Mercer International Inc (MERC) 2012 Q4 法說會逐字稿

Good morning and welcome to Mercer International's fourth quarter 2012 earnings conference call. On the call today is Jimmy Lee, Chairman, Chief Executive Officer and President 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, Martina. Welcome, everyone. As usual, we'll begin with formal remarks, after which we'll take your questions. For Safe Harbor, 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 fully described in the press release and with the company's filings with the Securities & Exchange Commission. So I'll start with the key financial aspects and then pass the call to Jimmy. Relative to the third quarter average, NBSK pricing was up in all markets, however, the stronger Euro partially offset these price gains. Demand remained fairly strong. The Chinese demand slowed down late in the quarter due to the pending Chinese New Year holiday.

Overall, 2012 was Mercer's best production year ever with Stendal setting an annual production record and Celgar and Rosenthal both had their second-best production years. We also achieved an annual sales tonnage record this year. However, due to -- relative to Q3's record pulp sales, Q4's sales were down approximately 69,000 tonnes. Lower sales in Q4 combined with production resulted in an increase in finished goods inventory of approximately 14,000 tonnes.

Pulp prices remain low but demand and low inventories created pricing momentum in the fourth quarter with average prices up between $25 and $30 US on average. The European list price ended the year at $810 US per tonne. And our Chinese list price was $660 US per tonne. Since then, we've seen a modest upward pricing pressure in Q1.

And as you'll have seen in the press release, we reported a net loss of EUR5.2 million for the quarter or a loss of EUR$.09 per basic share compared to a net loss of EUR9.7 million or a loss of EUR0.17 per basic share in quarter three. Our Q4 2012 net loss includes approximately EUR1.7 million of net noncash gains primarily related to the mark to market valuation of our fixed interest rates lock. And before these noncash items, basic EPS was a loss of EUR0.12 per share. We recorded quarterly EBITDA of EUR21.3 million or approximately $27.6 million US. This compares to EUR22.3 million or about $27.9 million US in the third quarter this year.

The most significant impact on our EBITDA this quarter was higher NBSK pulp prices across all markets which increased our EBITDA by EUR7 million relative to Q3 and offsetting the impact of higher prices were lower pulp sales volumes and the negative foreign exchange impact on the stronger Euro as I mentioned earlier. Switching to cash flow, overall our cash position is approximately EUR22 million lower than at the end of Q3, sitting at EUR104 million or approximately $137 million US. Quarterly working capital movements decreased cash by approximately EUR28 million on a net basis, primarily due to a significant decrease in payables which included approximately EUR10 million of interest paid on our senior notes in our Stendal facility.

Capital expenditures drew approximately EUR9 million during the quarter, and of this total, EUR6.4 million was spent on Stendal's Blue Mill project while the remaining EUR2.6 million was spent on high-return capital projects at Rosenthal and Celgar. Our working capital movements in the 12-month period ended December, excluding cash and short-term debt, decreased cash by approximately EUR6 million, down from EUR155 million at the end of Q4 2011. The reduction was primarily due to lower receivables along with a small reduction in wood inventories. At December 31, 2012, we had approximately EUR26.2 million of undrawn revolver available at Rosenthal and approximately CAD24 million available at Celgar.

Our EUR104 million of cash December 31 is compromised of approximately EUR37 million for the restricted group and EUR67 million at Stendal. Net debt to equity on a consolidated basis at December 31 is up slightly from Q3 but remains a little over two times equity while the restricted group's net debt to equity is essentially unchanged at about .5 times equity. I want to remind everyone again that many of our competitors report using IFRS and as such, account for major maintenance using a different method than we do.

In accordance with US GAAP, we expense all non-major capital maintenance costs in the period they're incurred, while for those reporting under IFRS, non-capital major maintenance costs are capitalized as property plant and equipment and then amortized over the period ending with the next major maintenance through the depreciation and amortization line.

So, as a result, financial performance comparisons to many of our competitors using certain metrics such as EBITDA are no longer on an apples-to-apples basis. So I'll highlight for you that we expensed approximately EUR6.4 million of major maintenance cost in Q4 and about EUR14 million for 2012. The majority of these would have been eligible for capital treatment under IFRS. So that ends my overview of the financial results and I'll turn the call over to Jimmy.

Thanks, David. Good morning, everyone. We're generally satisfied with our fourth quarter results, given the challenging state of the market. We believe pricing reached bottom in the third quarter and we're encouraged by the modest pricing momentum experienced in the fourth quarter. On the production side, I'm pleased that our overall continuing focus on reliability has resulted in the annual pulp production record.

In addition, the strong production translated into record electricity and chemical sales this year. And we've sold a record volume of pulp this year, surpassing our previous record by about 28,000 tonnes. Our energy and chemical revenue in Q4 exceeded our interest expenses by approximately EUR3.5 million which is significant given current pulp prices. In other words, our by-product sales suppressed our debt covering charges by 25%. This is a simple measure but it highlights the value of our strategy to increase our by-product sales. In the fourth quarter, average NBSK list prices rose slightly in all markets, with European quarterly average list prices rising $26 US to $803 US per tonne and the Chinese quarterly average list price rising $32 US to $662 US per tonne.

I'll talk a little bit more about recent pricing developments in a moment but first, let me comment on the mills. After adjusting for Stendal's annual maintenance shut, our mills ran reasonably well in the quarter. Celgar and Stendal both experienced some unplanned down time. However, Rosenthal continued to benefit from its Q2 recovery boiler upgrade, achieving a new quarterly pulp production record. In total, we produced approximately 350,000 tonnes of pulp this quarter, compared to 373,000 tonnes in the third quarter and 365,000 tonnes in the fourth quarter of 2011.

Our Q4 production was broken down as follows. Stendal produced 139,000 tonnes. Celgar produced 117,000 tonnes. And Rosenthal produced 94,000 tonnes. In addition, the mills produced almost 406 gigawatt hours of electricity in the quarter compared to 437 in Q3. Turning back to the pulp markets for a moment, we believe that the NBSK pulp market bottomed out in Q3. In Q4, we experienced modest price increases, however the momentum was muted by the Chinese buyers essentially exiting the market in December.

This caused NBSK-produced inventories to rise about three days to 29 days at the end of December. At these inventory levels, the NBSK market is still considered to be balanced and has historically led to price increases. Chinese demand remains low in part due to the Chinese New Year holidays, but we believe that customer pulp inventories are also low. The resulting expected increase in demand has prompted producers to announce a $20 US price increase effective February. This will increase the Chinese list price to $680 US per tonne. In Europe, the $30 US increase for January was not successfully implemented, as Europe continues to struggle with weak paper demand and slow economic growth. A $10 US increase has been implemented for February, taking the European list prices to $820 US.

As I noted, producer inventories were at 29 days at the end of December, and we believe that the January statistics will show that we remain at balanced levels, creating a good foundation for further price increases. In addition, hardwood pulp inventories are down five days to 38 days. The price spread between hardwood and softwood remains narrow and we expect to see further demand increases resulting from reverse substitution as papermakers increase amount of softwood in their recipes to take advantage of low NBSK prices to reduce their overall costs. Europe continues to suffer from weak economic growth which has resulted in weak paper demand. The current economic dynamics 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 upside pricing momentum. However, new production in Russia is scheduled to come online in Q1 and though we believe this incremental production will be offset by incremental demand, it may take a quarter or so before the market rebalances. Last quarter, we noted our belief that inventories in China were low despite strong shipments, and as such, we felt that traders and customers would need to stay in the market. However, we saw demand weaken slightly in Q4, likely in anticipation of the new Russian production coming online.

We believe that customers will have to re-enter the market before that new production is available. Consequently, we're expecting Chinese demand to pick up following the Chinese New Year holidays. In the long term, we expect the Chinese market to continue to grow as the industry adjusts to the almost nine million tonnes of polluting annual pulp and paper capacity that was scheduled to be shut down in 2012. Many of these older facilities use recovered or nonwood fiber and when this capacity is replaced with modern facilities, the demand for high-quality pulp will grow. Even after these closures are complete, there remains significant additional pulp and paper capacity in China that is outdated and highly polluting. It is expected the Chinese government will target additional capacity closures in the future.

We continue to believe that the growth in China and other economies will increase demand for NBSK in the medium to long term as consumers increase their use of tissue-based products. We're not alone in this belief as many of our customers are investing heavily in new paper and tissue capacity in anticipation of this expected incremental demand. For example, two large tissue producers have publicly announced plans that when they combined will add a total about 50 tissue machines at various sites by the end of 2015.

These announced machines equate to approximately 2.3 million tonnes of incremental tissue capacity. Our pulp sales volume totaled 335,000 tonnes in Q4 compared to 404,000 tonnes in quarter three of 2012, and 400,000 tonnes in Q4 2011. Let me now take a moment to discuss developments in the wood markets. European fiber markets, noticeably tightened late in Q4. Seasonal demand for sawmill residuals from the pellet industry combined with weather-related challenges that limited harvesting, drove chip prices higher and to a lesser extent, pulp log prices.

We anticipate that we'll see German fiber costs rise as seasonal demand and limiting harvesting put pressure on fiber prices in Q1. 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 but we'll continue to monitor them, of course, closely. In British Columbia, our fiber calls were down in Q4 relative to Q3, primarily due to increased chip supply in Celgar's fiber basket. The sawmills near Celgar are wrapping up production to meet demand from recovering lumber markets.

As a result, we expect Celgar's fiber cost to continue trending slowly downward in Q1. We are currently satisfied with Celgar's fiber inventories but as always, we continue to monitor them closely. We continue to look for new sources of fiber. We are currently working with the governor of British Columbia and our suppliers to develop greater efficiencies in processing residual fiber harvest waste, otherwise known as (inaudible). We remain hopeful that we will be able to find both technical and procedural solutions that will allow us to more effectively access this resource. I hope to have more to share on this topic in the future.

Last January, we announced our Blue Mill Project at Stendal. We're excited about this project because it will create an additional 30,000 tons of pulp production capacity and includes the installation of a new 40-megawatt turbine. We expect to invest approximately EUR40 million in this project with EUR12 million that's coming in the form of nonrefundable government grants. Overall, we're anticipating this project will pay for itself in about two years.

We also expect to benefit from excess energy-generating capacity going forward as each incremental future investment in pulp production will also increase our energy capacity. We regularly get questions about the timing of our annual maintenance shuts, so I would like to highlight what our 2013 shuts will be. Celgar will have its annual shut in Q2, Rosenthal in Q3, and Stendal in Q4. During the quarter, Celgar negotiated a new five-year labor agreement with its union. The new agreement expires April 30, 2017. This is a critical agreement for Celgar because we are expecting it to pave the way for a new level of cooperation between mill management and the union. With respect to our NAFTA claim, we have been working with our advisers 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'll continue to provide updates as we move through the process. If I can close with a few observations, we continue to, of course, watch the NBSK market very closely. Statistically speaking, the market is in a balance, based on producer inventory levels. In addition, customer inventory levels are low so we're optimistic that the pulp market will continue to strengthen, despite the incremental production that is coming online.

We believe that NBSK pulp prices will continue to slowly climb through Q1. We remain strong believers in the medium- to long-term NBSK supply demand fundamentals, which we foresee as being driven by increasing economic standards of the emerging markets. That's the conclusion of my prepared remarks and I'll now turn the call back to the operator so that we can open the call for questions. Thank you.

Ladies and gentlemen, if you would like to ask a question, star one on your telephone key pad. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Bill Hoffmann from RBC Capital Markets. Your line is open.

Good morning. Jimmy, can you talk a little bit more about the shuts that you have this year, whether you've got any major projects or whether they're just more normal than they were prior years?

I think they're pretty much normal. Of course, you know, we have the tie-in of the Blue Mill but that shouldn't really produce any additional downtime than normal. There is of course the ongoing of capital investments.

You mentioned some operating problems at Celgar in the fourth quarter. Can you just talk a little bit about that, where you are with that site right now?

Could you repeat that again?

I said you talked a little bit about operating problems at Celgar in the fourth quarter. You took some extra downtime. I wondered what was going on.

That was really more of a, let's say kind of an error during the start-up. And there was, of course, some items that should have been addressed during the major shut and therefore, the start-up was a lot more difficult, subsequently, we had to take a second shutdown to deal with that. And it has been resolved. So now it's running quite well.

Okay. Thanks. And then just final question, just in regards to the Chinese market, you mentioned some, you know, the closures that were supposed to happen in 2012 with some skepticism about how much. Do you have any real sense of what they've shut so far of this sort of high-polluting pulp capacity and what might more happen in 2013?

We're hearing that essentially the shuts this time around, of course, were occurring where you know, they were very much serious in the sense, you know, certain equipments were knocked down and of course the authorities are taking measures to ensure that they don't restart after they leave. So I think the government in China is very much committed to essentially eliminating these facilities because, of course, environmental pollution as a whole is very much a very high item in terms of their policies moving forward. So I think unlike in the past where you know, of course, we've heard a lot of mills which are shut and restart, I think this time around, those mills essentially are going to remain down. And also, as you know, the paper situation in China, because of new capacities, of course their pricing situation is quite depressed.

Supply availability is high. These mills are not competitive. So I do believe you'll not see these mills come back.

Thanks. If I may, just as a last question, between the new Russian capacity as well as additional hardware capacity that we expect this year, your sense that may take through the second, third quarter to have markets start to balance better?

Well, you know, I don't think that the incremental Russian demand is going to have that much of an impact. But I think because, of course, everybody is expecting it, we are going to probably have kind of a moderate price increase rather than the more stronger increase that one would expect. As you know, both Resolute and of course, Domtar is scheduled to take additional capacity off so you know, if you're talking about the actual increases, it's not that significant.

And at the same time, there's still a lot of very marginal mills which are operating at pretty significant losses at these pulp price levels. And therefore, once the winter is over, there's every possibility that there may be production curtailment for economic reasons. So I think that one has to expect that the supply side will not be as robust as, you know, everybody is expecting. Certainly the hardwood is a lot more challenging. There's no question about that. But in terms of the softwood, you know, with the continued growth and in tissue capacity, certainly in China, I'm very optimistic that this incremental supply will be more than sufficiently taken up fairly quickly.

Great. Thanks for your thoughts.

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

Good morning. You know, it looked like lower costs were a big part of the improved performance particularly in the restricted group. Can you talk a little bit more about what the puts and takes were relative to the third quarter there?

David, you want to comment on that?

Yeah, Richard, there aren't any really big cost changes. You know, I think it has more to do with fixed cost coverage and timing of maintenance shuts. Really the only material items.

Okay.

You know, fiber, chemicals, all of that kind of stuff has been relatively stable.

Okay. How much did the Celgar unplanned downtime end up costing you in the quarter?

Well, probably about 5,000 or 6,000 tonnes I would guess.

You guys talked a little bit about the new union agreement you have there at Celgar. Any idea what the labor cost increase that you might expect from that will be on an annual basis?

Well, it's the same as the -- it's the same as the Canfor pulp pattern agreement. It has the two bonus payments in years one and two then I think it is two and a half, two and a half, three for years three, four and five. What we did was we spent most of our energy talking about the need for sustainability agreement which is sort of an add-on to the traditional collective agreement which talks about doing things differently, more flexibility. We've got some dual trade ticket opportunities now.

So it paves the way for, you know, efficiencies and just breaking some of the traditional patterns that have plagued DC labor for many years. So we're quite excited about it. The wage increase is a small thing in the grand scheme of the costs of a pulp mill. It is really more about the level of flexibility and structure that you could put into the mill to drive -- improve the liability and higher production levels.

Okay. I see. And just one last housekeeping question. Can you guys give us the sales volumes by mill?

Yeah, I can do that, Richard. In the fourth quarter, sales volumes for Rosenthal were 89,900 tonnes. Stendal was 143,000 and Celgar was 102,300 tonnes for a total of 335,200.

Great. Thanks a lot, guys.

Your next question comes from the line of Mark Kennedy from CIBC. Your line is open.

Good morning. First question I guess, Jimmy, just with regards to some of the recent further announcements of paper machine closures by Scandinavian producers, do you expect that's going to result in more integrated pulp supply being turned on to the market?

Well, certainly, last year, that had a big impact in terms of the China market. There's no question about that, and we expect that those may continue. But at the same time, you know, surprisingly, the year has been lot stronger than I think everyone has expected. I think if you take the Euro kind of levels, last year certainly was probably reasonable to sell what you couldn't sell into Europe essentially into the China markets. And still, you know, it was probably not the best markets which certainly wasn't so bad.

But I think with the Euro being where it is today, I think, you know, the attractiveness certainly is there. I think, you know, considering the high cost continued to be, you know, because of the wood situation, et cetera, in Europe, I think those producers probably will reassess really whether it's more economic to really sell into China or essentially take the incremental production downtime. So I think that those impacts will be pretty much similar if not maybe trending down, if Euro continues to, you know, be at these kind of more stronger levels.

Okay. And then just coming back to pulp pricing, I mean, you know, certainly the North American list from the September low has moved up, you know, now probably close to $70 a tonne. Now, you guys in terms of your average realized Euro price didn't see a significant move in Q4. Is there any guidance you can give us in terms of what we should be expecting from Q4 into Q1 here?Should we be looking for increases in the range of EUD10 a tonne or closer to EUD25 a tonne because between discounts and everything else, sometimes it is hard to gauge this stuff.

Of course our main markets is Europe and China. So the American, US list isn't as important to us. It is really the European list and the Asian list. I think, you know, China certainly, the prices dropped last year much more than any of the other markets. And that was, of course, a combination of the fact that you had additional tonnes coming in from probably this deintegration of papermakers' pulp essentially finding their outlet in China.

So the Chinese prices dropped much faster and further than any other market and I see the recovery in China market probably going to be stronger through the year than the other markets. And I see stabilization in Europe because I think we're pretty much operating at kind of like flat conditions. I don't see demand in Europe dropping, you know, much more than what it is at these kind of levels. So I think the European market, because of the supply dynamics, will continue to show moderate incremental increase in price and the China market essentially experiencing much more stronger type pricing through this year.

Okay. Then finally, David, maybe if you can just highlight again sort of cap ex expectations for 2013?I guess Stendal or sorry, if you can break out Project Blue Mill separate from other sort of expected cap ex.

Yes, sure Mark. So start with Rosenthal, capital budget is about EUR6.5 million. High return projects, nothing too large. Celgar is just a little shy of EUD5 million. And Stendal's got about EUD2.5 million of high return and almost EUD27 million left to spend on Blue Mill for the year.

Okay. That's great. Thanks, guys.

Your next question comes from the line of Andrew Shapiro from Lawndale Capital Management.

Hi. When you have the unscheduled downtime on Celgar, you provided kind of the tonnage that would have been sold at approximate sales realizations and gross margin percentages, we can probably estimate the impact. Can you further assist us in how much energy sales and cash flow this downtime may have cost this quarter?

Can't really do that off the top of my head, Andy, sorry.

One for one. Andy, I think approximate numbers to use is a one for one type of thing. One tonne is equivalent to like one gigawatt hour.

Okay. And then from -- is there an energy sales realization kind of number to then try to take a stab at the cash flow loss?

I think you can try to get an approximation from what our overall gigawatts production of sales were and what our income stream was.

Okay. I can't remember, energy was broken out separate from chemical?

I think it was basically -- you'll see the gigawatt production and I can't remember -- David?

Is the chemical and energy revenues --

I think we probably today have much --

Chemical, we've guided is about EUR11 million of the total energy in chemicals.

Okay. Great. Follow-up for just a little bit more clarification, on the grant programs, you've got some grants coming in for Project Blue Mill. Is there talk in Canada or in Germany of any additional grant programs on the horizon for which you might be able to avail yourself of and take advantage of additional technological upgrades?

Yeah, well there's always -- there always seems to be new opportunities in Germany. You know, if you've got the right type of project that's interesting to them, you know, you still hear about opportunities in the 30% range. In Canada, you know, there are -- every year, there's sort of a topping up of what they call the IFIT programs which are basically grant money for first-in-kind technology investments. We took advantage of one of those for one of our chemical recovery projects that we did last year early in the year. Yeah, there's still opportunities and lots of discussion about transformation assistance coming from governments globally. So we'll continue to participate in those to the extent that we can identify.

A few follow-up questions here to get a little bit of color. Ilim has been progressively delayed. From your eyes out there on the street and in the industry, when do you expect the supply to actually find its way on to the market?

Well, yeah, we've been hearing rumors that some -- they've been having some installation problems and that may have resulted in this kind of recent delay. I mean of course, the winter conditions in Siberia, as you know, is extreme. So I would expect that, you know, the delays certainly are taking a lot longer than they probably expected. But I would not be surprised that actually if they start to wrap up sometime in Q2 rather than really Q1.

Okay. And again, with eyes on the street that you have, you know, the recent China anti-dumping announcement focused on dissolving pulp. But as those issues get resolved, do you see any of the remedies of that problem having any carryover impact into the NBSK markets in the form of, you know, conversions or anything else?

No. I mean, I think they're targeted, dissolving pulp market producers, because, of course, dissolving pulp prices have dropped significantly and there's a lot of overcapacity. There's also, I think, some thoughts that also the hardwood production or the producers in South America would also have similar type of actions taken against them. And, of course, that may moderate, you know, where the prices for both hardwood and dissolving are. That, of course, from a relative basis probably helps NBSK in the sense that there seems to be this feeling that hardwood supply and pricing certainly has, you know, this impact on NBSK which we don't quite necessarily believe but at the same time, certainly anything that will move prices higher and stabilize them certainly benefits us in the long run.

And even after the recent price hikes and taking into account Resolute and Domtar, the pricing where we're at still has got to be bleeding several higher cost players. After winter's over, do you have any views as to what plants might be considered high cost at risk of coming out of the market?

You know, I can't really comment about individual mills. I think the best thing to do, Andy, is probably look at where the closures were and the prior 2008-2009 scenario where you saw essentially the announcements and you saw the closures and probably that would give you a pretty good idea as to which mills will be the most vulnerable because I don't think that really cost conditions have changed that significantly for them.

Now, a lot of those plants, however, when they reopened, reopened under Chinese ownership or Indian ownership. And they seem to be running those plants with a different -- i don't want to say profit motive in mind but they seem to be more indifferent toward positive cash flow.

Well, you know, of course, they have deeper pockets. But at the same time, you know, I don't think anybody likes to lose money continuously. There comes a point where it makes more sense to look at economic downtime versus essentially running the mills and continuing to produce losses. It is just really, you know, a fixed cost kind of balance between what the expectations are.

Question about --

-- 1.5 million tonnes of that high-cost capacity running in Scandinavia as well that we saw closures and restarts on.

Okay. So they could be candidates for coming out. Last question for you, you've been presenting at a few conferences of late. I saw you put up a new slide show on your web site. Thanks for that kind of detail. What do you guys have planned in the coming quarter?What's on the calendar and where will you be?

There's nothing in the current quarter. But we've got most of the bank conferences during the year that we'll be attending, similar to last year. We do about ten in a year, actually. You know, if pulp prices really start to pick up following the summer, then I'm sure we'll do a marketing tour through the US in the fall. Generally our idea.

Okay. Thank you.

Your next question comes from the line of Paul Quinn from RBC. Your line is open.

Thanks very much. Good morning. Just a question on, you mentioned the integrated mills in Europe selling market pulp. I wonder if you could quantify that, is that sort of 500,000, 700,000 tonnes? And then with paper closures in that market, do you expect that to increase going forward?

Well, I mean, you know, of course it is very difficult to know exactly how much the incremental tonnes are. But based on shipment volumes coming out of Scandinavia into China, the increase year over year probably, you know, the amount that we're talking about somewhere in the range of about 300,000 or so incremental tonnes. I don't think that, you know, in terms of forecasts, will that grow to another 300,000 and become 600,000? My feeling is probably not. I would expect that clearly there will be some additional tonnes coming out of this deintegrated pulp but I would not expect the level of increase to be similar to the type of increases in prior years. So that's basically my feeling.

Okay, that's helpful. Then besides the Ilim expansion project there, what other additional Greenfield facilities have you seen on the radar screen for planned on the softwood side?

There's still talk about this Belarus pulp mill, as you know that looks like it is getting some Chinese government -- or at least Chinese producer kind of support. So that's generally a possibility. There's still kind of talk about another Russian mill being built. You know, but it is difficult to really say with any level of confidence that those will actually be completed.

The big Scandinavian guys have stepped right away from Russia in the last six months.

You haven't seen anything out of South America in terms of radiata.

We haven't heard any announcement in terms of any radiata increase or any new southern softwood really.

Okay, and then just lastly, if you could make just a general comment on pricing, pricing mechanisms, it seems like in the fall, there was a number of list price increases but it didn't seem to flow to the bottom line which suggests that discounts, you know, widened further. It seems like the level of discounts is getting up to, you know, well, very high levels and just wondering if that mechanism is completely broken yet.

Yeah, I think the problem is initiated by the fact that you have these marginal mills which essentially have restarted or essentially have lost their core customer base. So the discounting unfortunately is being kind of driven by these players which are forced to essentially take whatever they can because, you know, the customers know they're not going to be in the market in the future. So this market clearly has been disrupted in the second half of the year and in particular, in Q4 because of this type of behavior on the part of, you know, these producers. And unfortunately, they have not essentially taken any economic downtime.

They continue to be very disruptive. And in a market where demand side for the paper product is not robust, of course, they're going to seize on any opportunity essentially to reduce their raw material cost. I think they're, certainly in terms of our customer behavior, it is not abnormal. What is really disappointing for me is that, you know, we're having these kind of more not really long-term producers essentially coming in and disrupting the market and this is influencing pricing movements over the last couple of quarters. I think those impacts clearly, in my mind, will start to moderate, mainly because I think that the demand side, as I said, in terms of China will pick up. We've really have a lot of tissue machines which were installed second half of 2012.

We continue to see additional tissue machines essentially ramping up through the balance of this year. And when you're talking about, you know, two, three million tonnes of tissue capacity additions, you're talking about significant amount of softwood that needs to go in. So I'm very comfortable and confident that this kind of impact will become less and therefore, you know, things should improve. But as you know, the discounting is very extreme and it is driven by these guys who are essentially not there for the long term.

Okay. Great. Thanks, guys. Good luck.

Thanks.

(Operator Instructions). Your next question comes from the line of Mark Friedman from Gates Capital.

Hi, guys, just two quick questions. One, can you talk about payables at the end of the quarter and why those are where they are, and second, with regard to the Stendal facility, whether you got a waiver or have discussed with the banks on the leverage of the covenant.

Yeah, so the payables market is really mostly to do about timing. For example, there was $10 million of interest payable at the end of the previous quarter. Paid in the quarter. So other than that, it is just timing. On the Stendal, paid on Stendal is, we achieved our covenant levels so we pulled our waiver. So you know, all steaming ahead. No issues there.

Okay, great. Thanks.

We have no further questions at this time. I turn the call back to the presenters.

Okay. Well, I thank everyone for, again, attending today's call. And hopefully, you know, the next quarters will continue to see further improvements in terms of pulp prices. Thanks very much.

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