faster if there is a catalyst.

Okay. And then as far as China is concerned, we hear a lot about economic conditions there slowing a little bit, still growing but slowing. Have you guys felt that in the pulp market and what are your expectations there?

If you look at the demand growth in pulp from China, they have been significant over the last few years. We haven't seen, certainly from the import statistics as well as the amount of tonnes that we have been shipping into China, any real indication of weakness. And that is really because of the amount of new capacity that of course has been installed as well as the programs from the government to shut down older and polluting capacity.

So, I think there you are seeing a replacement of old machines by new ones, which will of course underpin the demand for virgin pulp as a whole. I think that the weakness that we are seeing in terms of the statistics in China certainly are not being reflected in terms of the demand growth for pulp from China to date.

Okay. And then lastly just a housekeeping question. Can you guys give us production and sales volume by mill?

Yes, I can do that, Richard. So production volumes for Q3 at Rosenthal 90.8%, Stendal 169.2% and Celgar at 113.4%. Sales volumes, Rosenthal 86.9%, Stendal 179.6% and Celgar 137.8%.

Great. Thanks a lot, guys.

Hamir Patel, RBC Capital.

I'm just wondering with North America we have seen additional fluff capacity come on and, from what I understand, some of those mills are swing mills and they are selling at least some of their volumes into the paper grade market. Have you seen that and what impact do you think that will have in the near-term?

Well, I mean we have seen generally an increase in terms of the imports into China from what we would term suppliers who have not had the level of presence there. I mean certainly we have seen a lot more tonnes over the last few years coming from Finland as well as Sweden as well as a little bit more from the United States.

Now the biggest growth in terms of those kind of de-integrated pulp has really come out of the Finnish market. And with the recent entry of Russia into the World Trade Organization, the traditional supply of hardwood -- which the Birch quality actually is quite appreciated in Europe -- certainly gives some indication that maybe some of those mills which had essentially gone out of Birch and gone into softwood may go back into Birch-based pulp production, which of course would aid in rebalancing what would be the normal type of export patterns coming out of that area.

So to date we haven't seen that, but clearly there is some indication that maybe we have reached the peak of this non-integrated or de-integrated pulp coming out of that area, which is really -- I would say which has been the most -- more significant rather than the US fluff grade.

That is helpful. And I was just wondering, was there any updates on the NAFTA dispute?

Well, I mean, we are just going through the procedural part of the NAFTA application. So I mean we are just basically picking the representatives and the president for that arbitration. So nothing really substantive has occurred and I mentioned in my prepared speech that really if assuming the normal time frame continues, we probably won't expect anything at lease 2014.

Sure, great --

At least (inaudible).

That's all I had, thanks.

Mark Kennedy, CIBC.

Just two or three questions of clarification. So for Stendal production in Q3 should we be assuming down time in the range of about 28,000 tonnes then between the 10 day shut and then the lost production on restart?

Yes, exactly, Mark.

Okay. And then, Jimmy, when you talk about the two-year payback on Blue Mill, is that on the net investment of about EUR28 million or is that on the gross investment?

No, it's on the net.

On the net, okay. Good. And then just with regards to your labor negotiations right now at Celgar, are there any sort of local issues or is this just a thing that you expect to be settled in due course?

Well, it will be settled when it is settled. All I can say basically is that there is a pattern agreement out there, clearly there are local issues. There are certain items that clearly we feel are important in terms of our situation and we are in discussions to see if we can iron out something that works for both sides.

They have of course taken the vote. To date we have not had any formal notice of a strike and therefore we are still engaged in the process of trying to come to an understanding. And if there is such a time when they do give us formal notice then of course we will make the necessary announcements.

Okay, no, that's helpful. Thanks again.

DeForest Hinman, Walthausen & Company.

(Technical difficulty) the price realizations. And can help us get a better understanding of how those work in the different pricing environments? If we look back last few years they have kind of been in the 84% to 85% range and now more recently they have moved on to the low 80%'s. And when we think about that, is there something fundamentally changing within the industry or is there something that has changed within the Company or is it a combination of both? Can you help us understand that?

I didn't quite hear the question. I guess I -- I think the first part of your question was unclear because we didn't hear it. So maybe you could repeat.

Sorry. On the price -- the mill net pulp price realizations there has been a change over the last few quarters in terms of where that percentage has been, more recently in the low 80s and then beyond that, two to three years out it was in the 85% range. Is there something changing?

Yes, I mean basically it is more reflective of the change in the industry, it is not specific to us. What you are seeing is a trend in to the higher discounts from the list that we have been wrestling with over many, many years.

So typically the industry has been increasingly seeing widening of the discounts in the list. And occasionally when the markets are extremely strong you do get some reversal of that, but the trend generally over the last several years has been still a continued kind of an upward movement.

Okay, thank you.

Andrew Shapiro, Lawndale Capital Management.

You mentioned outside of Project Blue Mill there is about [EUR7 million] of CapEx for high return projects. Is there any detail that you can provide on that?

Well, I mean they range into many different projects that of course are very accretive. Mainly they are related to energy savings and more let's say efficiencies and reduction of wood losses. So these would primarily be the focus. So they range -- we also have ongoing plans in terms of future years and they did it all related to the EBITDA 30 type of project work. So you will see a lot more in terms of efficiency gains continuing.

Okay. Just two more quick ones here. The apparent North American housing bump that we've seen, have you seen any meaningful impact on fiber supply prices?

Well, I mean (inaudible) more in terms of the North American market. And of course from Celgar's perspective what we are seeing is more plentiful supply of chips. And we expect that probably that will continue, which means that of course the pricing for those chips will be much more favorable as these sawmills increase their overall production.

In terms of the European situation, nothing really has changed. We remain at much lower levels, but there is no indications of the sawmill industry weakening much further than these extremely low levels.

Okay, and finally, grants have obviously been very helpful to you guys over the past few years. Is there any expectation of kind of new incremental programs that we might see come online that haven't been formally announced or aren't formally in the process?

No, nothing concrete other than I think the federal government in Canada still talks about extending some of their programs like the [IFID] program for example. So I mean there are little pockets of money around for certain types of innovative investments, but nothing of the scale of the green pulp and paper transformation program, for example. In Germany there still is capital available for the right types of projects and, as you know, we are taking advantage of that as part of our Blue Mill financing.

But also subsidies gradually get reduced. There is discussion amongst the Eastern -- the former East German states in regards to additional potential support because of the fact that the former East German states are of course experiencing weaker kind of economic conditions than the West.

So there is ongoing discussions as to what could be possible once this subsidization period is over. And so it is too early to say. Of course there are a lot of limiting factors as to what can and cannot be done because of the EU regulations as well as the fact that there is even more weaker states generally within the European Union.

Okay, thank you.

Bill Horn, First Angel Capital.

My question relates to a comment that you made in your disclosure saying that sales in China were significantly higher this quarter. Typically throughout 2011 you had about 29% of your sales in China. Can you give us a sense as to what percentage of sales this quarter were into China?

It's about -- I think it is 85% of Celgar's volume went into China in the quarter.

Okay. In hearing everything about this increase into China and you had indicated increased demand coming out of China late in August and into September. Were you seeing that from existing customers, your existing contracts or is that sales that you saw going into the spot market?

No, I mean it is a combination. I mean many of our customers are tissue manufacturers and of course they have ongoing expansion, so we are seeing growth in demand coming out of our regular existing customers. Of course there is also additional demand coming out of more of the speculative part which is the traders which typically come in when they see that they feel that the market has bottomed.

It is a combination of the two, the tissue clearly are in a much better position financially, so they take the opportunity during periods of weakness to buy as much inventory as well as the traders anticipating future price increases. So those would be the primary big buyers during periods of weakness.

Okay, thank you. And just a follow-up question in regards to this labor agreement, labor dispute. I don't know if it is possible, but are you able to give us a sense as to what the difference is or disparity is between what the union workers are asking for and what you are offering right now?

Well, I think right now we are really not in that position to comment on these negotiations. Of course we are hopeful that these will be resolved without a strike. And I would say that negotiations and discussions are ongoing.

Okay, great. Thanks very much. I will get back in the queue. Thanks.

George Berman, JP Turner & Company.

Good morning, gentlemen, thanks for your time. I have got just a quick question. Can you explain to me the [upwarding] costs for the September quarter jumping by about EUR40 million? It would seem to me if you have record production that your per unit costs or overall costs should come down some.

Yes, George, I am not sure -- I'm just not sure how you are handling your math there, but the cost of sales jumped really because of the additional sales volume. So we pull out of inventory at average cost based on the volume of sales. So you are right, production costs per tonne go down because you get better fixed cost coverage. But your cost of sales number will jump a big jump because we sold 404,000 tonnes in the quarter. So if you want to go any deeper than that maybe we could talk off-line and I could try to help you with your math.

Okay. And then did you take any additional bonds out of the market?

Not in the quarter. They are trading at quite a premium, as you may know.

Yes. Okay, thanks very much.

(Operator Instructions). David Quezada, Raymond James.

Wondering if you guys wouldn't mind just commenting sort of from a broader perspective how you see your energy business evolving beyond the Blue Mill project. What do you think the end game is for that and what is the long-term sort of potential?

Well, I mean we do have additional capacity at Celgar in the sense that we have a 48 megawatt turbine installed, so we still have capacity that would be available. As would mean an expansion in terms of probably our power boiler or some other source of incremental steam and that is why of course the focus is in terms of reducing earning and using -- and reducing steam consumption as a whole within the plant which would make a more available steam to turn into electricity.

The Blue Mill project, again, this is about a 40 megawatt turbine, we'll have a significant amount of capacity available on that one and therefore we will of course be looking towards further steam generation from some source to increase the overall power generation.

And we do have in terms of Rosenthal because of the fact that the recoverable project certainly has an increased amount of incremental tonnes coming out of there. In fact, it is producing a little bit better than what we originally projected. And this would mean that we do now have a fair amount of steam that we are not using in terms of our power generation. And therefore there is opportunity to install maybe an additional turbine in combination with other steam production type of facilities.

So we are going to continue to see incremental growth in the power generation. We are not going to get a significant increase clearly until we make some major investments, but you are going to see continued incremental growth still coming gradually based on present type of operations.

That's great. So I guess just to summarize, you could sort of the say that at Stendal and Celgar you have extra turbine capacity and not enough -- or opportunities to add steam and then at Rosenthal you have extra steam and opportunity to add a turbine?

That is a good way to summarize it.

Okay, great. Thank you.

Adam Zirkin, Knighthead.

Two quick ones. Just, Jimmy, on the improvement projects, you said you are expecting a two-year payback on the EUR28 million into project Blue Mill. The rest of the CapEx, do the projects have similar type economics?

Yes, I mean we are focused really on projects which have payback between, around the two to three year max. So the three years would be kind of like the outer limit but really focusing on that two year type of payback type of projects.

Got it. And David, I would like to just revisit the cost question if I can and as a follow up which is the volumes are up 26%, the costs on a dollar basis are up 26% as well. We know that fiber is a 9% tailwind, so was there something moving in the opposite direction?

Things are pretty stable. The only thing you have to maybe factor in in addition to all that is the timing of the maintenance shuts and the size of them.

Right, that is what I figured.

Because those are expensed in the quarters that they incur. So there are a few additional moving parts that might cause it to look that way.

I know it is a very difficult exercise, but is it possible to quantify the impact of the Celgar shut in the quarter?

Yes, compared to Q2 it would have increased a per unit manufactured cost per tonne by about EUR70.

EUR70 a ton. So if you were to take that number and multiply it through the volume that would give you sort of the per -- or that would give you the aggregate cost number?

Incremental over Q2, that is right, Adam.

And you'd pick up the revenue from the additional -- oh, no, I guess that that would be the apples-to-apples number, that's right. All right, perfect. Thanks, David, I appreciate it.

(Operator Instructions). Joe Licursi, BMO Capital.

I wonder if you can share with us your Q4 CapEx for the balance of the year, David or Jim.

Yes, I can do that for you, Joe. So Rosenthal's almost EUR4 million, Stendal will be about EUR11.5 million, and that is predominately Blue Mill spending, and Celgar is very light at about -- less than EUR500,000 remaining to go in the year.

Okay. And for 2013, would you have that as well?

That's a little bit far out for forecasting at this stage, Joe. So I don't think we are going to have anything large or significant to talk about. Maybe we are going to sit back into more of the EUR4 million to EUR5 million per mill type of strategy for the next year.

Okay. And how much would you have for Blue Mill? Like would you have like a net of [EUR17 million] left or --?

Yes, it will be about -- by the end of the year I think we are less than EUR20 million into it, maybe about EUR18 million. So about EUR22 million till completion.

Okay. And one last question. Do you know what your maintenance schedule will be 2013? (Multiple speakers) will occur?

Yes, so for 2013 Celgar is going to happen in the second quarter, Rosenthal will be third-quarter and Stendal in the fourth quarter.

Okay and just regular maintenance or like nothing extraordinary or --?

No, we are planning the standard 10 days shuts at this stage.

10-day shuts, okay. Thank you very much.

You have no additional questions in queue.

Well, I appreciate everyone coming to today's conference call. And I would like to conclude it. Thank you.