Mercer International Inc (MERC) 2013 Q3 法說會逐字稿

Good morning and welcome to the Mercer International's third-quarter 2013 earnings conference call. On the call today is Jimmy Lee, President and Chief Executive Officer of Mercer International, and David Gandossi, Executive Vice President, Chief Financial Officer, and Secretary. I will now hand the call over to David Gandossi.

Thank you, Lisa. 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 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 our press release and with the Company's filings with the Securities and Exchange Commission.

I will start by covering some of the key financial aspects of the quarter and then I will pass the call over to Jimmy.

In Q3, we achieved EBITDA of EUR24.8 million or $32.9 million, up almost EUR11 million relative to Q2. The improved results were driven by higher energy sales volumes, improved European pricing, lower major maintenance costs and reversal of a wastewater fee accrual at Rosenthal.

However, offsetting these positive effects were the negative impact of the strengthening euro and restructuring costs incurred at our Celgar mill. The mills had a strong production quarter in Q3 despite Celgar experiencing some unplanned downtime. Our finished goods inventories were up approximately 12,000 tons at Stendal as Stendal built their inventory in anticipation of its fourth-quarter shut.

Overall, all prices remain relatively flat in the quarter which actually highlights the strength of the market since prices have traditionally weakened during the slow summer months. List price ended the quarter at $880 per tonne in Europe and $695 per tonne in China. We are encouraged by recent NBSK pricing momentum with price increases announced for October and November.

As you will have seen in the press release, we reported a net loss of EUR2.2 million for the quarter or a loss of EUR0.04 per basic share compared to a net loss of EUR9.9 million or a loss of EUR0.18 per basic share in Q2. Our Q3 2013 net loss includes a net noncash unrealized gain of approximately EUR2.4 million related to a gain on the mark to market valuation of our fixed interest rate swap, partially offset by a loss on our pulp swaps. And for these items, basic earnings per share was a loss of EUR0.08 per share.

The US GAAP-IFRS differences relating to major maintenance had an impact this quarter when comparing results to those of many of our competitors. In Q3 we expensed approximately EUR2.9 million for major maintenance, the majority of which would have been eligible for capital treatment under IFRS.

Switching to cash flow, overall, our cash position was relatively flat to Q2 sitting at approximately EUR134 million or approximately $181 million. Quarterly working capital movements decreased cash by EUR6.8 million on a net basis, primarily due to a significant increase in inventories, most notably finished goods inventories at Stendal and good inventories at Rosenthal.

Capital expenditures drew approximately EUR7 million during the quarter. Of this total, approximately EUR4.6 million was spent on Stendal's Blue Mill project while the remainder was spent on high return capital projects at Rosenthal and Celgar.

On the financing side, Stendal made a schedule principal payment of EUR20 million on its lone facility and its first principal payment of EUR1.6 million on its Blue Mill facility. As at the end of the third quarter, Stendal had received EUR4.1 million of government grants for the Blue Mill project. In total this project is eligible for EUR12 million of government grants.

Earlier this quarter, Mercer issued an additional $50 million of its senior notes. They were issued at a price of 104.5% plus accrued interest from June 1, 2013. These funds were used to repay our Rosenthal and Celgar mill revolvers and for general corporate purposes.

Our working capital movements in the 12-month period ended September 30, 2013, excluding cash and short-term debt, decreased by approximately EUR3 million while working capital was down from EUR136 million at the end of Q3 2012. The decrease was primarily due to lower receivables partially offset by lower payables and higher inventories.

In terms of our liquidity, at September 30, 2013, we had approximately EUR28.3 million of undrawn revolvers available at Rosenthal and approximately CAD21.4 million available at Celgar. Our EUR134 million of cash at September 30 is comprised of approximately EUR75 million for the restricted group and EUR59 million at Stendal.

Net debt to equity on a consolidated basis at September 30 is down slightly from Q2 at approximately 2.2 times equity, while the restricted group's net debt to equity is up slightly at approximately 0.6 times equity due to the new senior notes.

In July, we announced a workforce restructuring at the Celgar Mill which will reduce the workforce by approximately 85 employees. In Q3 we incurred EUR2.9 million of restructuring costs. We estimate that we will incur additional costs of between EUR1.5 million and EUR3 million with the majority being recognized by the end of 2013. We also estimate that this workforce reduction will realize operating benefits between EUR6 million and EUR7.5 million annually with about 80% of those annual savings being realized in 2014.

As previously reported, we have successfully amended Stendal's loan facilities. We believe the amendment gives Stendal greater financial flexibility by changing how certain of the covenants are being calculated as well as how equity cures are calculated.

In addition, we obtained covenant waivers for both the 2013 measurement dates. Pursuant to the amendment we have invested an additional $20 million of equity in Stendal, taking our ownership interest up to 83%.

One final note with respect to our financial reporting presentation, we have made the decision to change our reporting currency from the euro to the US dollar. This change will be effective October 1, 2013. We believe this will enhance our communication and understanding with shareholders, analysts and other stakeholders. We also believe it will improve the comparability of our financial information with our competitors.

The implication of this change is that our Annual Report on Form 10-K will be presented in US dollars as will all our financial reports going forward.

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

Thanks, David. Good morning, everyone.

Overall, our third-quarter results were solid, driven primarily by lower maintenance, major maintenance costs and improved electricity sales volumes and despite incurring EUR2.9 million of restructuring charges at Celgar. Our energy sales volumes were positively impacted by Stendal's Blue Mill turbine, which began its ramp-up phase in September and contributed a modest amount of incremental energy this quarter.

We are also encouraged by how well the NBSK markets stood up in the historically slow summer months and by recent NBSK pricing momentum.

In the third quarter, steady demand kept average NBSK list prices essentially flat across all markets. The NBSK markets also benefited from the third-quarter closure of Celgar's high cost -- cost to NBSK mill.

In Europe, the quarterly average list price rose marginally to $867 per tonne, while the Chinese quarterly average list price was down slightly to $685 per tonne. September NBSK producer inventories were at 27 days, down one day from August. At these inventory levels, the NBSK market is considered to be below balance and historically led to price increases. September hardwood pulp inventories are also down seven days from August to 42 days. We believe the NBSK inventory levels highlights the strength of the NBSK market as well does -- as well as the recent price announcements.

Pulp prices went up $20 in all markets in October and producers have recently announced another $20 per tonne increase in all markets effective November 1, bringing the list price to $920 in Europe, $740 in China and $990 in the US. We estimate that there are over 3 million tonnes of incremental tissue capacity coming online in China between 2013 and 2014 with approximately 1 million of these tonnes scheduled for the fourth quarter of 2013.

In addition, there are approximately 1.3 million tonnes scheduled for 2015. We are optimistic about the demand for NBSK going forward, given the unprecedented tissue production of capacity growth that is planned. On the demand side, the closure -- on the supply side, the closure of Sodra's Tofte mill takes out approximately 400,000 tonnes of NBSK capacity which will also benefit the supply demand equation going forward.

Turning to our pulp production for a moment, Stendal achieved near record production this quarter. Roosevelt was down 10 days for its planned major maintenance shut, but otherwise their production was very strong. Celgar experienced some unplanned downtime due to a lime kiln issue and other associated issues which followed a power outage in the region. Other than approximately 15,000 tonnes lost to the somewhat connected issue, the mill generally ran well in the quarter.

In total, we produced approximately 369,000 tonnes of pulp this quarter compared to approximately 350,000 tonnes in the second quarter and approximately 373,000 tonnes in the third quarter of 2012. Our Q3 production was broken down as follows -- Stendal produced 170,000 tonnes; Celgar produced 117,000 tonnes; and Rosenthal produced 82,000 tonnes. In addition, the mills produced approximately 444 gigawatt hours of electricity in the quarter compared to 406 in Q2 and 437 gigawatt hours in Q3 2012.

Our pulp sales volume totaled approximately 357,000 tonnes in Q3 compared to 368,000 tonnes in the second quarter and 404,000 tonnes in Q3 of 2012. Sales were slightly lower than we would have normally experienced, primarily due to Stendal's having to manage their inventories in advance of their October major maintenance shutdown. Sales by mill in the quarter were as follows -- Rosenthal 87,000 tonnes; Stendal 151,000 tonnes; Celgar 119,000 tonnes.

Let me now take a moment to discuss developments in the wood markets. Despite steady harvesting rates during the quarter, demand for European fiber remained high. The incremental demand is primarily coming from pellet producers who, in contrast to their traditional seasonal production pattern, have continued to run at high levels all year. Saw mills continue to run at relatively high levels, but the supply of saw logs has improved, which has taken some pressure off of the pulpwood. However, we are already seeing demand beginning to increase as wood consumers start to build their winter inventories.

Overall, we anticipate that our German wood costs will increase marginally in Q4.

In British Columbia, our fiber cost were down slightly in Q3 relative to the second quarter, primarily due to strong sawmilling activity in Celgar's fiber basket. We expect that Celgar's fiber costs will stay flat with the potential for a moderate decrease in Q4.

We are currently satisfied with each mill's fiber inventories. We expect that we will be able to continue to source the fiber we need. We will continue to monitor, of course, the fiber markets and our inventory levels closely.

I am pleased to note that our Blue Mill Project is nearing completion. The new turbine began its ramp-up phase in September and we anticipate it will be running at planned capacity in the coming weeks. The project continues to be on budget as well as on time with our investment totaling approximately EUR40 million, with EUR12 million of that coming in the form of nonrefundable government grants.

We regularly get questions about the timing of our annual maintenance shuts so I would like to highlight that our remaining 2013 shut was recently completed at Stendal. With respect to our NAFTA claim, we continue to work with our advisors to move this process forward and we expect our case to be heard in mid- to late 2014 with a decision several months after that. We will provide regular updates as we move through the process.

As David noted, we are pleased with the amendments we have made to the Stendal loan facilities. These changes will give the mill more flexibility and puts them in a position to take advantage of the expected stronger NBSK markets.

David also mentioned our drive to reduce manning levels at our Celgar mill. This restructuring is designed not only to reduce the mill's fixed cost, but also make it more efficient and productive. Celgar management continues to work through this process.

This is not an easy process for all concerned, but we are encouraged by the progress we are making. We remain confident that this restructuring will be successful in meeting its productivity and costsaving goals.

If I can close with a few observations, we believe that the NBSK markets are building some momentum with price increases in all markets three months in a row. Statistically speaking, the market is slightly below balance based on producer inventory levels and customer inventory levels remain low. So we are optimistic that the NBSK market will continue to strengthen, despite the incremental Russian production that has slowly been making its way to the market.

We also continue to be very optimistic about the medium to long-term NBSK supply demand fundamentals which we perceive 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). Bill Hoffmann, RBC Capital Markets.

Good morning. Jimmy, can you talk a little bit about what your capital plans are for 2014? Kind of what you are thinking about strategically as well?

Yes. In terms of our, of course, spending on capital projects next year, they will continue to be very limited to what we call very fast payback type of investments, or investments that really are critical to the continued efficiency gains that we are looking for.

On a rough kind of number basis, you are looking somewhere between around the EUR6 million to EUR8 million per facility, max. But of course as we move through the year, some of those projects may be adjusted or accelerated, depending on market conditions.

And then -- we keep asking this question, we are all sort of watching and waiting with all the capacity coming on in the hardwood side of the equation. Wonder if you could give us some thoughts on any change in view right now or about the upward potential of the softwood markets, just because the hardwood markets will become pretty flushed with the supply?

Well, I know that a lot of the analysts and the commentaries certainly coming out of many of the observers of the pulp market has been negative because, of course, of the significant capacity increase on the hardwood side coming in the next couple of years or so. However, my view -- based on more factual evidences to date that realistically capacity has not shown to be correlated with price movements, that seems to be the case from historic numbers. So just because you have capacity increases doesn't necessarily mean pulp prices will actually drop.

The other thing that, of course, is not quite correlated is that there is any relationship between hardwood and softwood movement. There has been a fairly long period of time where the gap between hard and soft wood prices have been fairly wide for a fairly reasonably long period of time and what has typically closed these types of gaps has been weakness in terms of the economic activity or essentially lumpiness in terms of closures of paper capacity, which then released some incremental excess supply of softwood. And it takes a little bit of time to adjust for that.

So, I don't think necessarily that just because we have significant capacity increases coming up in hardwood, that I would view prices for NBSK necessarily having to follow and in fact there could be a fairly wide price gap between the two for a much longer period than many people may be expecting. We will have to see.

Yes. Thanks. Then just regards to the Chinese customers that are building all the additional tissue capacity, any change in behavior there from them being concerned about being able to source sufficient softwood?

No, as far as I know the capacity increases that have been announced and expected to come, I have not heard of any deviation from the plan. In fact, other than further significant potential increases in tissue production within the Asia as well as even in the Middle East markets, I haven't really seen any retrenchment certainly on the tissue side. We haven't seen any real change in behavior in terms of the buying pattern of the tissue customers.

Of course, what you are seeing in China is issues related to high inventory of finished products, but that is really more on the publication or the printing and writing grades, and of course that has limited many of the buyers from building up raw material inventories until such time they can reduce finished product inventories. And I think that has been more the driver of what we're seeing in terms of the demand dynamics rather than, really, one of oversupply or overinventory of the raw material. I think, in fact, certainly the customers that I am aware of are pretty much sitting on fairly low levels of raw material inventory because of this credit issue, clearly.

Okay. Thank you.

Richard Kus, Jefferies.

Good morning. Can you talk a little bit about the situation you guys are seeing with regards to discounts? I know that they had been at some pretty high levels now with the strength that you guys noted in pulp markets. Have you seen those come down a little bit?

No, I think the discounts are pretty much about the same as what they were. What you are really seeing is discounts about the same, but prices moving up. I think what is more an impact really is the currency movements of the last few months, which of course has impacted euro as well as Canadian dollar type of pricing movements. But the discounts have essentially been pretty much the same.

Okay, great.

Wide levels.

Understood, understood. Do you see any opportunities for those to tighten up, given the markets currently?

I think what I would prefer clearly would be more of a transparency and really go to the net pricing rather than the strange pattern of having list price and then this wide discounting. And historically, we are seeing discounts become more and more larger, which, of course has been the pattern over the last few years. And rather than essentially assume that people are not aware, I think it will be better to go with this net pricing picture rather than continue to have this gap which seems to not really reverse, but really continues to just get bigger and bigger.

Okay. Can you talk a little bit, it may be a little tougher here, but the extent that your customers have the ability to shift their furnish between softwood and hardwood, do you think they are running more softwood right now, more hardwood at this point? And is there any further ability to switch if all that hardwood capacity comes online and you end up with lower pricing?

Well, it all depends on the type of paper they're producing. Clearly, of course, the percentage of hard- and softwood will always influence the quality issue especially in terms of the hygienic grades in terms of softness and strength. So I think from maybe the direct hygiene grades really it is one of the type of quality that they are producing in terms of softness and strength combination; and I think that is probably a little bit more difficult.

In terms of the basic printing and writing grades, depending on the level of speciality, that can range clearly to pretty much almost all hardwood with very little softwood to one which is more difficult. This is really the very low grainage type of products that require a lot of strength.

So I cannot give you a broad generalization. It really depends on the type of products they are making, but I can tell you that it does, overall, influence productivity. Because even if you are going to use more hardwood, it just means that you have to run the machine slower, clearly. And, of course, on a production volume basis, depending on what their cost profile is, of course, you'll have an impact in terms of their efficiency and productivity level and ultimately influencing other costs.

So it isn't those types of simple things of saying, well, I would buy something which is cheaper and then I would produce it and I would save money. It is very difficult to know exactly what the influence will be, and it will be different for each of these papermakers as well as each individual plant depending on their age of the facilities.

That's great.

And if I might just add somethng to that, Richard. There has been substitution occurring for decades and, then, as we saw in 2010 and 2011, we felt we saw the end of it as evidenced by a differential of around $200 plus between softwood and hardwood pulp fitting. It was there for an extended period of time.

There haven't really been any massive shifts since then. We ended up back at parity.

But I think for the last several months we have been running with softwood being $80, $90 more than hardwood. So, if there is substitution, it is just on the fringes and the margin and we were already seeing, our feeling as we are starting to see the extent that -- really not much more to come.

Great. I appreciate it. Thanks.

Andrew Shapiro, Lawndale Capital.

So, while you contributed $20 million from the parent company down into Stendal and you showed your ownership in that joint venture rising, did your JV partner contribute anything at all and monies? And why or why not?

No, he did not. And he -- I can't answer why not other than it was clear he certainly was not going to. Period.

Okay. So, your -- and the ownership interest rose to what level again?

83%.

You are converting to US dollars starting this current quarter. Will you be providing retroactively quarterly data adjusted for the currency switch in bulk? Or will it only come out incrementally each quarter for us?

All of our reporting will have its typical historical comparatives and it will all be in US dollars.

So, basically, it will drip out quarter by quarter? You won't be able to or won't provide a kind of a catch-up release?

No. When we release the K, you will have all of the previous periods that are typically in the K converted to US dollars.

Right, but that is on an annual basis, right?

Yes and then the quarterlies will have the prior period quarterlies compared to them. It won't be an on the bus every period of every reporting for the last five years of quarterly release. That would not be a normal thing to do.

Okay. Well, I am trying to understand what uniquely happened year over year in the restricted group and/or in Stendal to create the inconsistency that your year-over-year gains you had in operating income and EBITDA in the restricted group, but Stendal year-over-year the EBITDA and operating income numbers were down year-over-year. Can you explain a little bit the inconsistency? I would think either they would both be up or they would both be down.

There's too many variables to do it effectively on this call. I mean if you are comparing quarter-over-quarter annually massive shifts in pulp pricing and mix, you have got 7% increases in fiber costs. Restricted group has beneficial fiber costs on the Celgar side which is the bigger of its two mills versus Stendal, which is a large mill in the European wood market. Timing of maintenance shuts, restructurings, upsets, things like that. I am just not prepared to give you anything.

Can you give us a call off-line and maybe we can just walk through it? I just want to reconcile that, please. On that.

And then, Blue Mill is done. You've got the Celgar cost reductions in the works. We have got improved pricing. So it seems to me we have a period at least of substantially enhanced cash flows. So, following up I think it was Mr. Hoffman's question, what is next on the horizon either in CapEx or is it going to be in terms of any major project that has a decent return? Or is the priority in cash now is going to be multiple periods of a decent tranche of debt paydown?

Well, I think as Jimmy mentioned, we've targeted for next year between EUR6 million and EUR8 million per mill. As we see how things develop, we may pull back a little or let out the club a bit. We do continue to have debt reduction as a priority particularly on the Stendal site and it's happening. We are making good progress. So we will see.

Okay. And your EUR6 million to EUR8 million is -- that has kind of been typical per plant though, hasn't it?

Well, we just spent EUR40 million on Stendal a few years ago.

No, no. I am asking what is the next big project?

We don't have a --.

We don't really have any significant projects at the mills, coming forward, that we have envisioned. I think what we have is EUR6 million to EUR8 million range is really full of smaller, very accretive type of projects or projects that build on in terms of additional efficiency gains for the future.

So, we have at least on the horizon a few -- probably a few straight quarters of a decent chunk in debt paydown targeted then?

Well, we are optimistic about our future, Andy, and if that were to occur then, then that's what would --

Right, well, look, we know Blue Mill is going to give you a bunch of incremental energy cash flow. You have got an incremental production out of Stendal. The near-term visibility on pricing is favorable and you have just put in place some substantial annual Celgar cost cuts. So it would just seem that in the near term, there is a decent amount of cash flow generation that one might (multiple speakers).

Yes. One has to look at a lot of the factors that come into this play. I mean, if you look at the pricing, clearly it is very favorable. If you look at in terms of cost development, certainly it looks favorable again, especially at the Celgar moving forward was the restructuring is over, all of those are favorable. Now, on the negative side, of course, which we have no crystal ball as to what the impact in terms of the euro or US dollar nor the Canadian dollar exchange rates are going to be one day from now or even certainly not a quarter from now.

So these are things that have a big influence in terms of our cash generation. So yes, based on what we know, we look very good.

But if you have got a crystal ball and you can tell me currencies are going to behave X, then I can tell you the results. But unfortunately, we don't have that right now.

So, all I can say, yes, it looks very good based on what we know. And yes, if all of those occur we will build again very healthy cash flows and, of course, as we pointed out, our priority is really to reduce cost. And, of course, that is a big component of that because we have, in relative terms, expensive debt.

Yes. Very expensive. Last question is for the coming quarter. What are the planned road shows and conferences?

So, Jimmy and I are -- got a non-deal roadshow next week. We are attending the CIBC Conference later in January and we are contemplating a West Coast tour in November possibly with an organization that conducts those kinds of roadshows. So we will be possibly even in your neighborhood, Andy, in which case (multiple speakers)

Yes, I think you may have called us. We'd love to have you come and see us, so that would be great. Thank you.

Bruce Klein, Credit Suisse.

Good morning. Was wondering, you mentioned China and tissue additions, but what sort of in market demand and inventory do you think is going on right now with their pulp inventory?

In terms of tissue guides, or --?

No, no separate. Just in terms of what their demand appetite is these days and how you think their inventory sits for NBSK right now?

Yes, I think generally if I look at the kind of overview of pretty much all over our customers, I think their inventory levels are not that high. In fact, probably they are much lower than where they would want to be. I think there has been several kind of, let's say strategies as a result of the expected Russian production coming on. As you know, it took much longer. They have had a lot more production difficulties. And so I think that caught a lot of people off guard.

Also I don't -- I think there was a significant degree of skepticism especially on the Tofte mill. So that kind of caught a few of the buyers by surprise. So I don't think that people were building inventory because they felt that supply was going to be limited. I think people were probably reducing the purchasing, because of credit as well as anticipation of new supply coming on.

So we know that essentially the China situation is really the -- it is influenced, not just by the credit but also the end finished products. And certain paper grades, as I said, currently are sitting on a lot of finished goods inventory and until they can release those, clearly they are going to limit their purchases of the raw material as best they could.

I think the tissue guys probably they are expecting that the combination of the Russian and the continued reasonably good markets that there was no urgency in terms of raw material purchases. So there is no particular reason quite any of these guys essentially would have built up any significant levels of inventory.

And therefore, we believe with the capacities that are scheduled to come onstream from the end of this year and throughout next year in China especially under tissue, they will have to build up inventory for their ramp-up. I am very optimistic as a result of those activities that we will see continued strength.

The other positive side is that the de-integration as well as the closure of paper as such in Europe certainly has now reached a level where you are not going to see any significant retrenchment because demand is down and it is not getting worse, it is pretty much as bad as it is going to get.

So all in all, I guess we are through the worst of the markets and we are optimistic that we are building now momentum. Unfortunately it is a lot weaker momentum than otherwise. That's because, of course, customers have their own issues and the fight is a lot harder.

Thank you very much.

Mark Kennedy, CIBC.

Good morning. Just wanted to come back to this issue in terms of the spread between NBSK and BEK. So it is just starting to crack that $100 a tonne level based on the November 1 list price here of $990 on NBSK. And I would like to get your sense. Is there a spread here where you start to become uncomfortable? Or would you be comfortable if that spread went back, say, to a $200 a tonne premium?

The spreads are going to get to what it will. And I think it's not a question of our comfort level. I guess it's a question of supply and demand fundamentals.

As I said, as far as I'm concerned, there has been really no correlation between the two movements. Nor has there been correlation between hardwood capacity increases and pulp prices as a whole. So, it is easy to point to capacity and it's an easy way to say, well, this is going to create a problem and it should reduce prices.

But, if you look at the actual statistics and all of the historical data, nothing seems to indicate that's really the case.

So I am not saying that psychologically there isn't a feeling out there and that influence is clearly the buyer's mentality as well as other people's mentality, but the fact of the matter is the supply and demand situation certainly is healthy for softwood. Capacity side is very limited. We see capacity on the customer side further expanding especially in the areas that uses a lot more softwood than the other paper grades.

So based on those factors, everything indicates that things are aligned for positive momentum. And I cannot tell you that oh, all of a sudden, just because there's a $200 gap, you are not going to produce tissue paper, which is going to be substandard just because of $200. You are going to basically swallow the increase. Yes, you are going to try to limit the cost by reducing a little bit less, but you are going to have to be very careful that the quality is not going to be substandard.

So these are the issues. It is not just the cost that's going to drive our customers. It's really what is the quality spectrum that they are really playing with and if their customers themselves are demanding in that regard. So yes, I am a lot more optimistic. I think that the gap can be quite as wide as $200 plus and for a much extended period of time.

That's helpful, Jimmy. Thanks. Then, one last question. As you look into 2014, just your thoughts on your fiber costs in Germany. Do you see them staying at present levels or do you think there's more cost pressure coming there yet?

No. What we have been able to do is, of course, every time we have these localized price increase pressures is, of course, to increase our imports. And the fact of the matter is that fiber cost increase in terms of price is not really the impact of actually wood prices, but really reflecting the fact that we have to source the wood from further distances. So it is really that incremental increase in the logistics which has influenced our price. And it did that only because the general would availability in Germany has been constrained, as you know, because of the adverse winter conditions as well as the unexpected flooding. And that took away almost -- if you take the winter and the flood, maybe four months out of 12.

And this clearly is going to impact wood availability because if you have already shortened the period of harvesting, you also have increased the level of other end-users like wood pellet because they saw their demand side increase because of extended winter conditions. And therefore, they have to rebuild inventory, too, and we, because we had no access to wood, we had to rebuild.

So I think the rebuilding of the inventory has now reached levels where it is more normal. So there isn't any of that demand surge. And at the same time, we have been able to address the wood shortage by imports. And this essentially cured the problem.

Yes, there may be -- as we said -- maybe a little bit more marginal increases because, again, we are going into the seasonal weaker period of harvesting. But all in all, we have seen the maximum impact. We have dealt with it with the imports and we will continue to deal with it if the event continues like this through additional importation of wood.

And therefore, next year, we do have a strategy and try to, one, deal with the unexpected hiccups really which create these very large disturbances. And what we have typically seen is these price increases tend to then stabilize and then ultimately go back to where we started albeit, maybe a little bit higher than the levels we were at in the past, but our focus is driving that kind of flat pricing, the stable pricing, more down to traditional levels rather than the elevated levels we have seen in the last three or four years.

That's great, Jimmy. Thank you.

Mark Friedman, Gates Capital.

It is actually Jeff. I have a couple of questions. The $20 million that went into Stendal, what was a split between equity and loan?

Jeff, it is all equity. In Germany we have the concept of registered capital and unregistered capital. So, the increased ownership percentage is really the result of a negotiation with our minority partner as to what that level would be. The number was a predefined number. So the split was about, roughly, if $20 million is EUR15 million. about half of it went in as registered capital and half of it went in as unregistered capital. It is kind of like a voting and nonvoting concept.

But the $20 million was all for equity?

It all went in as equity, yes.

So you are valuing that at [$230 million] before you put the money in or something like that?

It is not a value question (multiple speakers). It is not a function of valuation. In this case there's too many other issues associated with having a minority partner that it is just -- it is not an indication of value. It's an indication of how far we could go in terms of diluting him.

The second question is, you had a reversal of wastewater see accruals at Rosenthal in the third quarter. How much was it?

That was EUR6.6 million.

EUR6.6 million?

Yes. So the history on that, Jeffrey, is that it happens on both of the German mills now. We accrue a wastewater charge every month and this carries on for three years. And the way the system works is if you can design a capital project that allows you to reduce your wastewater emission levels, permit levels, then you can avoid having to pay the wastewater fee and effectively offsetting the wastewater fee with the capital that you spent.

So in Rosenthal's case, we were successful this quarter in convincing the authorities that the project that we just completed, net all of those hurdles, and therefore avoided having to pay with the wastewater fee in the quarter. We've done that, I think, four times now for Rosenthal. So it is like a government grant in a lot of ways.

So that showed up as just a reduction in your cost for the quarter?

No, it comes through the earnings.

Right, okay. Then, the third question is the Project Blue Mill. I know it just started, but can you remind us again what's the financial effect you expect that to have?

Yes. It produces about 30,000 extra tonnes of production over a year primarily through effective debottlenecking in the winter conditions. So, a lot quicker penetration, pre-cooking and chip screening, that kind of thing. And also it is about a 46 megawatt turbine we put in there. The steam coming to it today is generating, I guess, 109,000 megawatt hours of power which translates into about EUR7.5 million of EBITDA. And on the pulp side, it depends on what you assume -- where you assume you are in the cycle. If you take a mid-volume cycle of EUR150 per tonne, that's another call it EUR5.5 million. So all in, somewhere between EUR11 million and EUR14 million annual benefit depending on where you are in the cycle.

That's at the EBITDA level, right?

That's at the EBITDA level, yes.

Then, can you talk about the recent price announcements and how they are going? You had one -- you've had two in a row here. Does that mean the first one was realized or can you give us some help there?

Yes. I think everything in September, October is fine. A little early to tell on November, but I think we are certainly -- the industry producers are all expecting November to go. I don't see why it shouldn't. I mean the statistics are at 27 days having stayed at the 28-day period level for three to four months. We didn't lose $0.01 of price in the summer, which is a traditional slow period.

So I mean it is, the market issue statistically is snug. So we should be continuing to push price increases.

Okay, thank you.

(Operator Instructions). Paul Quinn, RBC Capital Markets.

Good morning. Following up on the very strong statistics that we are seeing, do you see any disconnect at all between the strength of the statistics and what you are experiencing in the marketplace? You described it as below balance levels from the softwood side, but I am having a heck of a time trying to reconcile the seven-day drop on the hardwood side.

I have got a theory.

Excellent.

It's a fragmented industry with a lot of small producers and a bunch of producers that sell through agents and I just think there's too many guys that don't get it. That's my theory.

Well, if you look at the statistics, clearly the summer months are weaker. So one would expect, of course, certainly inventory levels on the hardwood side to come down. It came down surprisingly more than what one would have expected, but I think that could be a combination of seasonal as well as better kind of credit conditions certainly in China. As well as the shipping kind of movements because, as you know, it is very difficult with the large volumes of hardwood shipments that are being made from Brazil these days, really to get the right kind of numbers because it can be a lot lumpier than what traditionally it would have been.

In terms of the softwood inventory levels, I think clearly the inventory levels staying constant through the summer, that is a real positive. Typically we end up with build in inventory, and, of course, the continued reduction coming out of the inventory, again, sends a very strong signal that the balance between supply and demand is very healthy.

Now it has been very difficult to get price increases, mainly because all of our end-users are under their own constraints and, therefore, every price increase has been a fight. Now, the increases we've announced 20 each, clearly are not the type of increases that we traditionally make in the industry when we have such supply and demand type of balances. Typically you would have seen 50 plus increases in very short order. I think the producers of softwood pulp have become quite gun shy in the last few years.

So, clearly it is reflecting good markets' probably gunshy producers in the sense of the increase that we are announcing and continued ongoing movement, albeit a smaller kind of pace than what we otherwise would have seen in the past.

Great. All fair points. Maybe you can -- when you talked about tissue earlier on and the amount of capacity coming into China, maybe you could give us an update as to what percentage of your tonnes goes to that end user and then how the rest is split between printing and writing paper and other grades.

Yes, generally, on a kind of broad basis about half of our customers are in to hygiene kind of grade and the specialty and the other ones would be essentially printing and writing. Mainly the, clearly, the coated and other grades.

Okay. Any, just a quick update on geographic split end markets. What percentage of your sales are China now versus Europe and North America?

For Celgar primarily it is all 80 plus percent as you know is China. So essentially, pretty much all of the sales activity out of Celgar would be to the China market and the rest of Asia.

In terms of our German facilities, Rosenthal doesn't ship anything into Asia. In fact it is only within the European -- Western and Eastern European area that it ships. Stendal, depending on the exchange rate and market conditions, may ship anywhere between around slightly between 10% and maybe 15% of its sales. Recently, it has been far less than that.

So, typically, it could be anywhere between 30,000 tonnes to 40,000 tonnes to over 100 something thousand tonnes. But we would say this year it is going to be significantly lower than prior years.

Okay. And, lastly, on the M&A front, anything you are seeing out there? It sounds like your outlook is bullish in kind of a muted way. Are you seeing any interest in acquiring something at these pricing levels?

Well, our profile, as you know, in terms of the type of assets that we are looking for, we have always indicated they are very difficult to find because we are looking very -- more modern type of competitive assets with the right kind of location. So, clearly, there is not really that many around. Certainly, we are not aggressively looking in terms of any opportunities. I think what we are focused really is in terms of organic growth, improving our costs and as well as, of course, improving our earnings stream from really more non-pulp commodity type of sectors so that we even out more of the cyclical earnings type of profile.

So is it fair to say --? I mean, you have gone -- you are going after the bigger machines just because they have that energy potential. But I think your -- would it be fair to say your experience on some of the bigger German mills has led to higher costs so that that has hurt you on the pulp side?

No. On the German side, we always had much higher wood costs and yet we been able to overcome those limitations through other kind of efficiency gains. And I think, of course, the major benefit or cost competitiveness is the logistics side of the business to the end market.

We are not necessarily looking for large modern machines. I think what we're looking for is a combination of wood availability, logistics to the end markets, potential for other type of byproduct streams that could command good prices. These are the factors. I don't think it is just limited to modern machines per se. There's a lot more to it.

Because -- just because you produce pulp cheaply, if your logistics is very poor from the end market, then you are not going to be as competitive.

Excellent. Fair enough. Thanks.

George Berman, J.P. Turner & Company.

Are you there, George?

George Berman, your line is open.

Hello. We seem to have a little feedback in the line. Thanks for taking my call. It looks like we are on the cusp of another nice one in earnings. I have one question. What prompted you to start reporting in dollar terms rather than euros?

We've felt for some time that we would like to move to the US dollar. With the volatility of the currencies, looking back, what kept us away was the risk that the impact that a large swing could have on our equity. And I guess we are at a point now where we feel we put enough meat on the bones that we really don't see that as a risk going forward. And the benefits of reporting in US dollars are quite significant in terms of our comparability to our peers, making us look a little more normal in the US capital markets and so on.

Yes, what we found is that a lot of our investors and people who certainly would be interested in us sometimes get confused because our competitors or our peers essentially report in most cases in US dollars. So when they see the euro, of course, which is significantly stronger they can get easily kind of confused. When they just see it, they think it's US dollars and of course that is not the case. So it is just to make things a lot easier in terms of how they can look at our numbers and compare it to our peer groups.

I think that was a very wise decision. I absolutely concur. Next question is the current debt on the restricted group. When is that able to be refinanced without too much of a penalty?

We got our first call on those bonds in December of next year at a 104.75. So, as you approach that level, that signals the maximum premium you would have to pay on any (multiple speakers) well, another year.

Let's hope weights stay this low. So that we can really get some profit there. I think that would make a big difference in the per share earnings number as well.

Yes.

Okay. We will stay tuned. Good luck for the future and I hope we have a great quarter.

Great. Thank you.

We have no further questions in queue. I will turn the call back to the presenters for closing remarks.

I thank everyone for coming to today's earnings call. And we all are optimistic. Hopefully we will translate to much better markets and, again, thank you very much.

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