Mercer International Inc (MERC) 2013 Q1 法說會逐字稿

Good morning and welcome to Mercer International's first-quarter 2013 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 turn the call over to David Gandossi.

Thanks Laura. As usual, we will begin with formal remarks, after which we will take your questions. Please note that in this morning's conference call, we will make forward-looking statements similar to those that were made in the press release. According to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I'd like to call your attention to the risks related to these statements, which are more fully described in the press release and with the company's filings with the Securities and Exchange Commission.

Relative to the fourth quarter, average NBSK pricing was up marginally in all markets. However, the stronger Euro more than offset these price gains. Demand was seasonally strong in China during the quarter as buyers returned to the market following the Chinese new year holiday, while in Europe demand was steady. Relative to Q4, sales were up approximately 21,000 tons. The mills ran reasonably well in the quarter and sales essentially matched production. As a result, our finished goods inventory was up only 5000 tons relative to Q4.

Pulp prices remain low, when current market metrics are considered. But demand and low customer inventories did create some pricing momentum in the first quarter, with average prices up about $30 per ton. List prices ended the quarter at $840 and $700 per ton in Europe and China, respectively. As you will have seen in our press release, we reported a net loss of EUR0.4 million euros for the quarter or a loss of EUR0.01 per basic share, compared to a net loss of EUR5.2 million or a loss of EUR0.09 per basic share in Q4.

Our Q1 2013 net loss includes a net unrealized gain of approximately EUR4.7 million related to our non-cash gains on the market-to-market valuation of our fixed interest rate swap, offset by a small non-cash loss on our pulp swaps. Before these non-cash items, basic earnings per share was a loss of EUR0.09 per share. We reported quarterly EBITDA of EUR24.3 million or approximately $32.1 million. This compares to EUR21.3 million or about $27.6 million in the fourth quarter of 2012. The most significant impacts on our EBITDA this quarter was not having any major maintenance in Q1, and higher pulp and energy sales volumes. However, our results were negatively impacted by higher fiber and energy costs as cold weather limited the availability of wood in Europe, as well as increased our natural gas usage.

Switching to cash flow -- overall, our cash position is EUR6.4 million higher than at the end of Q4, sitting at approximately EUR111 million or $143 million. Quarterly working capital movements increased cash by approximately EUR6 million on a net basis, primarily due to an increase in payables and a decrease in raw material inventories which was partially offset by an increase in receivables. Capital expenditures grew approximately EUR11 million during the quarter. Of this, about EUR9 million was spent on Stendal's Blue Mill project, while the remaining EUR2 million was spent on higher return capital projects at Rosenthal and Celgar. In addition, Stendal made a scheduled principal repayment of EUR20 million on its debt facility.

During the quarter, Stendal submitted documentation for EUR4.4 million of government grants for the Blue Mill project, of which EUR0.7 million has been received before the end of the quarter. In total, we expect to receive EUR12 million of government grants on this project. Our working capital movements in the 12-month period ended March 31, excluding cash and short-term debt, decreased cash by approximately EUR9 million, with working capital up from EUR138 million at the end of Q1 2012. The increase was primarily due to higher receivables and finished goods.

In terms of our liquidity, at March 31 we had approximately EUR26.2 million of undrawn revolvers available at Rosenthal, and approximately 22.3 million CAD22.3 million available at Celgar. Celgar's credit facility is set to expire in May and we have negotiated a multiyear extension. Our EUR111 million of cash at March 31 is comprised of approximately EUR52 million for the restricted group and EUR59 million at Stendal.

Net debt to equity on a consolidated basis at March 31 is up slightly from Q4 but remains a little over two times equity, while the restricted group's net debt to equity is essentially unchanged at approximately 0.5 times equity. I want to, again, remind everyone 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 maintenance costs in the period they are incurred, while those -- for those reporting under IFRS, noncapital 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 line. 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. Although we did not incur any major maintenance in Q1, we expensed almost EUR14 million in 2012, the majority of which would've been eligible for capital treatment under IFRS.

That ends my overview of the financial results and I will now turn the call over to Jimmy.

Thanks David. Good morning, everyone. We are generally satisfied with our first-quarter results, given the current state of the market. And we are encouraged by the modest pricing momentum experienced in the first quarter. On the production side -- overall, our mills ran reasonably well, with production up slightly relative to Q4 after allowing for Stendal's Q4 annual maintenance shut. In addition, our electricity and chemical sales were also up compared to Q4. Our energy and chemical revenue in Q1 exceeded our interest expenses by approximately EUR5 million, which is noteworthy given the slow recovery of pulp prices. Put another way, out of our byproduct sales, suppressed our debt-carrying charges by almost 40% this quarter. Equally important, our debt-carrying charges continue to trend down as we pay down the Stendal debt, while our byproduct revenues are expected to continue to grow with the completion of Stendal's Blue Mill project.

In the first quarter, average NBSK list prices rose in all markets, with the European quarterly average list price rising $29 to $832 per ton, and the Chinese quarterly average list price widening rising $16 to $678 per ton. I will talk more about recent pricing developments in a moment.

But first, let me comment on the mills production. Celgar and Stendal both experienced some unplanned downtime this quarter. However, Rosenthal continued to benefit from its Q2 recovery boiler upgrade, achieving near-record production. In total, we have produced approximately 361,000 tons of pulp this quarter, compared to approximately 360,000 tons in the fourth quarter and approximately 380,000 tons in the first quarter of 2012. Our first-quarter production was broken down as follows -- Stendal produced 166,000 tons, Celgar produced 114,000 tons, and Rosenthal produced with 91,000 tons. In addition, the mills produced approximately 424 gigawatt hours of electricity in the quarter, compared to 406 gigawatt hours in the fourth quarter and 476 gigawatts in Q1 2013 -- 2012.

Turning now to -- turning back to the pulp markets for a moment, we believe that the NBSK pulp market is continuing to slowly improve from the lows of Q3 2012. Currently, March NBSK producer inventories are at 29 days, unchanged from December, but down two days from February. At these inventory levels, the NBSK market is considered to be in balance and historically led to price increases. In addition, hardwood pulp inventories are unchanged from February at 41 days, which is also considered to be low. Demand from China was down approximately 9% compared to Q1 2012, but we believe that customer pulp inventories are also low. Currently, the Chinese market is unsettled, as producers have announced price increases in China of $30 per ton for April. But so far, it appears that the market is resisting this increase.

In Europe, the $30 price increase announced in January is still not fully implemented, as Europe continues to struggle with weak paper demand and slow economic growth. However, we believe that producers will continue to push for small price increases. Europe continues to suffer from weak economic growth, which has resulted in the weak paper demand. Weak demand for paper has led to certain integrated mills curtailing their paper production and selling pulp those pulp as market pulp. Consequently, we continue to believe that a supply-side reduction would accelerate the upward pricing momentum. However, new production in Russia is scheduled to come online in Q2 and, though we believe this incremental production will be offset by incremental demand, it may take a quarter or so for the markets to rebalance. However, it appears purchasers are taking a wait-and-see approach to this incremental capacity, especially in China, as evidenced by low purchasing activity levels in Q1.

Our pulp sales volume totaled approximately 357,000 tons in Q1, compared to 335,000 tons in the fourth quarter of 2012 and 385,000 tons in Q1 2012. We believe customer inventories are low, so we expect this pent-up demand to be realized in Q2. We also believe that supplies of NBSK will be lower, as producers begin to take their annual maintenance shuts which should add to the pricing momentum. In addition, we are now seeing unusual dynamics where softwood pulp is excelling on par with hardwood, which should add to softwood demand as paper makers adjust their recipes to take advantage of the cost-savings benefits of additional softwood. Overall, these factors lead us to conclude that moderate pricing momentum in Q2 will remain. We believe that the Chinese market will continue to grow at or near historic rates and that additional demand will come from other growing economies in the medium to long-term, as consumers increase their use of tissue-based products.

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 incremental demand. For example, two large tissue producers have publicly announced plans that, when combined, will add a total of 50 tissue machines at various sites by the end of 2015. These announced machines equate to approximately 2.3 million tons of incremental tissue capacity.

Let me now take a moment to discuss developments in the wood markets. European fiber markets tightened significantly in Q1; poor weather conditions in Germany; severely restricted harvesting; and increased demand. Aggravating the supply-side issue was the shortage of truck drivers. Overall, we have seen all log and chip prices increase. We anticipate that we will see German fiber costs continue to rise in the short term, but it is too early to determine how significant that increase will be and for how long before the markets get back into balance. Though, at a minimum, we're expecting higher wood costs in Germany through Q3. We are also expecting that we'll be able to continue to source the fiber we need to run our German mills, but we will, of course, continue to monitor the markets and our inventory levels closely.

In British Columbia, our fiber costs were up slightly in Q1 relative to Q4, primarily due to the weakening Canadian dollar on our US chip purchases. However, with high harvesting rates and sawmilling activity in Celgar's fiber basket, we expect Celgar's fiber costs to trend down through Q2. We are currently satisfied with Celgar's fiber inventories but, as always, we will continue to monitor them closely.

We continue to look for new sources of fiber, and we are currently working with the British Columbia government and our suppliers to develop greater efficiencies in processing residual fiber harvest waste, otherwise known as a [burn piles]. 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.

Last January, we announced our Blue Mill project at Stendal. We are 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 of that coming in the form of nonrefundable government grants. Overall, we are 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. This project is on budget and remains on schedule to begin producing electricity in late Q3.

We regularly get questions about the timing of our annual maintenance shuts. So I'd like to highlight that our 2013 shuts will be as follows -- Celgar will have its annual shut in Q2; Rosenthal in Q3; and Stendal in Q4.

With respect to our NAFTA claim, we have been working with our advisers to move this process forward. Based on the current schedule, we continue to expect our case to be heard in 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 close with a few remarks on the observations of the NBSK market -- it seems to appear that it's unsettled as it waits for new production to come online. We don't believe this incremental tonnage is significant enough to materially affect the market, especially when the supplies are relatively low due to the seasonal maintenance shuts. Statistically speaking, the market is in balance based on producer inventory levels and customer inventory levels are low. So we remain optimistic that the pulp market will continue to strengthen despite the incremental production that is coming online. We believe that NBSK prices will continue to slowly climb through Q2. We also continue to be very optimistic about the medium- to long-term NBSK supply demand fundamentals, which we foresee as being driven by increasing economic standards of the emerging markets.

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

(operator instructions). Richard Kus, Jefferies.

Just firstly, a procedural question. Would you guys mind giving us what the sales were by mill?

Yes, I can do that, Richard. So, the sales volumes for Rosenthal were 91,500, Stendal was 157,300, and Celgar was 107,900 for a total of 356,700.

Great. I appreciate it. And then, a question on the fiber situation in Germany. Can you talk a little bit about how much you guys think that contributed on a per-ton basis, maybe versus the fourth quarter? And then, I would be curious to hear how you feel about the fiber cost situation there over the medium term, given the different factors that you're experiencing.

I think in terms of the actual numbers -- David is just finding them now. You know, the impact of fourth quarter and the first quarter, of course, would not be as significant overall because, of course, it was only in the first quarter that we started to experience the wood situation arising from very severe winter conditions. In terms of any EBITDA difference between the fourth and the first for all of the operations -- because, of course, the Canadian cosats were slightly higher too -- it equated to roughly about just over EUR4 million impact.

Okay. And then, how do you see this situation developing over the course of the next couple of years?

Well, I think, you know, like in prior years, where we've had higher wood costs as a result of adverse winter type of conditions, we tend to peak out, you know, over the year and then we go back to more kind of normal conditions as this kind of interruption, or this kind of unusual event, filters through the system. So, we're expecting that we'll have higher wood prices, but then gradually coming down to more of the prices that we've seen in the past.

Okay. And then, just with regards to China -- you guys spent a little bit of time talking about the inventory situation there, at least how you see it. You know, it doesn't seem like shipments have been very robust there, and I would say maybe that's reflecting economic growth on the ground. You know, what are your customers are saying about that?

Well, I think, you know, it isn't really reflecting directly all of the economic conditions. I think it's also to do with the anticipation of additional capacity coming in, especially from Russia. I think many of the traditional trading entities in China -- which, of course, provide a significant outlet for market pulp -- have been reducing their inventories over the last few months in anticipation of Russian capacity coming online. And realizing on values that, of course, they had locked in by buying pulp in the earlier period at a much lower price. So you're seeing that type of movement which clearly is impacting the, I guess, the demand side right now in lower shipments. We know that the Russian capacity was longer -- or later in startup than people had expected. And therefore, I think the inventory levels, certainly in our customers, probably reflect that reality that maybe they're probably sitting on far lower inventory than they would've probably expected if the Russian production had been on schedule.

I see. Okay. Great. Thanks for taking my questions.

Bill Hoffmann, RBC Capital Markets.

I wonder if, David, you can just talk a little bit about the outages you got Celgar and Rosenthal, whether they're normal this year or anything different?

For which, Bill?

For both Celgar and Rosenthal (multiple speakers)

Production problems were essentially unexpected normal equipment type of issues. Nothing that we thought were substantive. But, of course, in a large production facility like Stendal and Celgar, we will, of course, have these unusual unexpected equipment failures.

No, that's fine. I was just actually asking about the planned outages, whether they're normal -- (multiple speakers)?

The maintenance shutdown schedule essentially is pretty much as normal compared to the normal maintenance schedule. Celgar may be a little bit shorter because we are implementing a little bit more efficiencies than prior shutdowns but nothing substantive.

Okay. Thanks and with regards to [Elem] and the capacity, I'm assuming these guys are pre-selling that into the market. So I'm a little bit surprised that you're still seeing customers uncertain about that capacity.

Well, I think you know, if you look at the actual startup date, which was from their announcement April 24 or so, I think the original anticipation of this volume was much earlier than that. And there's been several delays in terms of the actual announced anticipated startup dates. And, therefore, I think they may have contracted, but you know, the contracts are one thing. You have to actually have the physical volume to deliver.

So clearly, the commitments may have been there, but the volume certainly was not being produced. That's one. I think there is also several closures which have occurred, as you know, in Canada. And that, of course, has to filter through the system because, of course, there is still inventory working the way through, and also, there's the uncertainty of the Tofte production. Our expectation is that sometime in June as they announced, certainly the Tofte Mill could go down, which, of course, would rebalance the capacity to actually less. In fact, there will be no incremental supply growth. In fact, it would be an incremental supply reduction if Tofte actually does close.

And then, I wonder if you just comment a little bit, obviously Paper Excellence is in the process of buying this group from Chuck Mill and then [MBS Grady]. Obviously these guys have been buying mills up in Canada historically. Any thoughts on how that might change the dynamics of the market up there?

Well, I think, you know, clearly Paper Excellence as part of, I guess, the APP group has certainly a very big growth ambition in terms of the tissue market in China, as you know, based on the announced projects. In terms of the expansion on their tissue side, it will require a significant amount of softwood supplies, and therefore, I guess it fits into their strategy of assuring availability of those supplies for the future.

Thanks. Finally, any strategic thoughts at this point, Jimmy, just with regards to last year, you looked at Fibrek, but there's obviously other mills up there.

Well, you know, I think at this point we are focusing in terms of, of course, you know, reducing our debt if possible and also, of course, strengthening our balance sheet and, you know, holding on to efficiencies of our operations and looking for additional income. I think at this point, we are really focused on of course our own issues right now.

All right. Thank you.

Andrew Shapiro, Lawndale Capital.

A couple of questions here. Regarding maintenance and downtime, regarding your unemployment downtime that you mentioned you had in both Celgar and in Germany, can you take a shot at quantifying the estimated impact that unplanned downtime created in Q1?

Yes. In terms of the -- in comparison to the fourth-quarter comparison, the impact of the unexpected shots was positive because, of course, you had the Stendal maintenance downtime. So it's difficult to kind of factor in how much of the lost tonnages we have I think another number there. I'll have to look that up for you, Andy.

Right. Because, you know, you mentioned that the reduced -- you mentioned specifically that the reduced production at Celgar also contributed to reduced energy. And so, in that respect, there is lost tonnage, and there may be some estimate of lost energy. It would be useful to kind of quantify that.

With respect to the Q2 maintenance for Celgar, I think I've seen some press reports that discussed it, so that made me think that perhaps it's already started and maybe perhaps it's been completed. What's the timing for it, and if it's been done, is it back up and running at full capacity?

It is in process right now.

It just went down. So it's not started up yet.

Alright. So it's expected to be back up around when?

Second week of May.

Okay. You mentioned you know how Blue Mill is on track, scheduled to be up and running by September 30. Can you speak or explain a little bit about the power contract pricing and similarities or differences to the enhanced energy prices we enjoy at Celgar? We got some subsidized or enhanced pricing on the prior German power generation. Do we get to enjoy that, or is that program over, and where do the power rates we're going to get in Germany on the new incremental capacity stand?

Well, we believe that the new generation will qualify under the existing EEG renewable electricity generation program. So, of course, we will get the higher feed-in rates that are available to the biomass to energy cogen producers. It will be slightly lower than the overall kind of number that we have on the first because there is certain additional benefits that we derive on the first very small incremental amount of generation. But it will be similar in overall magnitude because it is qualified, we believe, under the EEG program as it exists today.

And on the NAFTA claim, are there interim milestones that trigger the sides potentially having mutually agreeable settlement talks?

Well, I guess our feeling, Andy, is that the closer or the further along we get, the more tension there is, things like discovery, hundreds of thousands of documents as far as being required to produce these things and be examined on them and stuff.

So it's becoming very real for both the Canadian and provincial bureaucrats that are managing this process. We've also got an election in British Columbia that could produce a new way of thinking within the government. At least, we hope that will happen. If it's the same government, there might be different leadership principles applied, and if it's a change in government, then that's an opportunity for a fresh discussion. So, I --

When is that election?

It's this month. It's May 14.

Okay. With the current prices that are going on and the limited profitability we see from plants that are modern and low cost, are there plants other than Tofte and out there where the mills are running red ink that you see at potential risk or for Mercer opportunity for supply reductions?

Well, there is a few mills that we know are even at today's type of prices probably are still experiencing some kind of red figures, but we can cannot comment on those.

What we do know is that, of course, there is two production facilities, which have announced and have taken closures. As an example, one of the lines at Kamloops as an example, which, again, is produced from more sawdust. So it's not really strictly the same type of quality. But it is a softwood, and we know that coupled with those two in Canada and the Tofte announcement, you know, as I earlier mentioned, this incremental increase of 0.5 million tons is a result of Elem actually will matter current. In fact, you have a small capacity decrease of, say, something in the order of about 200,000 tons or so roughly.

Just two more here. You know, based on the substantially narrow spread between softwood and hardwood and also in light of the new tissue capacity and other paper modernization capacity that's going on, is substitution between hardwood and softwood finally or possibly to Mercer's benefit going on at these levels?

Well, I mean if prices certainly in China are such that hardwood prices are at or close, in fact, in some instances above that of softwood, then, of course, it makes sense for many of the producers to use more softwood because, of course, the production efficiencies would improve their run rates, etc. And, therefore, there is likelihood that probably the recipe will be adjusted to use more softwood because of the efficiency gains that they would experience as a result.

Right. And can you provide some insight to your views from this heavily de-integrated point already as to the risk or opportunity from deintegration or reintegration of softwood pulp from these integrated paper players? Are you seeing more paper capacity coming out and the risk of increased deintegration, or is it the headwinds are gone and there's a prospect of any tailwinds and when that might occur?

Well, I think the European side, especially in terms of the printing and writing grade, it's very clear that there is a significant weakness. There is further anticipation of consolidation and possibly additional paper capacity closures.

So we think that clearly the European situation has not returned to normal, but we don't think at the same time the closures are going to be as deep or as significant as what has already occurred.

So, I think what additional new capacity that may be shut will not be as material clearly, and therefore, the impact in terms of nonintegrated or de-integrated pulp going into China won't be as significant in terms of the growth year over year as we've seen. Certainly we've seen a big amount of that really coming out of more of the Scandinavian area in terms of actual growth based on the reported numbers. And we don't think that that type of growth rate in terms of the incremental increases year after year is going to be comparable.

So we think that the real big impact of the nonintegrated pulp into China is probably already being felt. There will be probably potential for additional, but that could reverse if Tofte clearly shut down because, of course, there was some incremental tonnages coming from Norway into China. And therefore, if that mill shut, then, of course, that will benefit us in terms of this nonintegrated pulp coming into China.

Okay. And lastly, David, what's the roadshow/investor conference agendas for the coming quarter or months?

You know, we've got Barclays coming up shortly, and then there is a CIBC mini conference in London to meet some potential European equity investors. We are presenting at Sidoti June 9, I think it is, Andy, and then Jefferies later in August.

Okay. Great. Thank you.

Mark Kennedy, CIBC World Markets.

First of all, just with regards to the maintenance shut coming up this year, can you just give us a guide as to the expected tonnage outage for each of those?

Yes, sure, Mark. Rosenthal will be about 11,800. Stendal would be 22,400. Obviously the bigger mill. And Celgar is expecting 16,000 tons.

Great. And, Jimmy, I guess I'd like to get your perspective on an issue. If we can look through NBSK markets, say, after the next 12 months once the Brasck mill has started and that tonnage has been absorbed into the marketplace, you know, I don't think there's another new NBSK greenfield mill being built anywhere in the world right now, is there? And if we get one or two more mills that convert into dissolving, such as [Terrace phase] is going to do that at some point and there's even some speculation that Paper Excellence might be thinking of converting Skookumchuck to dissolving at some point, what's that really going to lay out the path for NBSK when we look at one to two to three years?

Well, that's why we are very optimistic in terms of certainly the medium- to long-term supply and demand type of situation because even if you take the Tofte potential closure, there won't be an increase. At the same time, we know that based on even the continued decline in paper consumption in North America and Europe, we know that on a global basis, the softwood demand has continued to grow, albeit at a very low rate, but because of the growth in tissue and other paper products in the emerging markets, the demand for softwood is increasing year after year. So and we don't see anything that will change that view.

In fact, in terms of the tissue market, we know that the incremental capacity increases in China are just mind boggling. And therefore, a lot of that requires softwood. Even if you take a 30% type of, you know, proportion of soft and hard, it means many hundreds of thousands of tons that is going to be new demand. And there is no new capacity. And yes, every mill will have a little bit of incremental production capacity growth because of efficiency, etc.

But, you know, the scale of the demand growth is such that we do believe we will have good supply/demand balance so that we will enjoy very good capacity utilization once we get through this transitioning of the healing capacity. And so we are optimistic.

The only thing that analysts clearly point to is the significant capacities of the hardwood side coming towards the end of this year in South America.

Now, in prior type of correlations, they indicate that actually there is no direct correlation between price movements and capacity increases today. So yes, you can point to the capacity increases, but certainly studies by other analysts seems to indicate that there is no direct correlation as to the capacity coming on and actually the price movement.

So I think it's indicative that really, yes, you can point to that and be negative, but I don't see certainly from an NBSK softwood perspective why that will have an adverse impact in terms of the demand for us. Yes, prices have been much higher for softwood versus hardwood for an extended period of time. We have had periods where we had many, many months of price gap of about $200.

And that was in a timeframe where there was two brand-new hardwood mills.

Right, coming on. So you can point to the capacity growth on hardwood, but I don't necessarily, you know, agree that this is going to have an immediate impact in terms of price because prior studies don't seem to indicate that.

And at the same time, you cannot directly correlate hardwood and softwood because we've seen the extended period of times where there has been a disconnect and good premium on softwood for a long period of time, and we've also seen periods where for whatever reason, softwood prices actually being cheaper than hardwood for a reasonable period, but actually not for too long. Technically, those situations tend to correct much faster than the other where you have a continued high premium of softwood against hardwood.

Great. Thank you.

David Quezada, Raymond James.

Thanks. Good morning, guys. Just a quick question. You mentioned the 2.3 million tons of additional tissue capacity coming on in China. Do you have any idea how much NBSK pulp demand that would translate into or even pulp demand in general?

We typically say, look, a typical recipe would be about 30% softwood in tissue, and the rest would be hardwood. So that would be kind of probably a generally reliable figure. I mean, some guys use less, some guys use more, and it also depends on the type of tissue product clearly. But 30% is a pretty decent kind of ballpark figure to use.

And is it about 1 to 1 then for pulp input to tissue output?

Yes, roughly.

And, David, just remember that's just two -- that's just two customers. That's Hengyang and PPE. But if you add up all of the announced tissue capacity today, that's -- between 2012 and 2016, that's 5.6 million tons.

Wow. Okay. Great. Thank you.

Paul Quinn, RBC Capital Markets.

Yes, thanks very much. I just wanted to try to further break down or solidify my model on the addition of Blue Mill. So you stated that it's coming out at the end of September. What should we look for in terms of additional tonnage at all in 2013, and will the extra 30,000 start to come in Q1 2014 and then how should we (multiple speakers)?

So I'll try to help and maybe Jimmy can add. But so a big part of what is going to produce the incremental tons was completed in the December timeframe. So you're starting to see the impact of that in the first quarter. You know, we are saying Stendal is going to do about 645,000 tons this year. It will do about 650,000 to 660,000 the next year, all depending on shuts.

In a year where Stendal doesn't have a shut, we think its capacity is up at 670,000 right now. So that's a difficult thing to quantify for you on this call.

On the energy side, in our disclosure previously, we've indicated it's about 100,000 kWh of power per year incremental, you know, based on today's cooling rates. So it's going to depend on what we ultimately negotiate with the EEG for that power. But if it was EUR60 a megawatt hour, you would be 60 x 100,000 roughly to give you a feel. You know, you're in the EUR7 million, EUR8 million-ish range annual incremental.

Great. That's very helpful. And then just a higher level question on geographic shift. If we look back five years and given that you're running the exact same mills that you were at that point, how do you switch into your customer base over that period of time? Obviously, China has grown over that, but can you give us some rough outlines of where you're selling your pulp into the major end markets?

Yes, I mean if you look at what has been occurring on the European side, what is clearly noticeable is paper demand certainly in Europe has been weaker in the Western European market and stronger in the Eastern European market. So the emerging Europe as such, paper consumption, tissue consumption, etc. is strong.

In terms of the Western Europe, Germany, France, etc., etc., you're having weakness. Tissue is not as bad certainly as the printing and writing grade. And therefore, if you look at our percentages, we've had a slight decline in terms of the volumes to the developed Europe and a slight increase to the emerging Europe. Nothing of real significance, but that's the trend.

In terms -- and again, a little bit more into China depending on the US dollar exchange rates. Because it is sometimes more favorable to ship into China than it is to ship to the peripheral European markets.

In terms of the Celgar operation, we all know that there is overcapacity of premium quality NBSK in North America, and therefore, we have been essentially been more focused on the China, as well as the Asian markets.

So you are shifting from probably more tonnage out of Celgar than ever before into the Asian and China markets. And we see that trend continue unless we are able to have a finer quality strategy, which will be as good if not better than the premium qualities clearly on the market in the US.

Great. And then just, you know, now that, well, I guess Blue Mill will soon be done. What's the next project after Blue Mill?

Well, we look at the byproduct stream as very significant for us, and therefore, as you know, Rosenthal also produces tall oil. It has traditionally shipped the soap up to the Stendal facility for processing. We don't essentially have capacity now because of the Blue Mill expansion, etc., etc. And therefore, Rosenthal will be investing in its own tall oil processing facility, and of course, we will generate additional income as a result of that. We will also pursue additional wood-based chemical strategies. So I think that really the incremental stuff will not be done strictly on the pulp side, but really more in terms of this byproduct stream. So enhancing more of the chemical recovery processes and upgrading them to chemicals and pursue that line, which, of course, will have good margin benefits without significant capital type of outlays.

Great. Thanks very much. Best of luck.

(Operator Instructions). John Pace, Stone Harbor Investment.

Just a quick couple of questions here. Number one, to sort of get a feeling for the incremental costs and the maintenance outage in 2Q, do you expect the cost of that Celgar outage to be similar to what it was in 3Q last year?

Hard to say. We're doing some things differently this year in Celgar to try to reduce the costs and improve the efficiency. We've designed some different approaches to the length of the shifts, for example, to improve some efficiencies. It's doing things a little bit different from a DC labor perspective. We are optimistic it will bear some fruit for us and help us reduce our costs.

And on the equipment side, I think that we've been reasonably pleased, you know, the early -- they've been down since I guess four or five days so far. The early reports are that we haven't really found any big surprises yet. Our fingers are crossed here. So, without any big surprises, then maybe we could possibly do better than we did last year.

And then last year was what, $6 million or $7 million roughly?

Yes, well, Celgar, yes, last year would've been a little above that. This year we are kind of targeting around the $6.5 million range.

All right. And as far as just looking into 3Q, the Rosenthal outage, would that be similar to the sort of $4.5 million you had last year?

Yes, Rosenthal is actually budgeted to be quite a bit lower this year. Last year we had an extensive shut with the turbine revision. So our budget is in the EUR1.7 million to EUR1.8 million range for Rosenthal in Q3.

Great. And then just talking about fiber costs, I think did you say earlier that fiber cost had a negative $4 million sequential impact to costs in 1Q versus 4Q?

That's correct, yes.

Companywide, okay. So based on where fiber costs sit today run rate, how would 2Q look versus 1Q? So they give lower Celgar, but still elevated Europe at this point.

There would probably be a continuation at these levels.

All right. So sort of flattish then basically?

Yes.

Okay. All right. That's good. And then, also in terms of your later contracts, when do the annual raises kick in sort of calendrically speaking? When should we see a bump in your labor costs sequentially?

Well, I don't know quite how to answer that. Because we do some fancy amortization and pre-funding and things like that, so you're not really sequentially going to see anything material in the amounts.

Okay. So it's pretty smooth throughout the year basically is what you're saying.

Yes.

Okay. All right.

Other than the Stendal, I guess goes up. Stendal will have a 2% increase, I think, or something like that. I'm just not sure, John.

Okay. Great. And then we're not that big anyway. And finally, I just want to circle back to the unplanned outages that you saw in the first quarter. Was there a cost number associated with that?

Not that we've calculated for this call, no.

Or, I think you said earlier, there was no -- you don't have a tonnage impact that you've calculated, right?

Yes, we do. We do. We just don't know the number off the top of our heads.

Okay. Do you have a total number of days you lost between the two?

I don't know that, John. On the top of my head, it wasn't one single event. We had a number of different things, so the mill would go down, come back up, and then down and up. And I should know it, but I just don't have it with me and sitting in a room with a bunch of paper around me.

Okay. Well, we can circle back on that. All right. Great. Well, thanks a lot, guys. Really appreciate it.

With no further questions in queue at this time, I'll turn the call back over to our presenters.

Okay. Well, thank you, again, for everyone attending today's conference call, and we look forward to making further progress, certainly in terms of our productivity and efficiency and keeping our fingers crossed that the markets will continue to improve for the coming quarters. Thank you and bye.

Thank you.

You may now disconnect.